IDO Security Inc. - FORM 10-Q - November 19, 2014

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - IDO Security Inc.	Financial_Report.xls
EX-32 - EXHIBIT 32 - IDO Security Inc.	t80795_ex32.htm
EX-31 - EXHIBIT 31 - IDO Security Inc.	t80795_ex31.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

MARK ONE

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period ended September 30, 2014; or

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to ________

COMMISSION FILE NUMBER: 0-51170

IDO SECURITY INC.

(Exact name of registrant as specified in its charter)


Nevada		38-3762886
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7875 SW 40th Street, Suite 224

Miami, Florida 33155-3510

(Address of principal executive offices, including zip code)

786-603-5212

(Issuer’s telephone number, including area code)


	N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a Smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 19, 2014, there were 399,658,514 shares of registrant’s common stock, par value $0.001 per share outstanding.

INDEX PAGE


		PAGE

PART I -- FINANCIAL INFORMATION

Item 1	Financial Statements

	Condensed Consolidated Balance Sheets September 30, 2014 (Unaudited) and December 31, 2013 (Audited)	2

	Unaudited Condensed Consolidated Statements of Operations for the nine and three months ended September 30, 2014 and 2013	3

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 4	Controls and Procedures	22


PART II -- OTHER INFORMATION

Item 1	Legal Proceedings	22
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3	Defaults upon Senior Securities	24
Item 4	Mine Safety Disclosures	24
Item 5	Other Information	24
Item 6	Exhibits	24

SIGNATURES		25

IDO SECURITY INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2014			2013
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	466		$	1,989
Inventories		16,024			16,024

Total current assets		16,490			18,013

Property and equipment, net		-			-

Total assets	$	16,490		$	18,013

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	8,720,455		$	7,716,062
Bank line of credit		12,336			12,026
Convertible promissory notes
(net of discount of $49,810 and $-0-)		462,292			2,125,237
Redeemable Series A Cumulative Convertible Preferred Stock
(net of discount of $615,164 and $138,832)		13,705,286			13,807,905
Loans payable		173,473			167,206
Derivative liability		266,667			-
Warrant liability		400,000			400,000

Total current liabilities		23,740,509			24,228,436

NON-CURRENT LIABILITIES
Convertible promissory notes
(net of discount of $2,470,767 and $3,036,146)		5,460,762			2,943,006
Notes payable		-			387,200
Redeemable Series A Cumulative Convertible Preferred Stock
(net of discount of $205,054 and $37,708)		1,009,946			336,004
Preferred Stock - Series B		1			1

Total liabilities		30,211,218			27,894,647

COMMITMENT AND CONTINGENCIES

STOCKHOLDERS’ DEFICIENCY
Preferred Stock
6,500 shares authorized; none outstanding		-			-
Common stock, $.001 par value;
400,000,000 shares authorized,
399,658,514 and 24,844,611 shares issued and outstanding		399,658			24,844
Additional paid-in capital		27,653,866			27,654,134
Accumulated other comprehensive loss		(331	)		(331	)
Accumulated deficit		(58,247,921	)		(55,555,281	)

Total stockholders’ deficiency		(30,194,728	)		(27,876,634	)

Total liabilities and stockholders’ deficiency	$	16,490		$	18,013

See Notes to Condensed Consolidated Financial Statements.

IDO SECURITY INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Nine Months			Nine Months			Three Months			Three Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2014			2013			2014			2013
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Revenues	$	-		$	15,043		$	-		$	-

Cost of sales		360,000			376,756			120,000			120,000

Gross loss		(360,000	)		(361,713	)		(120,000	)		(120,000	)

Operating expenses
Research and development expenses		-			53,202			-			-
Selling and general and administrative expenses		458,618			775,146			120,953			98,096
Stock based compensation - selling and general and administrative		-			696,691			-			99,527

Total operating expenses		458,618			1,525,039			120,953			197,623

Loss from operations		(818,618	)		(1,886,752	)		(240,953	)		(317,623	)

Interest expense (including amortization of debt and preferred stock discounts,
accretion of convertible promissory notes and dividends)		(1,891,422	)		(2,711,918	)		(665,442	)		(858,979	)
Gain on derivative liability		(59,321	)		-			(106,666	)		-
Foreign currency translation		76,721			(21,882	)		76,721			-

Net loss	$	(2,692,640	)	$	(4,620,552	)	$	(936,340	)	$	(1,176,602	)

Basic and diluted loss per share	$	(0.02	)	$	(0.23	)	$	(0.00	)	$	(0.06	)

Weighted average number of shares outstanding
Basic and diluted		178,541,587			19,986,471			377,826,733			19,986,471

See Notes to Condensed Consolidated Financial Statements.

IDO SECURITY INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2014			2013
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,692,640	)	$	(4,620,552	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		-			2,799
Amortization of note discount		765,184			1,878,431
Accretion of note discount		748,764			550,931
Stock based compensation		-			696,691
Interest and exchange rate differences		6,266			-
Financing costs related to warrant liability		-			1,896
Issuance of Preferred Stock - Series B		-			1
Gain on derivative liability		59,321			-
Debt issued for services		190,000			-
Derivative liabilities charged directly to interest		47,347			-
Loss on disposal and abandonment of property and equipment		-			42,603
Decrease in net liability for severance pay		-			(26,250	)
Increase (decrease) in cash attributable to changes in operating assets and liabilities
Inventory		-			5,236
Prepaid expenses and other current assets		-			33,830
Accounts payable and accrued liabilities		752,325			989,619

Net cash used in operating activities		(123,433	)		(444,765	)

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property and equipment		-			900

Net cash provided by investing activities		-			900

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loan payable - bank		310			15,377
Proceeds from notes payable		121,600			302,700

Net cash provided by financing activities		121,910			318,077

DECREASE IN CASH		(1,523	)		(125,788	)

CASH - BEGINNING OF PERIOD		1,989			125,982

CASH - END OF PERIOD	$	466		$	194

Supplemental disclosures of cash flow information:
Cash paid for interest	$	-		$	-

Non-cash activities:
Issuances of common stock for the conversion of
promissory notes and accrued interest	$	374,605		$

Issuances of convertible notes payable in exchange for notes payable	$	486,000		$

See Notes to Condensed Consolidated Financial Statements.

IDO SECURITY INC. AND SUBSIDIARY

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 nine months ended September 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013, as filed with the Securities and Exchange Commission.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. At September 30, 2014, the Company had not achieved profitable operations, had accumulated losses of $58.2 million (since inception), expects to incur further losses in the development of its business and is dependent upon debt and equity financing to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated 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 and short-term debt. From December 2007 through September 2014, the Company received net proceeds of approximately $7.8 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 condensed consolidated 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.

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 condensed consolidated financial statements.

NOTE 3 - NET LOSS PER SHARE

Basic loss per share is computed by dividing net 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:

	Shares of Common Stock
	Issuable upon Conversion/Exercise
	September 30,
	2014		2013
Warrants		4,010,699		4,014,477
Convertible notes		22,347		21,254
Stock options		-		667
Convertible preferred stock		41,104		37,655

NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Substantially all of the Company’s financial instruments, consisting primarily of cash, 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.

The Company issued a convertible promissory note that contained a conversion feature which was accounted for separately as a derivative liability and measured at fair value on a recurring basis. Changes in fair value are charged to other income (expenses) as appropriate. The fair value of the derivative liability was determined based on Level 2 inputs utilizing observable quoted prices for similar instruments in active markets and observable quoted prices for identical or similar instruments in markets that are not very active. See Note 8(vii).

The Company issued a warrant that contained a put option which was accounted for as a warrant liability and measured at fair value on a recurring basis. Changes in fair value are charged to other income (expenses) as appropriate. The fair value of the warrant liability was determined based on Level 2 inputs utilizing observable quoted prices for similar instruments in active markets and observable quoted prices for identical or similar instruments in markets that are not very active. See Note 9.

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 September 30, 2014 and December 31, 2013 consisted of completed devices held in the United States totaling $16,024.

NOTE 6 – BANK LINE OF CREDIT

In 2013, one of the banks of IDO Ltd. in Israel honored credit card payment obligations to vendors. At September 30, 2014 and December 31, 2013, the Company owed the bank $12,336 and $12,026, respectively. The bank has filed a lien against the assets of IDO Ltd. to secure the payment of the balance.

NOTE 7 – NOTES PAYABLE

From November 2012 through July 2014, the Company issued various notes to two 2008 Investors in the amount of $486,000. The notes bore interest at the rate of 2.5% and were due as defined in the various note agreements. In July 2014, all of the notes were converted into Secured and Convertible Promissory Notes. See Note 8(viii).

At September 30, 2014 and December 31, 2013, notes payable amounted to $0 and $387,200, respectively.

NOTE 8 - CONVERTIBLE PROMISSORY NOTES

Convertible promissory notes consist of the following:


	September 30, 2014			December 31, 2013
	(Unaudited)

2008 Notes - secured and convertible - see (i) below	$	1,956,945		$	1,956,945

December 2008 Notes - secured and convertible – see (ii) below		815,062			815,062

2009 - 2011 Notes - secured and convertible - see (iii) below		4,010,579			4,010,579

2012 Notes - secured and convertible - see (iv) below		962,245			1,321,803

2014 Convertible Promissory notes - see (vii) below		190,000			-

2014 Notes and Series A Preferred - see (viii) below		508,800			-

Total		8,443,631			8,104,389

Less: Discount		(2,520,577	)		(3,036,146	)
		5,923,054			5,068,243
Less: Current Portion		(462,292	)		(2,125,237	)

Total	$	5,460,762		$	2,943,006

(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 shares of the Company’s Common Stock at an adjusted per share price of $450. The warrants were not exercised and have expired.

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 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, July 2014 and October 2014, the requisite Majority in Interest agreed to certain modifications of the terms of the 2008 Notes (see (vi) Modifications 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 June 30, 2014, 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 2014.

(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 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 shares of the Company’s Common Stock at a per share exercise price equal to $750 exercisable through October 31, 2013. The warrants were not exercised and have expired.

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, July 2014 and October 2014, the requisite Majority in Interest agreed to certain modifications of the terms of the 2008 Notes (see (vi) Modifications of Debt).

There were no payments of principal or interest in 2014.

(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.

●

In 2009, the Company raised net proceeds of $1,332,500 from the private placement to certain holders of the December 2008 Notes. 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.

	●	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.
	●	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.

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, July 2014 and October 2014, the requisite Majority in Interest agreed to certain modifications of the terms of the various notes (see (vi) Modifications of Debt).

There were no payments of principal or interest in 2014.

(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. The 2012 Notes have substantive terms identical to those prevailing with respect to the December 2008 Private Placement discussed at further length in Note 8(ii) above. 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, July 2014 and October 2014, the requisite Majority in Interest agreed to certain modifications of the terms of the 2012 Notes (see (vi) Modifications of Debt).

For the nine months ended September 30, 2014, the Company issued 374.8 million shares of Common Stock in payment of principal and interest in the amount of $374,605. No shares were issued subsequent to September 30, 2014.

(v) Priority of Payments of Notes

In December 2011, a Majority in Interest 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.

(vi) Modifications of Debt

In May 2012, a Majority in Interest waived all Events of Default and consented to a modification of the note terms. Under the modification, effective January 1, 2012:

●

The Company may deem the maturity date of the outstanding notes (including any issued after January 1, 2012) to be December 31, 2015

●

The interest rate payable has been reduced to 2.5% per annum

●

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.

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.

In July 2014, a Majority in Interest consented to a modification of the Note terms. The effective date of the modification was upon the receipt by the Company of signed consents representing 66.67% of the Notes. Under the modification:

●

The Company may deem the maturity date of the outstanding notes to be December 31, 2017

●

For all Notes issued prior to April 30, 2012, 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 $0.05 (post-split), subject to further adjustment as provided in the Notes with respect to certain corporate events.

●

For all Notes issued after April 30, 2012, 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 as follows: 50% discount from the lowest closing bid price in the 20 trading days prior to the day on which such payment is to be made subject to further adjustment as provided in the Notes with respect to certain corporate events. This term was modified by the October 2014 modification described below.

●

Effective as of the date of the consent and continuing until the end of a six month period following an Event (as defined), the Company shall not be required to accrue and/or pay the Monthly Amount. In addition, the non-accrual and non-payment shall not be deemed to be Events of Default.

●

As discussed above, the Company’s obligations under the Notes are secured by a security interest in substantially all of its assets of the Company. Such security interest will not include the shares of the equity capital or assets of a company in formation in Peru that is intended to become a subsidiary.

In October 2014, a Majority in Interest consented to a further modification of one of the terms of the Note. The effective date of the modification was upon the receipt by the Company of signed consents representing 66.67% of the Notes. For all Notes issued on or after April 30, 2012, 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 $0.05 (post-split), subject to further adjustment as provided in the Notes with respect to certain corporate events.

(vii) 2014 Convertible Promissory Notes

In March 2014, the Company entered into a consulting agreement with an affiliate of a minority stockholder of the Company for certain business, financial consulting and advisory services. The monthly fee is $30,000 in the form of a convertible promissory note payable monthly on the first day of each calendar month, in advance. The convertible promissory notes will not have registration rights, are due within six months of issuance, unless converted sooner. The notes bear interest at the rate of 10% per annum and are convertible into shares of the Company’s Common Stock at 50% of the low closing bid price for the 30 days prior to conversion. The unpaid interest is convertible into shares of the Company’s Common Stock at $0.001 per share

From March 15, 2014, to September 30, 2014 the Company issued seven such promissory note totaling $190,000. The conversion feature contained in the promissory note is considered to be an embedded derivative. The Company bifurcated the conversion feature and recorded a derivative liability on the consolidated balance sheet. The Company recorded the derivative liability equal to its estimated fair value. Such amount was also recorded as a discount to the convertible promissory note and is being amortized to interest expense over the term of the note. For the nine and three months ended September 30, 2014, amortization of the debt discount amounted to $120,518 and $80,482, respectively. At September 30, 2014, the unamortized discount is $49,810. In October 2014, the Company issued an eighth promissory note for $30,000.

The Company is in default on three of the notes issued as no payments were made by the respective due dates. No actions have been taken by the note holder.

The Company is required to mark-to-market the derivative liability at the end of each reporting period. For the nine and three months ended September 30, 2014, the Company recorded a gain on the change in fair value of the conversion option of $59,321 and $106,666, respectively, and as of September 30, 2014, the fair value of the conversion option was $266,667.

(viii) 2014 Notes and Series A Preferred

In July 2014, the Company converted all of the notes payable issued to two 2008 Investors into 10% secured convertible promissory notes (“2014 Notes”) and 4.05 post-split shares of Series A Preferred. The 2014 Notes have substantive terms identical to those prevailing with respect to the December 2008 Private Placement discussed at further length in Note 9(ii) above In connection with such investments, the Company issued five-year warrants to purchase in the aggregate up to 1,080 post-split shares of the Company’s Common Stock at per share exercise price equal to $750. The 2014 Notes contain terms similar to the other secured promissory notes issued previously.

In August 2014, the Company raised net proceeds $22,800 from one holder of the December 2008 Notes. The Company issued $22,800 in principal amount of 10% secured convertible promissory notes and 0.19 post-split shares of Series A Preferred. The note has substantive terms identical to those prevailing with respect to the December 2008 Private Placement discussed at further length in Note 9(ii) above. In connection with such investments, the Company issued five-year warrants to purchase in the aggregate up to 51 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 2014 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. The 2014 Notes are subject to the terms of the July 2014 and October 2014 term modifications discussed above (see (vi) Modifications of Debt).

(ix) Maturities of Convertible Promissory Notes

Based on the July 2014 modification, the maturities on the Notes are $422,102 payable through 2014, $422,481 payable in 2015 and $7,599,048 payable in 2017.

NOTE 9 - CAPITAL TRANSACTIONS

Stock Issuances

Common Stock

For the nine months ended September 30, 2014, principal and interest of $374,605 were repaid in the form of 374.8 million shares of the Company’s Common Stock

Convertible Preferred Stock

The Series A Preferred Stock (“Series A Preferred”) was authorized in accordance with a Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred filed with the Nevada Secretary of State. The number of shares of preferred stock designated as Series A Preferred is 66.6667 shares. At September 30, 2014 and December 31, 2013, 52.1 shares and 47.9 shares of Series A Preferred were issued and outstanding, rspectively.

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 nine months ended September 30, 2014 and 2013, the Company declared dividends totaling $267,056 and $276,887, respectively. For the three months ended September 30, 2014 and 2013, the Company declared dividends totaling $89,997 and $93,310, respectively. At September 30, 2014 and December 31, 2013, dividends payable total $2,961,201 and $2,694,145, respectively, and are included in accounts payable and accrued liabilities. For the nine months ended September 30, 2014 and 2013, dividends and deemed dividends totaled $491,236 and $1,601,163, respectively. For the three months ended September 30, 2014 and 2013, dividends and deemed dividends totaled $137,636 and $473,240, 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, a Majority in Interest agreed that effective January 1, 2012:

	●	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.

	●	To eliminate the 10% dividend on their holdings.

	●	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.

In July 2014, in connection with the note modification, a Majority in Interest agreed to a modification of the terms of the Series A Preferred. The effective date of the modification was upon the receipt by the Company of signed consents representing 66.67% of the Series A Preferred. Under the modification:

●

For all Series A Preferred issued prior to April 30, 2012, 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 $0.05 (post-split), subject to further adjustment as provided in the Notes with respect to certain corporate events.

●

For all Series A Preferred issued after April 30, 2012, 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 as follows: 50% discount from the lowest closing bid price in the 20 trading days prior to the day on which such payment is to be made subject to further adjustment as provided in the Series A Preferred with respect to certain corporate events. This term was modified by the October 2014 modification described below.

●

In October 2014, a Majority in Interest consented to a further modification of one of the terms of the Series A Preferred. The effective date of the modification was upon the receipt by the Company of signed consents representing 66.67% of the Notes. For all Series A Preferred issued on or after April 30, 2012, 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 $0.05 (post-split), subject to further adjustment as provided in the Series A Preferred with respect to certain corporate events.

Series A Preferred totaled $15,535,450 at September 30, 2014. The maturities on the Series A Preferred are $14,320,450 payable through 2014 and $1,215,000 payable in 2015.

Series B Preferred Stock (“Series B Preferred”)

On September 30, 2013, the Company filed the Series B Preferred Stock Certificate of Designation with the Secretary of State of Nevada (the “Certificate of Designation”) authorizing 100 shares of Series B Preferred Stock and establishing the rights thereof.

As set forth in the Certificate of Designation, each one (I) share of the Series B Preferred has voting rights equal to (x) 0.019607 multiplied by the total issued and outstanding shares of the Company’s Common Stock eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. For purposes of illustration only, if the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote is 5,000,000 the voting rights of one share of the Series B Preferred shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) - (0.019607 x 5,000,000) = 102,036). With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series B Preferred shall vote together with the holders of Common Stock without regard to class, except as to those matters on which separate class voting is required by applicable law or the Articles of Incorporation or bylaws.

The stated value of each share of Series B Preferred is $0.001. There is no dividend due or payable and there are no liquidation rights. Unless otherwise voted on by disinterested members of the Board of Directors, the Company shall redeem all shares of Series B Preferred for $1 on September 30, 2015. As a result of the redemption provision, the Series B Preferred was not classified as permanent equity.

Effective September 30, 2013, the Company issued 100 shares (the “Shares”) of its Series B Preferred to Mr. Rodriguez solely for voting purposes. One share of Series B Preferred has the voting equivalent of not less than 0.67% of the issued and outstanding common stock (representing a super majority voting power) of the vote required to approve any action, in which the shareholders of the Company’s Common Stock may vote.

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.”

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 on or before May 6, 2013 if the Company does not file a proxy statement (as defined). 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 September 30, 2014 and December 31, 2013, the value of the warrant liability was $400,000.

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 was amortized over the term of the agreement. For the nine and three months ended September 30, 2013, the Company recognized stock compensation expense of $696,691 and $99,527, respectively, and such expense was included in selling and general and administrative expenses.

NOTE 10 – LOANS PAYABLE

At both September 30, 2014 and December 31, 2013, loans payable amounted to $167,206. Transactions were as follows:

IDO Ltd. received non-interest bearing advances from a 2008 Investor (as defined in Note 7(i)). The advances are due on demand. At both June 30, 2014 and December 31, 2013, 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 is due on demand. At both June 30, 2014 and December 31, 2013, the Company owed principal of $75,000.

The Company received working capital loans from certain former non-management affiliated stockholders of IDO Ltd. Amounts owed on the loans aggregated to $44,826 at both September 30, 2014 and December 30, 2013.

NOTE 11 – COMMITMENT AND CONTINGENCIES

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. Rodriguez 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.

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”), which is equivalent to approximately $387,000 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 2,147,000, which is equivalent to approximately $583,000 at September 30, 2014 and $564,000 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 $583,000 and $582,000 has been accrued at September 30, 2014 and December 31, 2013, respectively. Stiss has filed a lien against the assets of IDO Ltd. to secure the payment of the judgment.

In August 2014, IDO Ltd. filed a motion to dismiss the Appeal and on September 4, 2014, the National Court dismissed the Appeal.

In light of the foregoing, in April 2013, IDO Ltd. terminated all commercial activities in Israel. All employees were terminated and office premises closed. IDO Ltd. disposed of or abandoned most of its property and equipment.

The Company 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, the Company believes that the manufacturing activities formerly conducted by IDO Ltd. can be satisfactorily performed by such third party. Under the agreement with such third party, the Company undertook to remit to it $40,000 on a monthly basis in respect of the costs of manufacturing and marketing. While the company has remitted the required amounts in respect of the period from January through March 2013, its inability to raise working capital needed has prevented it from making timely payments subsequently. Accordingly, only limited service to existing devices is currently being accorded to customers, including the sale and servicing of spare parts. Until the Company raises significant working capital, it will not be able to resume production and fulfillment of orders and solicitations from third parties.

(ii) On or about January 20, 2014, IDO Ltd. received a letter from a law firm purporting to represent certain terminated employees of IDO Ltd. threatening legal action if payment of salaries, social benefits, severance pay and associated penalties in an unspecified amount is not made by February 12, 2014. As of the date of filing of this report, neither IDO nor IDO Ltd. was served with such lawsuit and the Company cannot estimate the amount of any loss that may result.

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. The required payments have been remitted in respect of the period from January to March 2013. However, lack of sufficient capital has prevented the Company from making further required payments and such third party has been able to provide limited support to devices that have been previously sold. The Company will need to raise significant funds in order to manufacture additional devices, fully respond to product solicitations and inquiries from interested third parties.

NOTE 12 – SUBSEQUENT EVENTS

Management has evaluated subsequent events through the date of this filing.

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, 2013 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.

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.

Current Operational Highlights

Effective April 2013, 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 working capital, we believe that the manufacturing activities formerly conducted by IDO Ltd. can be satisfactorily performed by such third party. 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 working capital needed has prevented us from making timely payments subsequently. Accordingly, only limited support and service to existing devices is currently being accorded to customers, including the sale of spare parts. Until we raise significant working capital, we will not be able to resume production and fulfillment of orders and solicitations from third parties.

No assurance can be provided that the proposed restructure of our activities whereby we are utilizing the third party to manufacture and service our devices will not be legally challenged by the plaintiffs and, if so challenged, no assurance can be provided that such challenge will not succeed.

In furtherance thereof, in March 2014, we entered into a consulting agreement with a financial consultant to assist us in strategizing our capital raising efforts as well as exploring strategic alternatives. We have also entered into a non-binding term sheet with entities affiliated with the financial consultant pursuant to which these entities are to assist us in availing ourselves of a provision in the federal securities laws that allows for the exchange of claims, securities or property for stock when the arrangement is approved for fairness by a court proceeding. The process, if approved by a court, has the potential to eliminate a significant portion of our debt obligations to existing creditors and lenders. The transactions contemplated by the term sheet are subject to the execution and delivery of legally binding agreements between us and these entities. No assurance can be provided that we will be successful in completing this process.

In June 2014, we and a private Peruvian based company engaged in gold and ore mining in Peru (“Peruvian Company”) entered into a non-binding letter of intent pursuant to which, subject to the satisfaction of specified closing conditions, we, through our wholly-owned Peruvian subsidiary (in formation), and the Peruvian Company are to enter into a share exchange agreement. Under the terms of the proposed merger, the current shareholders of the Peruvian Company will hold, after consummation of the transaction, approximately 95% of our issued and outstanding voting equity securities on a fully diluted basis. The terms of the agreement have been agreed to and the execution of the merger agreement is scheduled to occur immediately following the formation of our Peruvian subsidiary. The transaction is subject to certain closing conditions. If consummated, following the merger, we will cease to be engaged in our current business and shall devote our operations to the mining business of the Peruvian Company. Our board of directors believes that the opportunity with the Peruvian Company represents a promising option for realizing shareholder value.

We need to raise additional funds on an immediate basis in order to meet our on-going operating requirements and to enter into and consummate the transaction contemplated by the proposed merger with the Peruvian Company. If we are unable to raise capital on an immediate basis, we will most likely need to terminate all operations. Presently, we do not have any financing commitment from any person, and there can be no assurance that additional capital will be available to us on commercially acceptable terms or at all. These conditions raise substantial doubt about our ability to continue as a going concern.

RESULTS OF OPERATIONS

COMPARISON OF THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2014 TO THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2013

Revenues and costs of goods sold – No revenues were recorded for the nine and three months ended September 30, 2014. Revenues for nine and three months ended September 30, 2013 were $15,043 and $0, respectively. All revenues in the 2013 period were derived from sales of our MagShoe™ device and related spare parts. Costs of goods sold during the nine and three months ended September 30, 2014 were $360,000 and $120,000 respectively, as compared to $376,756 and $120,000 for the corresponding periods in 2013.

The decrease in revenues is attributable to the substantial decrease in the number of MagShoe™ devices delivered to customers worldwide as well as the shutdown of operations at IDO Ltd. commencing as of March 2013. We had a gross loss in 2014 due to the shutdown of operations in Israel. We 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 consisted primarily of salaries and related expenses for personnel, contract design and testing services, supplies used and consulting and license fees paid to third parties. No research and development expenses were incurred during the nine and three months ended September 30, 2014 as compared to $53,202 and $0 during the corresponding nine and three months in 2013. 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. in March 2013.

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, 2014 of $458,618 and $120,953, respectively, as compared to $775,146 and $98,016, respectively, for the corresponding periods in 2013. The decrease in selling and general and administrative expenses for the nine month period 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, 2014 was $377,474 and $137,810, respectively, compared to $282,556 and $94,471 in the corresponding periods in 2013. Interest expense relates primarily to the placement of our convertible promissory notes. Interest expense increased in 2014 as there was more debt outstanding in 2014 than in 2013.

Amortizations — The amortizations are included in interest expense in the statement of operations. During the nine and three months ended September 30, 2014, we recorded amortization of $1,022,712 and $389,996 compared to $828,199 and $291,268 for the corresponding periods in 2013. 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.

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, 2014, dividends and deemed dividends totaled $491,236 and $137,636, respectively. For the nine and three months ended September 30, 2013, dividends and deemed dividends totaled $1,601,163 and $473,240 respectively.

Net loss – For the nine and three months ended September 30, 2014, we had a net loss of $2,692,640 and $936,340, respectively, compared to a net loss of $4,620,552 and $1,176,602 for the corresponding periods in 2013, 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 enter into and consummate the proposed merger with the Peruvian Company. 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. As previously disclosed in our periodic reports, we have been actively seeking additional capital. 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. Our limited availability of authorized and unissued shares of Common Stock impairs our ability to raise additional funds. 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 year ended December 31, 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. If we are unable to raise additional capital on an immediate basis, we may be forced to cease operations entirely.

As of September 30 2014, we had a cash balance of $466 compared to $1,989 at December 31, 2013.

Cash used in operating activities was $123,433 for the nine months ended September 30, 2014. The decrease in cash was primarily attributable to funding the operating loss for the period.

Cash provided by financing activities was $121,910. We received proceeds of $121,600 from the issuance of notes.

To date, we have financed our operations primarily from the sale of our securities (secured convertible notes, notes payable, 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, 2014, 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.

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 ILS 1,475,000, which is equivalent to approximately $387,000 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 2,147,000, which is equivalent to approximately $564,000 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. Stiss has filed a lien against the assets of IDO Ltd. to secure payment of the judgment.

In August 2014, IDO Ltd. filed a motion to dismiss the Appeal and, on September 4, 2014, the National Court dismissed the Appeal.

(ii) On or about January 20, 2014, IDO Ltd. received a letter from a law firm purporting to represent certain terminated employees of IDO Ltd. threatening legal action if payment of salaries, social benefits, severance pay and associated penalties in an unspecified amount is not made by February 12, 2014. As of the date of the filing of this report on Form 10-Q, neither we nor IDO Ltd. was served with such lawsuit. As of the date of the filing of this report on Form 10-Q, we cannot estimate the amount of any loss that may result.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following paragraph sets forth certain information with respect to all equity securities sold by us during the three months ended September 30, 2014 without registration under the Securities Act:

Between July 1 and September 30, 2014, we issued convertible promissory notes to a consultant affiliated with a minority stockholder in the principal amount of $90,000. The notes were issued pursuant to a consulting agreement with such party. The convertible promissory notes are due within six months of issuance, unless converted sooner. The notes bear interest at the rate of 10% per annum and are convertible into shares of the Company’s Common Stock at 50% of the low closing bid price for the 30 days prior to conversion. The unpaid interest is convertible into shares of the Company’s Common Stock at $0.001 per share

We also issued convertible notes according to substantially the same terms as the 2008 Notes to certain 2008 investors in the amount of $508,800, of which $486,000 was for the rollover of bridge loans previously lent to the Company. In connection with such convertible notes, we also issued convertible preferred shares in the amount of $1,272,000.

All of the securities issued in the transactions described above were issued without registration under the Securities Act in reliance upon the exemptions provided in Section 4(2) of the Securities Act. The recipient of securities in each such transaction acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to the share certificates issued in all of the above transactions. The recipient represented that it was an “accredited investors” within the meaning of Rule 501(a) of Regulation D under the Securities Act, or had such knowledge and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in its common stock. The recipient had adequate access, through its relationship with the Company and its officers and directors, to information about the Company. None of the transactions described above involved general solicitation or advertising.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

MINE SAFETY DISCLOSURES

None.

ITEM 5.

OTHER INFORMATION

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, 2014			/s/ MAGDIEL RODRIGUEZ
			MAGDIEL RODRIGUEZ CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) AND PRESIDENT

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