WARRANT WITH DOWN-ROUND PROTECTION, TEMPORARY EQUITY AND SHARE CAPITAL | 12 Months Ended |
Dec. 31, 2013 |
WARRANT WITH DOWN-ROUND PROTECTION, TEMPORARY EQUITY AND SHARE CAPITAL [Abstract] | ' |
WARRANT WITH DOWN-ROUND PROTECTION, TEMPORARY EQUITY AND SHARE CAPITAL | ' |
NOTE 10 | - | WARRANT WITH DOWN-ROUND PROTECTION, TEMPORARY EQUITY AND SHARE CAPITAL | | | | | | | | | | | | | | | | | | | | |
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| A. | 1 | Description of the rights attached to the Common Stock | | | | | | | | | | | | | | | | | | | |
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| Each share of Common Stock entitles the holder to one vote, either in person or by proxy, on each matter submitted to the approval of the Company's stockholders. The holders of Common Stock are not permitted to vote their shares cumulatively. As described below, holders of Preferred Stock are entitled to vote together with the holders of Common Stock on an as-converted basis. Accordingly, the holders of the Company's Common Stock together with the holders of the Preferred Stock who hold, in the aggregate, more than fifty percent of the total voting rights can elect all of the directors and, in such event, the holders of the remaining shares will not be able to elect any of such directors. The vote of the holders of a majority of the issued and outstanding shares of Common Stock, voting together with the holders of the Preferred Stock on an as converted basis, are entitled to vote thereon is sufficient to authorize, affirm, ratify or consent to any act or action submitted to the vote of the Company's stockholders, except as otherwise provided by law. | | | | | | | | | | | | | | | | | | | | | |
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| 2 | Description of the rights attached to the Preferred Stock | | | | | | | | | | | | | | | | | | | | |
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| Holders of Preferred Stock are entitled to receive cumulative dividends at a rate of 5% per annum, based on the stated value per share of Preferred Stock, which was initially $1,000 per share. Dividends on the Preferred Stock are payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on March 31, 2013, and on each conversion date (with respect to the shares of Preferred Stock being converted). Until September 13, 2013, dividends were payable only in cash. Thereafter, dividends on the Preferred Stock are payable, at the option of the Company, in cash and/or, if certain conditions are satisfied (including, among others, that the volume weighted average trading price for the Common Stock on its principal trading market is equal to or greater than 110% of the then current conversion price for the Preferred Stock for five consecutive trading days prior to the dividend payment date), in shares of Common Stock, valued at the then current conversion price of the Preferred Stock. The Company will incur a late fee of 9% per annum, payable in cash, on dividends that are not paid within three trading days of the applicable dividend payment date. During the year ended December 31, 2013 the Company paid an aggregate of $288,248 in cash as dividend to its Preferred Stockholders. | | | | | | | | | | | | | | | | | | | | | |
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| The Company may become obligated to redeem the Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Preferred Stock will have the option to require the Company to redeem such holder's shares of Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder's outstanding Preferred Stock. | | | | | | | | | | | | | | | | | | | | | |
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| Subject to certain conditions, the Company will have the option to force the conversion of the Preferred Stock (in whole or in part) if the volume weighted average price for the Common Stock on its principal trading market exceeds $11.60 for each of any 20 trading days during any 30 consecutive Trading Day period and the average daily dollar trading value for the Common Stock during such 30 day period exceeds $100,000. | | | | | | | | | | | | | | | | | | | | | |
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| If the Company fails to timely deliver certificates for shares of Common Stock issuable upon conversion of the Preferred Stock (the "Conversion Shares") and, as a result, the holder is required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder of the Conversion Shares (a "Buy-In"), the Company will be required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by which such holder's total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate number of Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Preferred Stock equal to the number of shares of Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements. | | | | | | | | | | | | | | | | | | | | | |
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| In addition, the Company will be required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Preferred Stock which have been converted by a holder and in respect of which the Company fails to deliver Conversion Shares by the eighth trading day following the applicable conversion date. | | | | | | | | | | | | | | | | | | | | | |
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| As long as at least 15% of the originally issued shares of Preferred Stock are outstanding, without the written consent of the holders of a majority in stated value of the outstanding Preferred Stock, the Company will not be permitted to, among other things, incur indebtedness or liens not permitted under the Certificate of Designations; repay, repurchase, pay dividends on or otherwise make distributions in respect of any shares of Common Stock or other securities junior to the Preferred Stock; or enter into certain transactions with affiliates of the Company. | | | | | | | | | | | | | | | | | | | | | |
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| Subject to the beneficial ownership limitation described below, holders of Preferred Stock will vote together with the holders of Common Stock on an as-converted basis. Holders will not be permitted to convert their Preferred Stock if such conversion would cause such holder to beneficially own more than 4.99% of the outstanding number of shares of Common Stock outstanding after giving effect to such conversion (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days prior written notice to the Company) (the "Beneficial Ownership Limitation"). In addition, no holder may vote any shares of Preferred Stock (on an as converted to Common Stock basis) in excess of the Beneficial Ownership Limitation. | | | | | | | | | | | | | | | | | | | | | |
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| Subject to certain limitations, so long as any Purchaser holds any shares of Preferred Stock, if (1) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (2) a Purchaser then holding Preferred Stock, Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such Purchaser, then the Purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such Purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such Purchaser). | | | | | | | | | | | | | | | | | | | | | |
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| The conversion price of the shares of Preferred Stock that were included in the Units is subject to adjustment for certain issuances of Common Stock or other securities of the Company at an effective price per share that is lower than the conversion price then in effect ($5.80 per share at December 31, 2013), as well as for stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders. | | | | | | | | | | | | | | | | | | | | | |
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| B. | Stock-based compensation | | | | | | | | | | | | | | | | | | | | |
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| 1 | Grants to non-employees | | | | | | | | | | | | | | | | | | | | |
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| a. | During 2005, Integrity Israel granted to three consultants an aggregate sum of 144,250 of its ordinary shares of NIS 0.01 par value as consideration for consulting services. The compensation expense was recorded as an expense over the consulting service period (varying from 2 months to 2 years). | | | | | | | | | | | | | | | | | | | | |
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The non-cash compensation recorded with respect to such grants was $123,625, $229,564 and $175,516 for the years 2007, 2006 and 2005, respectively. The fair value of the shares was based on the recent share price applicable. | | | | | | | | | | | | | | | | | | | | |
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Following the merger with Integrity Israel, the shares were replaced with shares of Common Stock of the Company. | | | | | | | | | | | | | | | | | | | | |
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| b. | In October 2006, Integrity Israel granted 45,531 options with an exercise price of $4.305 per share in consideration of investor finders, of which 17,657 were forfeited. | | | | | | | | | | | | | | | | | | | | |
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In November 2008, Integrity Israel granted 8,989 options with an exercise price of $5.517 per share in consideration of investor finders, of which 5,365 were forfeited. | | | | | | | | | | | | | | | | | | | | |
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The fair value of each such grant was based on the most recent share price with respect to the relevant grant date. | | | | | | | | | | | | | | | | | | | | |
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Following the merger with Integrity Israel, the options were replaced with options of the Company. | | | | | | | | | | | | | | | | | | | | |
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| c. | In connection with the 2010 Offering, the Company issued to the Placement Agent warrants to purchase 45,097 and 84,459 shares, respectively, of the Company's Common Stock, with an exercise price of $6.25 per share, in 2011 and 2010, respectively. The warrants expire on the fifth anniversary of the date on which the shares of Common Stock underlying such warrants are fully registered with the SEC. The warrants include customary adjustment provisions for stock splits, reorganizations and other similar transactions and in addition, the warrants that were issued to the placement agent, included a limited Period (until September 1, 2012) Down-Round Protection under which the strike price of the warrants would be adjusted to a price per share at which the Company will subsequently issue stock, if such price per share is less than the original strike price of the warrants. | | | | | | | | | | | | | | | | | | | | |
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In connection with the 2012 Offering, the Company issued to the Placement Agent warrants to purchase up to 256,554 shares of Common Stock. Half of such warrants are exercisable at an exercise price of $5.80 per share, and the remainders of such warrants are exercisable at any exercise price of $6.96 per share. Such warrants have substantially the same terms as those issued to the Unit Purchasers (see Note 10M below). In addition, on May 13, 2013, the Company issued to the Placement Agent warrants to purchase an aggregate of 215 shares of Common Stock at an exercise price of $7.00 per share in partial consideration for its service as placement agent for the Initial Closing. Such warrants have substantially the same terms as the warrants issued to the Placement Agent in connection with the 2010 Offering, as described above, except that such warrants do not include provisions relating to anti-dilution protection. | | | | | | | | | | | | | | | | | | | | |
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| d. | On September 10, 2013 the Company granted 26,484 options with an exercise price of $9.50 per share in consideration of investor relations services. The options vest ratably over a period of 12 months from the date of grant and will expire on the fifth anniversary thereof, subject to certain limitations. In connection with this grant the Company recorded during 2013 non-cash compensation expenses amounting to $16,657. At December 31, 2013 fair value per option of $2.52 was estimated using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 105.14%, risk free interest rate of 0.12%, stock price of $8.50 and exercise price of $9.50. | | | | | | | | | | | | | | | | | | | | |
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| 2 | Grants to employees | | | | | | | | | | | | | | | | | | | | |
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| a. | During 2005-2006, Integrity Israel granted to two individuals (an officer and a director), options exercisable into 24,394 shares of NIS 0.01 par value of Integrity Israel. The exercise price of each option was $3.49 (with respect to 4,486 options) and $3.84 (with respect to 19,908 options). The vesting period was three years with respect to the 4,486 options and two months with respect to the 19,908 options. The 19,908 options were forfeited. The total non-cash compensation recorded with respect to such grants was $45,291, $2,435 and $203 for the years 2007, 2006 and 2005, respectively. The fair value of the grants, which was estimated using Black-Scholes option pricing model, was based, among other factors, on the most recent share price with respect to the relevant grant date. | | | | | | | | | | | | | | | | | | | | |
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Following the merger with Integrity Israel, the options were replaced with options of the Company. | | | | | | | | | | | | | | | | | | | | |
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| b. | In August 2007, Integrity Israel's Board of Directors ("Integrity Israel's Board") approved a stock option plan ("Integrity Israel's plan") for the grant, without consideration of options exercisable into ordinary shares of NIS 0.01 par value of Integrity Israel to employees, officers and directors of Integrity Israel. The exercise price and vesting period for each grantee of options was determined by Integrity Israel's Board and specified in such grantee's option agreement. The options vested over a period of 1-12 quarters based on each grantee's option agreements. Any option not exercised within 10 years after the date of grant thereof will expire. | | | | | | | | | | | | | | | | | | | | |
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In July 2010, following the merger with Integrity Israel, the Company adopted the 2010 Share Incentive Plan (the "2010 Share Incentive Plan"), pursuant to which the Company's Board of Directors is authorized to grant options exercisable into Common Stock of the Company. The Company has reserved 529,555 shares of Common Stock for issuance under the plan. The purpose of the 2010 Share Incentive Plan is to offer an incentive to employees, directors, officers, consultants, advisors, suppliers and any other person or entity whose services are considered valuable to the Company, as well as to replace the Integrity Israel Plan and to replace all options granted in the past by Integrity Israel. | | | | | | | | | | | | | | | | | | | | |
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Upon the adoption of the 2010 Share Incentive Plan, all options granted under the Integrity Israel's Plan were replaced by options subject to the 2010 Share Incentive Plan on a 1 for 1 basis. | | | | | | | | | | | | | | | | | | | | |
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| c. | Pursuant to the terms of their respective employment agreements with the Company, in March 2012, the Company issued to Avner Gal, the Company's Chief Executive Officer, and David Malka, the Company's Executive Vice President of Operations, options to purchase up to 264,778 and 79,434 shares of Common Stock, respectively. The Options are exercisable at an exercise price of $6.25 per share. The options vested or will vest (as applicable), in 3 equal parts, upon the achievement of each of the following milestones: (i) submission of clinical trials' results to the Notified Body; (ii) receipt of CE mark approval; (iii) receipt of FDA approval. In the event of a merger and/or acquisition in which one or more of the abovementioned milestones have not yet been met, the options shall be deemed vested on the date of the merger and/or acquisition. All options granted as described above are subject to the terms of the 2010 Share Incentive Plan. | | | | | | | | | | | | | | | | | | | | |
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The total non-cash compensation expenses recorded with respect to such grants amounted to $ 327,663 and $378,072 for the years ending December 31, 2012 and 2011, respectively. The amount recognized as an expense takes into consideration the actual achievement of the first and second milestones. Approximately $353,000 of deferred compensation costs are expected to be recognized upon receipt of the FDA approval, if and when received. The fair value of the shares was based on the recent share price applicable. | | | | | | | | | | | | | | | | | | | | |
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| d. | On March 12, 2012, the Company granted to certain employees options to purchase 17,500 shares of Company's Common Stock at an exercise price of $6.25 per share. All options were granted in accordance with and subject to the terms of the Company's 2010 incentive Compensation Plan. The total non-cash compensation expenses relating to these grants amounted to $18,962 and $21,859, for the years ending December 31, 2013 and 2012, respectively. Approximately $2,500 of deferred compensation costs are expected to be recognized in 2014. | | | | | | | | | | | | | | | | | | | | |
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| e. | As of December 31, 2013, there are 114,708 shares available for future grants under the 2010 Share Incentive Plan. | | | | | | | | | | | | | | | | | | | | |
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| The following tables present a summary of the status of the grants to employees, officers and directors as of December 31, 2013 and 2012: | | | | | | | | | | | | | | | | | | | | | |
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| | Number | | | Weighted average exercise price (US$) | | | | | | | | | | | | | | | |
Year ended December 31, 2013 | | | | | | | | | | | | | | | | | | | | |
Balance outstanding at beginning of year | | | 471,854 | | | | 5.47 | | | | | | | | | | | | | | | |
Granted | | | - | | | | - | | | | | | | | | | | | | | | |
Exercised | | | - | | | | - | | | | | | | | | | | | | | | |
Forfeited | | | (57,007 | ) | | | 3.48 | | | | | | | | | | | | | | | |
Balance outstanding at end of the year | | | 414,847 | | | | 5.74 | | | | | | | | | | | | | | | |
Balance exercisable at the end of the year | | | 298,910 | | | | 5.55 | | | | | | | | | | | | | | | |
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| | Number | | | Weighted average exercise price (US$) | | | | | | | | | | | | | | | |
Year ended December 31, 2012 | | | | | | | | | | | | | | | | | | | | |
Balance outstanding at beginning of year | | | 454,354 | | | | 5.44 | | | | | | | | | | | | | | | |
Granted | | | 17,500 | | | | 6.25 | | | | | | | | | | | | | | | |
Exercised | | | - | | | | - | | | | | | | | | | | | | | | |
Forfeited | | | - | | | | - | | | | | | | | | | | | | | | |
Balance outstanding at end of the year | | | 471,854 | | | | 5.47 | | | | | | | | | | | | | | | |
Balance exercisable at the end of the year | | | 321,039 | | | | 3.12 | | | | | | | | | | | | | | | |
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| The aggregate intrinsic value of the awards exercisable as of December 31, 2013, 2012 and 2011 is $882,471, $ 609,706 and $ 368,926, respectively. The aggregate intrinsic value of the awards outstanding as of December 31, 2013, 2012 and 2011 was $1,143,330, $ 722,817 and $368,926, respectively. For the years 2012 and 2011, these amounts represent the total intrinsic value, based on management's estimate of the Company's stock price of $ 7 less the weighted exercise price. For the year 2013 management's estimate of the Company's stock price of $8.50 was determined based among other factors on the closing sale price for the Common Stock as reported on the OTC Bulletin Board on December 27, 2013, the last reported sale of Common Stock in 2103. | | | | | | | | | | | | | | | | | | | | | |
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| The following tables summarize information about options outstanding at December 31, 2013: | | | | | | | | | | | | | | | | | | | | | |
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Exercise | | | Outstanding at December 31, 2013 | | | Weighted average remaining contractual life (years) | | | Weighted average exercise price | | | Exercisable at December 31, 2013 | | | Weighted average remaining contractual life (years) | |
price (US$) |
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| 1.72 | | | | 40,408 | | | | 3.75 | | | | 1.72 | | | | 40,408 | | | | 3.75 | |
| 3.49 | | | | 4,486 | | | | 1.92 | | | | 3.48 | | | | 4,486 | | | | 1.92 | |
| 3.63 | | | | 4,849 | | | | 3.75 | | | | 3.63 | | | | 4,849 | | | | 3.75 | |
| 5.52 | | | | 1,119 | | | | 5.2 | | | | 5.52 | | | | 1,119 | | | | 5.2 | |
| 6.03 | | | | 4,273 | | | | 5 | | | | 6.03 | | | | 4,273 | | | | 5 | |
| 6.25 | | | | 359,712 | | | | 8.25 | | | | 6.25 | | | | 243,775 | | | | 8.25 | |
| | | | | 414,847 | | | | | | | | | | | | 298,910 | | | | | |
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| The fair value of options granted was estimated at the dates of grant using the Black-Scholes option pricing model. The following are the data and assumptions used: | | | | | | | | | | | | | | | | | | | | | |
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| | 2013 | | | 2012 | | | 2011 | | | | | | | | | | | |
Dividend yield (%) | | | - | | | | 0 | | | | 0 | | | | | | | | | | | |
Expected volatility (%) (*) | | | - | | | | 50 | | | | 50 | | | | | | | | | | | |
Risk free interest rate (%) | | | - | | | | 2 | | | | 2 | | | | | | | | | | | |
Expected term of options (years) (**) | | | - | | | | 6 | | | | 6-May | | | | | | | | | | | |
Exercise price (US dollars) | | | - | | | | 6.25 | | | | 6.25 | | | | | | | | | | | |
Stock price (US dollars) (***) | | | - | | | | 6.25 | | | | 6.25 | | | | | | | | | | | |
Fair value (US dollars) | | | - | | | | 3.08 | | | | 3.08 | | | | | | | | | | | |
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| (*) | Due to the low trading volume of the Company's Common Stock, the expected volatility was based on the historical volatility of the share price of other public companies that operate in the same industry sector as the Company. | | | | | | | | | | | | | | | | | | | | |
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| (**) | Due to the fact that the Company does not have sufficient historical exercise data, the expected term was determined based on the "simplified method" in accordance with Staff Accounting Bulletin No. 110. | | | | | | | | | | | | | | | | | | | | |
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| (***) | The fair value of the share was based on the most recent share prices, as applicable to each grant. | | | | | | | | | | | | | | | | | | | | |
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| C. | Convertible notes | | | | | | | | | | | | | | | | | | | | |
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| 1 | In April 2010, the Company issued Secured Notes ("Senior Notes") in the aggregate initial principal amount of $ 999,000 together with rights to acquire Common Stock following the reorganization and merger described in Note 1. The principal amount of the notes, together with any interest accrued but unpaid thereon, and any fees and charges, are referred to collectively as the "Outstanding Amount" of such Senior Notes. | | | | | | | | | | | | | | | | | | | | |
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| The Senior Notes provided for an interest rate of 9% per annum and were due and payable on the first to occur of (a) the date of the closing of the Company's next Qualified Financing (as defined therein); or (b) August 9, 2010, provided that the holders of Senior Notes were permitted to extend the date in clause (b) by up to 60 days with respect to all of the Senior Notes (the "Maturity Date"). Interest on the Senior Notes was to be paid on the Maturity Date if such interest was not exchanged for Common Stock in the manner described above. | | | | | | | | | | | | | | | | | | | | | |
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| Immediately after the initial closing of the 2010 Offering, each purchaser of a Senior Note (each a "Senior Note Purchaser") was entitled to receive Common Stock issued and sold at the closing of the 2010 Offering in accordance with the following: | | | | | | | | | | | | | | | | | | | | | |
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| (i) | If the Senior Note Purchaser elected, to be repaid under its Senior Note in shares of Common Stock in lieu of any cash, such Senior Note Purchaser received the number of shares of Common Stock equal to the quotient obtained by dividing (i) 200% of the unpaid portion of the Outstanding Amount of such Senior Note Purchaser's Senior Note by (ii) the offering price per share of the Common Stock, rounded to the nearest whole share; or | | | | | | | | | | | | | | | | | | | | |
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| (ii) | If the Senior Note Purchaser did not make the election in clause (i) above, such Senior Note Purchaser instead received the number of shares of Common Stock equal to the quotient obtained by dividing (i) 100% of the unpaid portion of the Outstanding Amount of such Senior Note Purchaser's Senior Note by (ii) the offering price per share of the Common Stock, rounded to the nearest whole share, in addition to a cash payment equal to the Outstanding Amount of such Senior Note Purchaser's Senior Note pursuant to the terms thereof. | | | | | | | | | | | | | | | | | | | | |
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| The original amount of the Senior Notes $ 999,000, which entitled the holders of the Senior Notes to an either cash or stock settlement at a price per share equal to the fair value of the share that would be determined at the offering, represented stock-settled debt under the provisions of ASC Topic 47-20, "Debt-Debt with Conversion and Other Options". Due to the terms of the conversion price, the Company determined that this component did not provide an active beneficial conversion feature. However, the entitlement of the Senior Note holders to receive a fixed value of Common Stock in an amount equal to 100% of the original amount of the Senior Notes (in addition to the stock settled debt described above), which represented an obligation to issue a variable number of shares under the provisions of ASC Topic 480, "Distinguishing Liabilities for Equity" (totaling $999,000), was recognized as a stock-based interest compensation (which was included among financing expenses, net), over the term of the Senior Notes (April 2010 - August 2010). | | | | | | | | | | | | | | | | | | | | | |
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| On December 16, 2010, the Company completed an initial closing of the 2010 Offering, at which the Company issued 87,977 shares of Common Stock to certain holders of Senior Notes, who held an amount of $ 549,797 (including unpaid interest) and which elected to be repaid in shares. The remaining amount of the Senior Notes, $ 527,396 (including unpaid interest), was settled in cash. | | | | | | | | | | | | | | | | | | | | | |
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| In addition, the Company issued 171,208 shares of Common Stock to the holders of Senior Notes as a repayment of the obligation to issue a variable number of shares. The fair value of the shares ($1,069,244) represents 100% of the original amount of the Senior Notes and interest accumulated up to the date of the initial closing of the 2010 Offering. | | | | | | | | | | | | | | | | | | | | | |
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| The Company issued to the Placement Agent warrants to purchase an aggregate of 25,919 shares of Common Stock with an exercise price of $ 6.25 and in addition was required to pay the Placement Agent $ 129,870 in cash (see Note 9C). | | | | | | | | | | | | | | | | | | | | | |
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| 2 | In November 2010, Integrity Israel issued Unsecured Junior Promissory Notes ("Junior Notes") in the aggregate initial principal amount of $ 170,000 (of which $ 25,000 was received in 2011). The Junior Promissory Notes were substantially similar to the Senior Notes, except that immediately after the initial closing of the 2010 Offering, each holder of Junior Promissory Notes was entitled to receive the number of shares of Common Stock equal to the quotient obtained by dividing (i) 200% of the Outstanding Amount of such holder's Junior Promissory Note by (ii) the price per share of the Common Stock in the 2010 Offering, rounded to the nearest whole share. The entitlement to receive a fixed value of Common Stock sold at the closing of the 2010 Offering in an amount equal to 200% of the original amount of the Junior Notes was recognized as an obligation to issue a variable number of shares under the provisions of ASC Topic 480, "Distinguishing Liabilities for Equity", accordingly an amount equal to 100% of the original amount of the Junior Notes was recognized as stock-based interest compensation (which was included among financing expenses, net) over the term of the Junior Notes (November 2010 - December 2010). | | | | | | | | | | | | | | | | | | | | |
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| On December 16, 2010, the Company completed an initial closing of the 2010 Offering, at which, 54,792 shares of Common Stock were issued to the purchasers of the Junior Promissory Notes pursuant to the terms and in full repayment of such Junior Promissory Notes. The fair value of the shares ($ 345,100) represented 200% of the original amount of the Senior Notes and interest accumulated up to the date of the initial closing of the 2010 Offering. | | | | | | | | | | | | | | | | | | | | | |
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| The Company issued to the Placement Agent, warrants to purchase an aggregate of 5,480 shares of Common Stock with an exercise price of $ 6.25 and in addition was required to pay $ 77,292 in cash (see Note 9C). | | | | | | | | | | | | | | | | | | | | | |
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| D. | On December 16, 2010, the Company completed an initial closing of the 2010 Offering at which the Company received an amount of $ 3,016,250 for 482,600 shares of Common Stock, representing a price per share of $ 6.25. The Company issued to the Placement Agent warrants to purchase an aggregate of 48,260 shares of Common Stock at the initial closing with an exercise price of $ 6.25 and in addition was required to pay the Placement Agent $ 392,112 in cash (see Note 9C). | | | | | | | | | | | | | | | | | | | | |
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| E. | On December 30, 2010, the Company completed a second closing of the 2010 Offering at which the Company received an amount of $ 300,000 for 48,000 shares of Common Stock, representing a price per share of $ 6.25. The Company issued to the Placement Agent warrants to purchase an aggregate of 4,800 shares of Common Stock at the second closing with an exercise price of $ 6.25 and in addition was required to pay the Placement Agent $ 39,000 in cash (see Note 9C). | | | | | | | | | | | | | | | | | | | | |
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| F. | On January 31, 2011, the Company completed a third closing of the 2010 Offering at which the Company received an amount of $ 102,000 for 16,320 shares of Common Stock, representing a price per share of $ 6.25. The Company issued to the Placement Agent warrants to purchase an aggregate of 1,632 shares of Common Stock at the third closing with an exercise price of $ 6.25 and in addition was required to pay the Placement Agent $ 13,260 in cash (see Note 9C). | | | | | | | | | | | | | | | | | | | | |
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| G. | On March 31, 2011, the Company completed a fourth closing of the 2010 Offering at which the Company received an amount of $ 567,300 for 90,768 shares of Common Stock, representing a price per share of $ 6.25. The Company issued to the Placement Agent warrants to purchase an aggregate of 9,077 shares of Common Stock at the fourth closing with an exercise price of $ 6.25 and in addition was required to pay the Placement Agent $ 73,749 in cash (see Note 9C). | | | | | | | | | | | | | | | | | | | | |
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| H. | On April 29, 2011, the Company completed a fifth closing of the 2010 Offering at which the Company received an amount of $ 250,000 for 40,000 shares of Common Stock, representing a price per share of $ 6.25. The Company issued to the Placement Agent warrants to purchase an aggregate of 4,000 shares of common-stock at the fifth closing with an exercise price of $ 6.25 and in addition was required to pay the Placement Agent $ 32,500 in cash (see Note 9C). | | | | | | | | | | | | | | | | | | | | |
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| I. | On May 31, 2011, the Company completed a sixth closing of the 2010 Offering at which the Company received an amount of $ 213,750 for 34,200 shares of Common Stock, representing a price per share of $ 6.25. The Company issued to the Placement Agent warrants to purchase an aggregate of 3,420 shares of common-stock at the sixth closing with an exercise price of $ 6.25 and in addition was required to pay the Placement Agent $ 27,788 in cash (see Note 9C). | | | | | | | | | | | | | | | | | | | | |
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| J. | On July 29, 2011, the Company completed a seventh and final closing of the 2010 Offering at which the Company received an amount of $ 1,685,500 for 269,680 shares of Common Stock. The Company issued to the Placement Agent warrants to purchase an aggregate of 26,968 shares of common-stock at the seventh closing with an exercise price of $ 6.25 and in addition was required to pay the Placement Agent $ 219,115 in cash (see Note 9C). | | | | | | | | | | | | | | | | | | | | |
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| K. | Purchasers of the Common Stock in the 2010 Offering were entitled to anti-dilution protection until September 1, 2012 for certain issuances of Common Stock by the Company for less than $ 6.25 per share. | | | | | | | | | | | | | | | | | | | | |
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| L. | On November 19, 2012, the Company issued 165,057 shares of its Common Stock at a price of $7.00 per share, for a total consideration of $1,155,399. The issuance and sale of such shares constituted the initial closing (the "Initial Closing") of the 2012 Offering, which was originally structured as an offering of up to 785,714 shares of its Common Stock to accredited investors (the "First Closing Purchasers") at a price of $7.00 per share in a private placement transaction. See also Note 10M regarding the conversion of the Common Stock issued in November 2012 into Units. | | | | | | | | | | | | | | | | | | | | |
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| M. | Subsequent to the Initial Closing, the 2012 Offering was converted from an offering of Common Stock to an offering of Units and, on March 13, 2013, the Company entered into a Securities Purchase Agreement with certain accredited investors (the "Unit Purchasers") pursuant to which the Company issued to the Unit Purchasers an aggregate of 6,300 Units. The shares of Preferred Stock comprising the Units were convertible into an aggregate of 1,086,178 shares of Common Stock and the Warrants comprising the Units are exercisable into an aggregate of 1,086,178 shares of Common Stock, in each case subject to adjustment as described below. After giving effect to the payment of commissions to the Placement Agent for the offering and the payment of certain offering expenses, the Company received net proceeds from the offering of approximately $5.4 million (See Note 9C). | | | | | | | | | | | | | | | | | | | | |
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| The issuance and sale of the Units constituted the second and final closing of an offering of the Company's securities in a private placement transaction. As a result of the conversion of the offering from an offering of Common Stock to an offering of Units, the Company agreed with the Placement Agent that the Company would exchange the shares of Common Stock acquired by each First Closing Purchaser in the Initial Closing for such number of Units equal to the aggregate purchase price paid by such First Closing Purchaser in the Initial Closing (see Note 10L), divided by $1,000, in each case subject to the execution by the First Closing Purchaser of a consent to such modification. Pursuant to this agreement, on May 13, 2013, the Company cancelled 162,907 of the 165,057 shares of Common Stock issued to the First Closing Purchasers and issued to such purchasers an aggregate of 1,140.35 Units. These Units included Preferred Stock convertible into an aggregate of 196,597 shares of Common Stock and Warrants exercisable for 196,597 shares of Common Stock. The total fair value of such Units was equal to the amount originally invested by the First Closing Purchasers that consented to exchange their shares into Units ($1,140,139). As a result, during 2013, the total fair value of such Units was classified out of stockholders equity and was presented as temporary equity (convertible Preferred Stock) and liability (warrant with down-round provision), as applicable to each instrument. | | | | | | | | | | | | | | | | | | | | | |
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| The Warrants included in the Units have a five-year term commencing on their issuance date. The Warrants are exercisable at any time at an exercise price of $6.96 per share. The Warrants contain adjustment provisions substantially similar to the adjustment provisions of the Preferred Stock as described above, including provisions requiring an adjustment of the exercise price of the Warrants to the price at which the Company subsequently issues shares or other equity-linked financial instruments, if that price is less than the original exercise price of the Warrants (down-round protection). In addition, the Warrants provide for protection for a Buy-In on substantially the same terms as described above with respect to the Preferred Stock. No holder may exercise its Warrants in excess of the Beneficial Ownership Limitation. | | | | | | | | | | | | | | | | | | | | | |
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| In connection with the 2012 Offering the Company incurred a total of $1,479,864 of issuance costs of which $562,805 attributable to non-cash compensation expenses relating to warrants issued to the Placement Agent (See Notes 9C and Note10B.1.c). The average fair value per warrant of $2.19 was estimated using the following assumptions: dividend yield of 1%, expected volatility of 96.66%, risk free interest rate of 0.9%, stock price of $2.77 and exercise price ranging between $5.8-7.0. | | | | | | | | | | | | | | | | | | | | | |
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| The allocation of the issuance proceeds to the Preferred Stock and to the detachable warrants and their respective issuance costs is described in Note 2Q and Note 2R above. | | | | | | | | | | | | | | | | | | | | | |
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| The Company has determined its derivative warrant liability to be a Level 3 fair value measurement and has used the Binomial pricing model to calculate its fair value. Because the warrants contain a price protection feature, the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the valuation calculations. The key inputs used in the fair value calculations were as follows: | | | | | | | | | | | | | | | | | | | | | |
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| | December 31, | | | | | | | | | | | | | | | | | | | |
2013 | | | | | | | | | | | | | | | | | | |
Dividend yield (%) | | | - | | | | | | | | | | | | | | | | | | | |
Expected volatility (%) (*) | | | 105.14 | | | | | | | | | | | | | | | | | | | |
Risk free interest rate (%) | | | 1.36 | | | | | | | | | | | | | | | | | | | |
Expected term of options (years) (**) | | | 4.2 | | | | | | | | | | | | | | | | | | | |
Exercise price (US dollars) | | | 6.96 | | | | | | | | | | | | | | | | | | | |
Share price (US dollars) (***) | | | 8.5 | | | | | | | | | | | | | | | | | | | |
Fair value (US dollars) | | | 6.405 | | | | | | | | | | | | | | | | | | | |
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| (*) | Due to the low trading volume of the Company's Common Stock, the expected volatility was based on the historical volatility of the share price of other public companies that operate in the same industry sector as the Company. | | | | | | | | | | | | | | | | | | | | |
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| (**) | Due to the fact that the Company does not have sufficient historical exercise data, the expected term was determined based on the "simplified method" in accordance with Staff Accounting Bulletin No. 110. | | | | | | | | | | | | | | | | | | | | |
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| (***) | The fair value per share of the Company's Common Stock as of December 31, 2013 was based on the management's estimate which was based among other factors on the closing price per share of the Company's Common Stock on December 27, 2013, as reported on the OTC Bulletin Board, the last reported sale of Common Stock in 2103. | | | | | | | | | | | | | | | | | | | | |
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| N. | In connection with the 2012 Offering, the Company also agreed with the placement agent for the offering that, following the closing of the sale of the Units, the Company would issue to the holders of the 1,295,535 shares of Common Stock issued by the Company at a price of $6.25 per share pursuant to the Company's previously completed private placement of Common Stock (accrued during 2011 and 2010) such number of shares of Common Stock as would reduce the per share purchase price paid by such holders for such shares from $6.25 per share to $5.80 per share, in each case subject to the execution by the holder of a consent to such modification. As a result, upon the receipt of executed consents to modification from all such holders, the Company has issued or will be required to issue to such holders an aggregate of 100,526 shares of Common Stock. As of September 30, 2013, the Common Stock had an estimated fair value of $2.77 per share. The issuance of such shares has been accounted for as a stock dividend. Accordingly, the fair value of the shares was charged to the "deficit accumulated during development stage" against additional paid in capital. | | | | | | | | | | | | | | | | | | | | |
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| O. | During the year ended December 31, 2013 23.2 shares of Preferred Stock were converted into 4,000 shares of Common Stock. The conversion resulted in an increase to Stockholders equity and a decrease in temporary equity of $23,200, representing the fair value of the Preferred Stock at the closing date. | | | | | | | | | | | | | | | | | | | | |