Manuka, Inc. - Quarter Report: 2013 September (Form 10-Q)

zk1313842.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Commission file number 0-24431)

________________

INKSURE TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

DELAWARE	84-1417774
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

18 East 16th Street, Suite 307, New York, NY	10003
(Address of principal executive offices)	(Zip Code)

(646) 233-1454

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has 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 x No o

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. (Check one):

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No x

The number of shares of Common Stock of the registrant outstanding was 43,173,592 as of November 12, 2013.

INKSURE TECHNOLOGIES INC.

INDEX TO FORM 10-Q

		PAGE

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheet as of September 30, 2013 (unaudited) and as of December 31, 2012 (audited)	3

	Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012	4

	Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2013 and 2012	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	8

Item 4.	Controls and Procedures	13

PART II.	OTHER INFORMATION	13

Item 1A.	Risk Factors	14

Item 6.	Exhibits	24

SIGNATURES		25

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INKSURE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(U.S. DOLLARS IN THOUSANDS)

	SEPT. 30, 2013		DEC. 31, 2012
	UNAUDITED		AUDITED
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	271	$	596
Restricted cash		16		15
Short-term deposit		30		-
Trade receivables		123		145
Other accounts receivable and prepaid expenses		26		24
Inventories		275		322

TOTAL CURRENT ASSETS		741		1,102

PROPERTY AND EQUIPMENT, NET		33		48
LONG TERM DEPOSIT		5		6

TOTAL ASSETS	$	779	$	1,156


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Trade payables	$	37		$	84
Employees and payroll accruals		66			93
Accrued expenses and other payables		20			135

TOTAL CURRENT LIABILITIES		123			312

Warrants to issue shares		84			106

TOTAL LIABILITIES		207			418

STOCKHOLDERS' EQUITY:
Capital Stock:
Preferred stock of $ 0.01 par value - Authorized: 10,000,000 shares; Issued and outstanding: 0 shares as of September 30, 2013 and as of December 31, 2012		-			-
Common stock of $ 0.01 par value - Authorized: 75,000,000; Issued and outstanding: 43,173,592 as of September 30, 2013 and as of December 31, 2012		432			432
Additional paid-in capital		17,807			17,808
Accumulated other comprehensive income		118			118
Accumulated deficit		(17,785	)		(17,620	)

TOTAL STOCKHOLDERS' EQUITY		572			738

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	779		$	1,156

The accompanying notes are an integral part of the consolidated financial statements.

INKSURE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2013			2012			2013			2012
	UNAUDITED						UNAUDITED
Revenues	$	300		$	516		$	982		$	915
Cost of revenues		83			160			375			396

Gross profit		217			356			607			519

Operating expenses:
Research and development		70			95			244			342
Selling and marketing		48			71			152			387
General and administrative		131			157			386			505

Total operating expenses		249			323			782			1,234

Operating profit (loss)		(32	)		33			(175	)		(715	)

Financial income (expenses), net		5			16			(12	)		13
Financial income related to warrants		65			43			22			14
Total financial income, net		70			59			10			27

Net profit (loss) from continuing operations		38			92			(165	)		(688	)

Net loss from discontinued operations		-			(151	)		-			(261	)

Net profit (loss)	$	38		$	(59	)	$	(165	)	$	(949	)

Net loss per share from continuing operations:
Basic and Diluted	$	0.00		$	0.00		$	0.00		$	(0.02	)

Net loss per share from discontinued operations:
Basic	$	-		$	0.00		$	-		$	0.00

Net loss per share:
Basic and Diluted	$	0.00		$	0.00		$	0.00		$	(0.02	)

Weighted average number of shares of Common Stock used in computing basic and diluted net loss per share		43,173,592			43,173,592			43,173,592			42,834,658

The accompanying notes are an integral part of the consolidated financial statements.

INKSURE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. DOLLARS IN THOUSANDS)

	NINE MONTHS ENDED ON SEPTEMBER 30,
	2013			2012
	UNAUDITED			UNAUDITED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(165	)	$	(949	)
Adjustments required to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		15			19

Decrease in trade receivables		22			211
Decrease (increase) in other accounts receivable and prepaid expenses		(2	)		14
Decrease in inventories		47			43
Decrease in trade payables		(47	)		(159	)
Decrease in employees and payroll accruals		(27	)		(31	)
Changes in warrants to issue shares		(22	)		(13	)
Share based compensation		(1	)		49
Decrease in accrued expenses and other payables		(115	)		(491	)
Increase in liabilities related to discontinued operations		-			173

NET CASH USED BY OPERATING ACTIVITIES		(295	)		(1,134	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		-			(7	)
Release of short-term deposit		-			506
Decrease in restricted cash		(1	)		-
Increase in short-term deposit		(30	)		-
Long-term lease deposits used		1			2

NET CASH PROVIDED FROM INVESTING ACTIVITIES		(30	)		501

Decrease in cash and cash equivalents		(325	)		(633	)
Cash and cash equivalents at the beginning of the year		596			1,392

Cash and cash equivalents at the end of the period	$	271		$	759

NON-CASH TRANSACTIONS
CEO share-based payment	$	-	$	21
Warrants cashless exercise	$	-	$	8

The accompanying notes are an integral part of the consolidated financial statements.

INKSURE TECHNOLOGIES INC.

(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 1:- BASIS OF PRESENTATION

The accompanying condensed unaudited interim consolidated financial statements have been prepared by InkSure Technologies Inc., or the Company, in accordance with accounting principles generally accepted in the United States of America, or US GAAP, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position of the Company as of September 30, 2013 and the results of operations and cash flows for the interim periods indicated in conformity with US GAAP applicable to interim periods. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted. These financial statements should be read in conjunction with the audited financial statements and notes thereto of the Company for the year ended December 31, 2012 that are included in the Company's Form 10-K filed with the Securities and Exchange Commission on March 29, 2013, or our Annual Report. The results of operations presented are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2013.

The Company has sustained significant operating losses in recent periods, which has resulted in a significant reduction in its cash reserves. As reflected in the accompanying financial statements, the Company's operations for the nine months ended September 30, 2013 resulted in a net loss of $165 and negative cash flows from operation activities of $295. The Company believes that it will continue to experience losses and increased negative working capital and negative cash flows in the near future and will not be able to return to positive cash flow without obtaining additional financing in the near term. The Company experiences difficulties accessing the equity and debt markets and raising such capital, and there can be no assurance that the Company will be able to raise such additional capital on favorable terms or at all. If additional funds are raised through the issuance of equity securities, the Company's existing stockholders will experience significant further dilution. As a result of the foregoing factors, there is substantial doubt about the Company's ability to continue as a going concern. In order to conserve the Company's cash and manage its liquidity, the Company has implemented cost-cutting initiatives including the reduction of employee headcount and overhead costs.

In April 2012, the Company's previous major customer, which accounted for approximately 50% and 56% of the Company's revenues from sales in Europe during the Company's fiscal years ended December 31, 2011 and 2010, respectively, informed the Company that it lost its government contract and as a result, this major customer does not continue to purchase the Company's products at all. In addition, the Company has experienced a reduction in orders from one other large customer in the nine months ended on September 30, 2013. The Company expects the revenues from these customers to remain lower than historical levels for the remainder of 2013. The loss of any of these customers, or the sustained continuation of their reduced levels of business, which accounts for a significant portion of the Company's revenues, will materially adversely affect the Company's business, operating results and financial condition.

NOTE 2: - SUBSEQUENT EVENTS

On October 1, 2013, the Company InkSure Inc., a Delaware corporation and InkSure Ltd., an Israeli corporation, or together with the Company and InkSure Inc., the Seller entered into an asset purchase agreement, or the APA with Spectra Systems Corporation, a Delaware corporation, or Spectra, for the sale of substantially all of Seller’s assets to Spectra, or the Asset Sale. In consideration for the acquisition of assets pursuant, to the APA, Spectra will pay the Seller $840,684, plus (i) Spectra’s and the Seller’s joint good faith estimate of the value of Seller’s inventory at the time and date of the closing of the transactions contemplated by the APA (subject to adjustment after the closing), (ii) $200,000, deposited with Wells Fargo Bank, National Association, or the Escrow Agent to be held in accordance with the terms of the escrow agreement, or the Escrow Agreement to secure InkSure’s obligations to pay Spectra any indemnification claims for a period of up to one year after the date of the closing, (iii) up to an additional $185,000 in post-closing conditional payments, and (iv) an amount equal to 50% of all pre-closing accounts receivable collected after the closing, and Spectra assumes and agrees to perform the obligations of the Seller under contracts relating to the Seller's business. Following the acquisition, the Company plans to explore strategic alternatives to deploy the proceeds, which may include future acquisitions, a merger with another company, or other actions to redeploy capital, including, without limitation, distribution of cash to our stockholders or the sale of the “shell” company registered under the Securities Exchange Act of 1934, as amended, into which the net proceeds may be retained.

The Company intends to call an annual meeting of its stockholders to be held in November 2013 at which meeting the Company's stockholders will be asked to, among other items, consider and approve the transactions contemplated by the APA. The following parties, owning an aggregate of approximately 43.31% of the Company’s common stock, have agreed with Spectra to vote their stock to approve the APA and the transactions contemplated therein pursuant to the terms of stockholder voting agreements by and among the Company, Spectra and each of the stockholders party thereto:

Jonathan Bettsak, Director of the Company

Tal Gilat, President and Chief Executive Officer of the Company

Gadi Peleg, Chairman of the Board of Directors of the Company

ICTS-USA, Inc.

ICTS Information Systems, B.V.

ICTS International N.V.

NewCo Holdings Corporation

Peleg Investment Management LLC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this section, "Management's Discussion and Analysis of Financial Condition and Results of Operation," references to "we," "us," "our," "ours," or "InkSure," refer to InkSure Technologies Inc. and its consolidated subsidiaries and dollar amounts are in thousands, except as otherwise stated.

This Quarterly Report on Form 10-Q contains statements that may constitute "forward-looking statements." Generally, forward-looking statements include words or phrases such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "projects," "could," "may," "might," "should," "will," the negative of such terms, and words and phrases of similar import. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties, including, but not limited to, the difficulty inherent in operating in a rapidly evolving market, market and economic conditions, the impact of competitive products, product demand and market acceptance risks, changes in product mix, our ability to improve our margins, costs and availability of raw materials, fluctuations in operating results, delays in development of highly complex products, risks from uncertainties regarding litigation or mediation, our ability to continue as a going concern, risk of customer contract or sales order cancellations or reductions in volume, failure to meet the conditions necessary to complete the Asset Sale, risks inherent with each of the possible strategic alternatives to deploy the proceeds of the Asset Sale and possibly needing to seek bankruptcy protection if the Asset Sale is not completed or approved by our stockholders, as well as other risks detailed from time to time in our filings with the Securities and Exchange Commission, or the SEC. These risks and uncertainties could cause our actual results to differ materially from those described in our forward-looking statements. Any forward-looking statement represents our expectations or forecasts only as of the date it was made and should not be relied upon as representing its expectations or forecasts as of any subsequent date. Except as required by law, we undertake no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, even if our expectations or forecasts change.

The following discussion and analysis should be read in conjunction with the financial statements, related notes and other information included in this Quarterly Report on Form 10-Q and with the Risk Factors included in Part II, Item 1A of this Quarterly Report on Form 10-Q, our preliminary proxy statement filed on October 22, 2013, or our Proxy Statement and in our Annual Report.

OVERVIEW

We currently specialize in comprehensive security solutions designed to protect branded products and documents from counterfeiting, fraud, and diversion. By creating smart protection solutions using proprietary machine-readable authentication technologies, we help companies, governments and organizations worldwide control their most valuable assets, products, reputation and revenues. We employ experts in various fields, including material science, electro-optics and software. We utilize cross-disciplinary technological innovations to implement customized and cost efficient security solutions for data and asset integrity within customers' existing infrastructure and environment.

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

Subsequent to the end of the quarter, on October 1, 2013, the Company, with its subsidiaries InkSure Inc. and InkSure Ltd., entered into an asset purchase agreement with Spectra, subject to specified terms and conditions, including approval of the Asset Sale by its stockholders at the Annual Meeting, to sell to Spectra substantially all of its right, title, and interest in substantially all of its assets. In exchange the Company will receive on the closing date of the Asset Sale (the “Closing”) $840,684 in cash, plus Spectra’s and the Company’s good faith estimate of the inventory value at the closing date, plus an amount equal to 50% of all pre-closing accounts receivable collected after the Closing, and the Company may receive additional contingent consideration upon the achievement of development and commercialization conditions related to orders from certain specified clients. In addition, Spectra will, at the Closing, deposit an additional $200,000 with Wells Fargo Bank, National Association (the “Escrow Agent”) to be held in accordance with the terms of the escrow agreement (the “Escrow Agreement”) to secure the Company’s obligations to pay Spectra any indemnification claims for a period of up to one year after the date of the Closing.

Following the Asset Sale, the Company’s Board of Directors plans to explore strategic alternatives to deploy the proceeds of the Asset Sale, which may include future acquisitions, a merger with another company, or other actions to redeploy capital, including, without limitation, the sale of the public shell company into which the net proceeds may be retained. It is unlikely, however, that the Company will make a distribution of cash to its stockholders.

REVENUES

In the nine months ended on September 30, 2013, approximately 50% of our revenues were earned from customers located outside the United States compared with 63% in the nine months ended on September 30, 2012. In the nine months ended on September 30, 2013, approximately 37% of our revenues were earned from one customer located in the United States compared with 6% from such customer in the nine months ended on September 30, 2012.

In April 2012, our previous major customer, which accounted for approximately 50% and 56% of our revenues from sales in Europe during our fiscal years ended December 31, 2011 and 2010, respectively, informed us that it lost its government contract and as a result, this major customer does not continue to purchase our products at all. In addition, we have experienced a reduction in orders from one other large customer in the nine months ended on September 30, 2013. We expect the revenues from these customers to remain lower than historical levels for the remainder of 2013. The loss of any of these customers, or the sustained continuation of their reduced levels of business, which accounts for a significant portion of our revenues, will materially adversely affect our business, operating results and financial condition. In the nine months ended on September 30, 2013, less than 1% of our revenues were earned from our other large customer, which comprised 22% of our revenues in the nine months ended on September 30, 2012.

In the nine months ended on September 30, 2013, approximately $80 or 8% of our revenues were generated by the recognition of the approximately three-year-old advances from two of our customers.

COSTS AND OPERATING EXPENSES

Costs and operating expenses consist of cost of revenues, research and development expenses, selling expenses, marketing expenses, general and administrative expenses as described below.

THREE MONTHS ENDED ON SEPTEMBER 30, 2013 COMPARED WITH THREE MONTHS ENDED ON SEPTEMBER 30, 2012

REVENUES. Revenues consist of gross sales of products less discounts. Our potential contracts are subject to a long sales cycle and the timetable for entering and implementing such projects fluctuates. Our revenues, mostly derived by the sales of taggants and readers, decreased by $216, or by 42%, to $300 in the three months ended on September 30, 2013 from $516 in the three months ended on September 30, 2012. This decrease in revenues was mainly due to lower volume of deliveries of our TagSure product to one of our customers located in the Asia and to one of our customers located in Europe. Going forward, for so long as we remain engaged in our current business until the Asset Sale is completed, we expect to continue to encounter a number of industry and market structural risks and uncertainties that will affect our business climate and market visibility, and consequently, our ability to predict future revenue, profitability and general financial performance.

Due to our financial condition, we no longer have enough resources to concentrate on projects with long sales cycles. Revenue from customers outside the United States represented 67% and 77% of our revenues for the three months ended on September 30, 2013 and 2012, respectively. Revenues were assigned to geographic regions based on the customers' shipment locations.

COST OF REVENUES. Cost of revenues consists of materials, including taggants and electronic and optical parts, sub-contractors, travel and compensation costs. Cost of revenues decreased by $77, or 48%, to $83 in the three months ended on September 30, 2013, from $160 in the three months ended on September 30, 2012. Cost of revenues as a percentage of revenues was 28% in the three months ended on September 30, 2013, compared with 31% in the three months ended on September 30, 2012. The decrease in cost of revenues in percentage terms in the three months ended on September 30, 2013 was primarily related to a mix of sales of products with higher profitability in 2013 and lower salary expenses.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist primarily of compensation costs attributable to employees engaged in ongoing research and development activities, development-related raw materials and fees of sub-contractors. Research and development expenses decreased by $25, or 26%, to $70 in the three months ended on September 30, 2013, from $95 in the three months ended on September 30, 2012. This decrease in research and development expenses was primarily related to lower payroll expenses of $18, lower subcontractors' expenses of $4 and lower non-cash share based compensation expenses in an amount of $3 related to the impact of the accounting rules on share-based payments outlined in ASC Topic 718-10, "Share Based Payment".

We did not capitalize research and development expenses in 2013 and 2012, as all such expenses have been charged to operating expenses as incurred.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of costs relating to compensation attributable to employees engaged in sales and marketing activities, promotion, advertising, trade shows and exhibitions, sales support, travel, commissions and related expenses. Selling and marketing expenses decreased by $23, or 32%, to $48 in the three months ended on September 30, 2013, from $71 in the three months ended on September 30, 2012. This decrease in selling and marketing expenses was primarily related to a decrease in payroll expenses of $23, a decrease in other expenses of $8 (mainly advertising and travel expenses) offset by higher non-cash share based compensation expenses in an amount of $8 related to the impact of the accounting rules on share-based payments outlined in ASC Topic 718-10, "Share Based Payment".

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of compensation costs for administrative, finance and general management personnel, insurance, legal, accounting and administrative costs. General and administrative expenses decreased by $26, or 17%, to $131 in the three months ended on September 30, 2013, from $157 in the three months ended on September 30, 2012. This decrease in general and administrative expenses was primarily related to lower legal expenses of $25 and lower non-cash share based compensation expenses in an amount of $10 related to the impact of the accounting rules on share-based payments outlined in ASC Topic 718-10, "Share Based Payment", offset by higher travel expenses of $5 and higher payroll expenses of $4 . We have taken steps to reduce as much of our general and administrative expenses as possible.

General and administrative expenses in the three months ended on September 30, 2013 included non-cash share based compensation expenses of $2.

FINANCIAL INCOME, NET. Financial income, net, increased by $11, or 19%, to $70 in the three months ended on September 30, 2013, from financial income, net of $59 in the three months ended on September 30, 2012. This increase in financial income, net was primarily related to an increase of $22 in non-cash financial income related to warrants offset by a decrease of $11 in exchange rates changes.

NET LOSS FROM DISCONTINUED OPERATIONS. At the end of 2010, our board of directors decided to discontinue all further research and development of projects, which were not directly related to our core business of anti-counterfeiting and brand protection solutions, including our RFID product, SARCode, and its related technologies.

The discontinued operation mainly consisted of research and development expenses. These expenses consisted primarily of compensation costs attributable to employees that were engaged in research and development activities, development-related raw materials and fees of sub-contractors and other related costs such as rental of research and development tools. The discontinued operation expenses decreased by $151 to zero in the three months ended on September 30, 2013, from $151 in the three months ended on September 30, 2012. This decrease was due to accrued legal expenses in the three months ended on September 30, 2012 compared with no legal expenses in the three months ended on September 30, 2013.

NET PROFIT (LOSS). We had a net profit of $38 in the three months ended on September 30, 2013, compared with a net loss of $59 in the three months ended on September 30, 2012, which represents an increase of $97 in net profit. This increase in net profit was primarily related to lower operating expenses, higher financial income, net and no discontinued operation expenses.

NINE MONTHS ENDED ON SEPTEMBER 30, 2013 COMPARED WITH NINE MONTHS ENDED ON SEPTEMBER 30, 2012

REVENUES. Revenues increased by $67, or by 7%, to $982 in the nine months ended on September 30, 2013, from $915 in the nine months ended on September 30, 2012. This increase in revenues was mainly due to higher volume of deliveries of our TagSure product to one of our customers located in the United States and to one of our customers located in Asia. Going forward, for so long as we remain engaged in our current business until the Asset Sale is completed, we expect to continue to encounter a number of industry and market structural risks and uncertainties that will affect our business climate and market visibility, and consequently, our ability to predict future revenue, profitability and general financial performance.

Due to our financial condition, we no longer have enough resources to concentrate on projects with long sales cycles. Revenue from customers outside the United States represented 50% and 63% of our revenues for the nine months ended on September 30, 2013 and 2012, respectively. Revenues were assigned to geographic regions based on the customers' shipment locations.

COST OF REVENUES. Cost of revenues decreased by $21, or 5%, to $375 in the nine months ended on September 30, 2013 from $396 in the nine months ended on September 30, 2012. Cost of revenues as a percentage of revenues was 38% in the nine months ended on September 30, 2013, compared with 43% in the nine months ended on September 30, 2012. The decrease in cost of revenues in percentage terms in the nine months ended on September 30, 2013 was primarily related to lower salary expenses and due to the fact that approximately $80 or 8% of our revenues were generated by the recognition of the approximately three-year-old advances from two of our customers, with no cost involved.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased by $98, or 29%, to $244 in the nine months ended on September 30, 2013, from $342 in the nine months ended on September 30, 2012. This decrease in research and development expenses was primarily related to lower payroll expenses of $55, lower subcontractors' expenses of $44 and lower non-cash share based compensation expenses in an amount of $5 related to the impact of the accounting rules on share-based payments outlined in ASC Topic 718-10, "Share Based Payment", offset by higher travel expenses of $6.

We did not capitalize research and development expenses in 2013 and 2012, as all such expenses have been charged to operating expenses as incurred.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased by $235, or 61%, to $152 in the nine months ended on September 30, 2013, from $387 in the nine months ended on September 30, 2012. This decrease in selling and marketing expenses was primarily related to a decrease in payroll expenses of $182, a decrease in other expenses of $56 (mainly advertising and travel expenses) offset by higher non-cash share based compensation expenses in an amount of $3 related to the impact of the accounting rules on share-based payments outlined in ASC Topic 718-10, "Share Based Payment".

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased by $119, or 24%, to $386 in the nine months ended on September 30, 2013, from $505 in the nine months ended on September 30, 2012. This decrease in general and administrative expenses was primarily related to: lower payroll expenses in an amount of $36, lower legal expenses of $48 and lower non-cash share based compensation expenses in an amount of $43 related to the impact of the accounting rules on share-based payments outlined in ASC Topic 718-10, "Share Based Payment" offset by higher travel expenses of $3 and higher other expenses of $5. We have taken steps to reduce as much of our general and administrative expenses as possible.

FINANCIAL INCOME, NET. Financial income, net, decreased by $17, or 63%, to $10 in the nine months ended on September 30, 2013, from $27 in the nine months ended on September 30, 2012. This decrease in financial income, net was primarily related to an increase of $25 in exchange rates expenses changes, offset by an increase of $8 in non-cash financial income related to warrants.

NET LOSS FROM DISCONTINUED OPERATIONS. The discontinued operation expenses decreased by $261 to zero in the nine months ended on September 30, 2013, from $261 in the nine months ended on September 30, 2012. This decrease was due to accrued legal expenses of $261 in the nine months ended on September 30, 2012 compared with no legal expenses in the nine months ended on September 30, 2013.

NET LOSS. We incurred a net loss of $165 in the nine months ended on September 30, 2013, compared with a net loss of $949 in the nine months ended on September 30, 2012, which represents a decrease of $784 in net loss. This decrease in net loss was primarily related to the increase in our revenues, which was mainly due to higher volume of deliveries of our TagSure product to one of our customers located in the United States, the recognition of $80 due to the approximately three-year-old advances from two of our customers and a decrease in our operational expenses, which was mainly due to lower salary expenses.

LIQUIDITY AND CAPITAL RESOURCES

We have incurred substantial losses since our inception in April 1997. As of September 30, 2013, we had an accumulated deficit of $17,785, and had positive working capital (current assets less current liabilities) of $618. Losses will continue in the foreseeable future.

We do not have any material commitments for capital expenditures as of September 30, 2013.

The Company has sustained significant operating losses in recent periods, which has resulted in a significant reduction in its cash reserves. As reflected in the accompanying financial statements, the Company's operations for the nine months ended September 30, 2013 resulted in a net loss of $165 and negative cash flows from operation activities of $295. Further, if the Asset Sale is completed, the Company will no longer have revenue producing operations. The Company believes that it will continue to experience losses and increased negative working capital and negative cash flows in the near future and will not be able to return to positive cash flow without obtaining additional financing in the near term. The Company experiences difficulties accessing the equity and debt markets and raising such capital, and there can be no assurance that the Company will be able to raise such additional capital on favorable terms or at all. If additional funds are raised through the issuance of equity securities, the Company's existing stockholders will experience significant further dilution. As a result of the foregoing factors, there is substantial doubt about the Company's ability to continue as a going concern. In order to conserve the Company's cash and manage its liquidity, the Company has implemented cost-cutting initiatives including the reduction of employee headcount and overhead costs.

As of September 30, 2013, we had cash and cash equivalents of $271, compared to $596 as of December 31, 2012. This decrease of $325 is primarily due to the net loss of $165 in the nine months ended on September 30, 2013, an increase of $30 in short-term deposit, a decrease of $47 in trade payables in the nine months ended on September 30, 2013, a decrease of $27 in employees and payroll accruals in the nine months ended on September 30, 2013, a decrease of $115 in accrued expenses and other payables in the nine months ended on September 30, 2013, offset by a decrease of $47 in inventories in the nine months ended on September 30, 2013.

We had negative cash flow from operating activities of $295 in the nine months ended on September 30, 2013, compared to a negative cash flow of $1,134 in the nine months ended on September 30, 2012. The negative cash flow from operating activities in the nine months ended on September 30, 2013 is attributable mainly to the net loss of $165, a decrease of $47 in trade payables in the nine months ended on September 30, 2013, a decrease of $27 in employees and payroll accruals in the nine months ended on September 30, 2013, a decrease of $115 in accrued expenses and other payables in the nine months ended on September 30, 2013, offset by a decrease of $47 in inventories in the nine months ended on September 30, 2013. We had negative cash flow from investing activities of $30 in the nine months ended on September 30, 2013, compared to positive cash flow from investing activities of $501 in the nine months ended on September 30, 2012. The negative cash flow from investing activities in the nine months ended on September 30, 2013 was due to an increase of $30 in short term deposit.

We did not have any cash flow from financing activities in the nine months ended on September 30, 2013 and in the nine months ended on September 30, 2012.

Because of the reduced levels of orders from our largest customers and our expectation that our revenues from these customers will continue to remain depressed or decline further, we believe that our existing cash resources, together with cash to be collected from customers, will no longer be sufficient to support our operations for the next twelve months, absent completion of the Asset Sale. Continuing product development and enhancement, expected new product launches, corporate operations and marketing expenses will continue to require additional capital and our current cash flow from operations is insufficient to cover the plans for our current business. In order to have sufficient cash to meet our anticipated requirements for the next twelve months, we would be dependent upon our ability to obtain additional financing if the Asset Sale does not close. The inability to generate sufficient cash from operations or to obtain required additional funds would require us to curtail our operations. There can be no assurance that acceptable financing to fund our ongoing operations can be obtained on suitable terms, if at all. If we are unable to obtain the financing necessary to support our operations, we will be unable to continue as a going concern. In that event, we may be forced to cease operations and our stockholders would lose their entire investment in our company. In order to conserve our cash and manage our liquidity, we implemented cost-cutting initiatives including the reduction of employee headcount and overhead costs. Our management has also tightened its cost control, but increased the marketing of our current and new products.

If the Asset Sale is completed, the Company’s Board of Directors plans to explore strategic alternatives to deploy the proceeds of the Asset Sale, which may include future acquisitions, a merger with another company, or other actions to redeploy capital, including, without limitation, the sale of the public shell company into which the net proceeds may be retained. It is unlikely, however, that the Company will make a distribution of cash to our stockholders.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

A. Our contractual obligations and commitments at September 30, 2013 principally include obligations associated with the lease of one automobile, which expires in June 2016. Our total future obligation is approximately $26 until June 2016. We expect to finance this contractual commitment from cash on hand and cash generated from operations.

B. During the year 2007 through year 2010, we received governmental research and development grants of approximately $1,905 from the Office of the Chief Scientist of Israel, or the OCS. Of this amount, a total of $1,805 was received in connection with the research and development of our RFID product, which we discontinued in November 2010. The remaining $100 were allocated to our ScanSure line of products. These royalties-bearing research and development grants partially covered our research and development RFID project expenses. Royalties would become due to OCS only if the RFID or the ScanSure research and development projects funded by the grant were successfully commercialized and resulted in sales' revenues based on the know-how developed during the RFID or the ScanSure projects. The royalty rate is 3%-4% of the sales revenues based on the RFID or the ScanSure research and development projects funded by the grant, and is capped at the grant amount actually received from the OCS plus interest (total theoretical debt of $2,130).

ITEM 4.

CONTROLS AND PROCEDURES

Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and concluded that our disclosure controls and procedures were effective as of September 30, 2013.

No change in our internal control over financial reporting occurred during the quarter ended September 30, 2013, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

PART II.

OTHER INFORMATION

ITEM 1A. RISK FACTORS

Our business faces many risks, a number of which are described under "Risk Factors" in Part I of our Annual Report, in our Proxy Statement, and below. The risks so described may not be the only risks we face. Additional risks of which we are not yet aware, or that we currently believe are immaterial, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described in the risk factors contained in our Annual Report, in our Proxy Statement or described below occurs, our business, financial condition or results of operations could decline and the trading price of our debt or equity securities could decline. Investors and prospective investors should consider the foregoing risks and below and the information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operation" and elsewhere in this Quarterly Report on Form 10-Q before deciding whether to invest in our securities.

THE FOLLOWING RISK FACTORS, AMONG OTHERS, COULD AFFECT OUR ACTUAL RESULTS OF OPERATIONS AND COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN FORWARD-LOOKING STATEMENTS MADE BY US. THOSE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND WE ASSUME NO OBLIGATION TO UPDATE THAT INFORMATION. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q BEFORE MAKING AN INVESTMENT DECISION. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED BY ANY OF THESE RISKS. OUR COMMON STOCK IS CONSIDERED SPECULATIVE AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. THE FOLLOWING RISK FACTORS ARE NOT THE ONLY RISK FACTORS FACING US. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS.

Risks Related to Existing Business

The risks below relate to our currently existing business. If the Asset Sale is completed, we will have sold substantially all of our assets. For a description of certain risk regarding the Asset Sale, see "Risks Related to Asset Sale" below.

IF WE ARE UNABLE TO OBTAIN FINANCING NECESSARY TO SUPPORT OUR OPERATIONS, OUR CASH RESOURCES WILL BE REDUCED TO A LEVEL THAT WILL NOT ENABLE US TO CONTINUE OUR OPERATIONS AND WE WILL BE UNABLE TO CONTINUE AS A GOING CONCERN.

Because of the reduced levels of orders from our largest customers and our expectation that our revenues from these customers will continue to remain depressed or decline further, we believe that our existing cash resources, together with cash to be collected from customers, will no longer be sufficient to support our operations for the next twelve months. Continuing product development and enhancement, expected new product launches, corporate operations and marketing expenses will continue to require additional capital and our current cash flow from operations is insufficient to cover our business plans. In order to have sufficient cash to meet our anticipated requirements for the next twelve months, we will be dependent upon our ability to obtain additional financing. The inability to generate sufficient cash from operations or to obtain required additional funds will require us to curtail our operations. There can be no assurance that acceptable financing to fund our ongoing operations can be obtained on suitable terms, if at all. If we are unable to obtain the financing necessary to support our operations, we will be unable to continue as a going concern. In that event, we may be forced to cease operations and our stockholders will lose their entire investment in our company.

In order to conserve our cash and manage our liquidity, we implemented cost-cutting initiatives including the reduction of employee headcount and overhead costs. Our management has also tightened its cost control, but increased the marketing of our current and new products.

We are experiencing difficulties accessing the equity and debt markets and raising such capital, and there can be no assurance that we will be able to raise such additional capital on favorable terms or at all. If additional funds are raised through the issuance of equity securities, our existing stockholders will experience significant further dilution.

As a result of the foregoing factors, there is substantial doubt about our ability to continue as a going concern.

SINCE INCEPTION, WE HAVE HAD OPERATING LOSSES AND WE DO NOT EXPECT TO BE PROFITABLE IN THE FUTURE.

We have sustained significant operating losses in recent periods, which have resulted in a significant reduction in our cash reserves. As reflected in the accompanying financial statements, our operations for the nine months ended September 30, 2013 resulted in a net loss of $165 and negative cash flows from operation activities of $295. We believe that we will continue to experience losses and increased negative working capital and negative cash flows in the near future and will not be able to return to positive cash flow without obtaining additional financing in the near term. We may experience difficulties accessing the equity and debt markets and raising such capital, and there can be no assurance that we will be able to raise such additional capital on favorable terms or at all. If additional funds are raised through the issuance of equity securities, the Company's existing stockholders will experience significant further dilution. As a result of the foregoing factors, there is substantial doubt about the Company's ability to continue as a going concern. In order to conserve our cash and manage our liquidity, we are implementing cost-cutting initiatives including the reduction of employee headcount and overhead costs.

In April 2012, our previous customer, which accounted for approximately 50% and 56% of our revenues from sales in Europe during our fiscal years ended December 31, 2011 and 2010, respectively, informed us that it lost its government contract and as a result, this major customer does not continue to purchase our products at all. In addition, we have experienced a reduction in orders from one other large customer in the nine months ended September 30, 2013. The loss of any of these customers, or the sustained continuation of their reduced levels of business, which accounts for a significant portion of our revenues, will materially adversely affect our business, operating results and financial condition.

Our operating expense levels are based on internal forecasts for future demand and not on firm customer orders for products or services. Our results may be affected by fluctuating demand for our products and services from one quarter to the next and by increases in the costs of components acquired from suppliers among other issues.

SINCE INCEPTION, WE HAVE HAD NEGATIVE CASH FLOWS.

We have incurred substantial negative cash flows since our inception. In the nine months ended September 30, 2013 our cash and cash equivalents decreased by $325, from $596 in December 31, 2012. To the extent that we may have negative cash flows in the future, we will continue to require additional capital to fund our operations. There can be no assurance that we will achieve positive cash flow from our operations or that we can secure additional capital.

IF OUR PRODUCT OFFERINGS ARE NOT ACCEPTED BY THE MARKET, OUR BUSINESS WILL BE ADVERSELY AFFECTED.

We currently generate all of our revenue from sales of products relating to the "authentication industry." The market for providing these products and services is highly competitive and is affected by the introduction of new products and services that compete with the products and services offered by us. Demand for these products and services will be affected by numerous factors outside our control, including, among others, market acceptance by prospective customers, the introduction of new or superior competing technologies or products and services that are available on more favorable pricing terms than those being offered by us, and the general condition of the economy. Our products have not yet achieved any significant market penetration. Market acceptance for our products and services may not develop in a timely manner or may not be sustainable. New or increased competition may result in market saturation, more competitive pricing, and lower margins. Our business, operating results and financial condition would be materially and adversely affected if the market for our products and services fails to grow, grows more slowly than anticipated, or becomes more competitive, or if targeted customers do not accept our products and services and we experience a corresponding reduction in revenues, a higher loss and a failure to generate substantial revenues in the future. In addition, we may enter into several agreements pursuant to which we may grant third parties broad, exclusive rights to distribute and sell certain aspects of our technology, subject to customary provisions governing confidentiality and nondisclosure. Failure of these third parties to effectively market products and services based upon our technology will have a material adverse effect on our business, operating results, and financial condition due to the lack of revenues expected to be generated from such agreements.

WE ARE FOCUSING ON OUR NEW SMARTPHONE AUTHENTICATION APPLICATION DEVELOPMENT, THE SMARTSUREä. IF WE ARE UNABLE TO DEVELOP OR COMMERCIALIZE THE SMARTSUREä OR ANY OTHER PRODUCT THAT WE MAY PURSUE IN THE FUTURE, OR EXPERIENCE SIGNIFICANT DELAYS OR UNANTICIPATED COSTS IN DOING SO, OUR BUSINESS WILL BE MATERIALLY HARMED.

We are focusing on development of a new authentication of holograms via a commercially available smartphone product. We may spend significant amounts on attempting to develop the product and there is no assurance that such product will be successfully developed or, if developed, that we will be able to commercialize this product. As with many efforts at new product development, we are experiencing significant delays and incurring significant unanticipated expenses. Accordingly, we may spend significant time, management resources and money on the smartphone application with no material results. Even if we successfully develop our authentication of holograms via commercially available smart phones technology, we may be unable to successfully market our SmartSure products.

OUR SMARTPHONE AUTHENTICATION APPLICATION MUST MEET EXACTING TECHNICAL AND QUALITY SPECIFICATIONS. DEFECTS, ERRORS IN OR INTEROPERABILITY ISSUES WITH OUR PRODUCTS OR THE FAILURE OF OUR PRODUCTS TO OPERATE AS EXPECTED COULD AFFECT OUR REPUTATION, RESULT IN SIGNIFICANT COSTS TO US AND IMPAIR OUR ABILITY TO SELL OUR PRODUCTS.

Our SmartSure authentication application may not operate as expected or may contain defects or errors, which could materially and adversely affect our reputation, result in significant costs to us and impair our ability to sell our products in the future. Our customers have demanding specifications for quality, performance and reliability that our SmartSure authentication application must meet. Our products are highly technical and designed to be deployed in large and complex data networks and other settings under a wide variety of conditions. Customers may discover errors, defects, or incompatibilities in our products only after they have been fully deployed and are operating under peak stress conditions. In addition, users of our SmartSure authentication application may experience compatibility or interoperability issues between our products and their enterprise software systems or networks, or between our products and other products they use.

The costs incurred in correcting any product defects or errors may be substantial and could adversely affect our operating results. While we test our products for defects or errors prior to product release, defects or errors may be identified from time to time by our internal team and by our customers. To the extent product failures are material, they could adversely affect our business, operating results, customer relationships, reputation and prospects.

OUR RESEARCH AND DEVELOPMENT EFFORT FOR NEW PRODUCTS MAY BE UNSUCCESSFUL.

We incur research and development expenses to develop new products and technologies in an effort to maintain our competitive position in a market characterized by rapid rates of technological advancement. Our research and development efforts are subject to unanticipated delays, expenses and technical problems. There can be no assurance that any of these products or technologies will be successfully developed or that, if developed, will be commercially successful. For example, in November 2010, we discontinued the development of our RFID product and related technologies, after investing in research and development efforts for approximately 5 years and approximately $5 million (net of government grants), because we wanted to focus on our core technology and cash limitations. In the event that we are unable to develop commercialized products from our research and development efforts or we are unable or unwilling to allocate amounts beyond our currently anticipated research and development investment, we could lose our entire investment in these new products and technologies. Any failure to translate research and development expenditures into successful new product introductions could have an adverse effect on our business.

WE CONTINUE TO RELY ON OUR MAJOR CUSTOMERS FOR MOST OF OUR REVENUES; THE LOSS OF A MAJOR CUSTOMER HAS ADVERSELY AFFECT OUR BUSINESS.

In April 2012, our previous major customer, which accounted for approximately 50% and 56% of our revenues from sales in Europe during our fiscal years ended December 31, 2011 and 2010 respectively, informed us that it lost its government contract, and as a result, this major customer does not continue to purchase our products at all. In addition, we have experienced a reduction in orders from one other large customer in the nine months ended on September 30, 2013. We expect the revenues from these customers to remain lower than historical levels for the remainder of 2013. The loss of any of these customers, or the sustained continuation of their reduced levels of business, which accounts for a significant portion of our revenues, will adversely affect our business, operating results and financial condition. In the nine months ended on September 30, 2013, less than 1% of our revenues were earned from our other large customer, which comprised 22% of our revenues in the nine months ended on September 30, 2012.

A SIGNIFICANT PART OF OUR SALES IS TO INTERNATIONAL CUSTOMERS; COMPLICATIONS IN INTERNATIONAL MARKETS COULD ADVERSELY AFFECT OUR BUSINESS.

Sales to customers outside of the United States accounted for 50% and 63% of our revenues in the nine months ended on September 30, 2013 and 2012, respectively. We are seeking to continue to expand our sales in foreign markets, but there can be no assurance that we will be able to do so or that such markets will be viable. Moreover, a large percentage of our sales is derived from countries in which the political situation is unstable. To the extent that a large percentage of our sales continues to come from customers outside of the United States, we will continue to be subject to the risks associated with international sales, including economic and political instability, shipping delays, customs duties, export quotas and other trade restrictions, any of which could have a significant impact on our ability to deliver products on a competitive and timely basis. While we have not encountered significant difficulties in connection with sales in international markets to date, future imposition of, or significant increases in, the level of custom duties, export quotas or other trade restrictions could have an adverse effect on our business.

WE HAVE GRANTED EXCLUSIVITY RIGHTS TO CERTAIN CUSTOMERS, WHICH COULD ADVERSELY AFFECT OUR FUTURE DISTRIBUTION OPTIONS.

We have granted to certain customers the exclusive right to use our products within such customer's country of origin for so long as such customer's orders from us reach a certain level. Although this grant of exclusivity is limited to customers' countries of origin, it is of indefinite term and may have an adverse effect on our ability to enter into agreements with other potential customers that may have broad regional operations.

WE WILL NOT BE ABLE TO RECEIVE FURTHER RESEARCH AND DEVELOPMENT GRANTS FROM THE GOVERNMENT OF ISRAEL.

During 2007 and through the end of 2010, we received a research and development grant of approximately $1,905 from OCS. Of this amount, a total of $1,805 were received in connection with the research and development of our RFID product, which we discontinued in November 2010. The remaining $100 were allocated to our ScanSure line of products.

Due to the decrease in our operations, the Company reduced its research and development activities and did not apply for new research and development grants. Accordingly, there is no assurance that further grants may be available to us in the future.

WE HAVE A LONG AND VARIABLE SALES CYCLE WHICH CAN RESULT IN SIGNIFICANT FLUCTUATIONS IN OUR REVENUE FROM QUARTER TO QUARTER.

The sales cycle of our products, which is the period of time between the identification of a potential customer and completion of the sale, is typically long and subject to a number of significant risks over which we have little control. As our operating expenses are based on anticipated revenue levels, a small fluctuation in the timing of sales can cause our quarterly operating results to vary significantly from period to period. If revenue falls significantly below anticipated levels, our business would be seriously harmed. Investors can also anticipate uneven revenue and operating results, which may be reflected in a volatile market price for our stock.

WE FACE POTENTIAL LIABILITY DUE TO PRODUCT DEFECTS AND MAY INCUR SIGNIFICANT LIABILITIES IN DEFENDING LAWSUITS OVER ANY SUCH DEFECTS.

Authentication products as complex as those offered by us may contain undetected errors or defects when first introduced or as new versions are released. Despite testing by us and by current and potential customers, errors may be found in new authentication products after commencement of commercial shipments resulting in product recalls and market rejection of our authentication products and resulting in damage to our reputation, as well as lost revenue, diverted development resources and increased support costs. In addition, our products liability insurance, if any, may be insufficient to cover claims-related errors or defects in our authentication products.

WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH WOULD ADVERSELY AFFECT OUR ABILITY TO COMPETE IN THE AUTHENTICATION MARKET.

Our performance and ability to compete are dependent to a significant degree on our proprietary technology. We regard protection of our proprietary rights as critical to our success, and rely on patent, trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. Due to our reliance on our proprietary technology, our inability to protect our proprietary rights adequately would have a material adverse effect on us.

We are also seeking protection under the Patent Cooperation Treaty. We have several patents granted and pending. A patent may not be issued with respect to any patent application filed by us or the scope of any claims granted in any patent may not provide meaningful proprietary protection or a competitive advantage to us. The validity or enforceability of patents which may be issued or licensed to us may be challenged by others and, if challenged, may not be upheld by a court. In addition, competitors may be able to circumvent any patents that may be issued or licensed to us.

We generally have entered into agreements containing confidentiality and nondisclosure provisions with our employees and consultants and limit access to and distribution of our documentation and other proprietary information. However, the steps taken by us may not prevent misappropriation of our technology and agreements entered into for that purpose may not be enforceable.

Notwithstanding the precautions taken by us, a third party may be able to copy or otherwise obtain and use our proprietary information without authorization or to develop similar technology independently. Policing unauthorized use of our technology is difficult. The laws of other countries may afford us little or no effective protection of our intellectual property. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services are made available. In the future, we may also need to file lawsuits to enforce our intellectual property rights, protect our trade secrets, and determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or unsuccessful, could have a material adverse effect on our business, operating results, and financial condition due to the substantial costs and diversion of resources.

WE FACE COMPETITION AND PRICING PRESSURES FROM LARGER, WELL FINANCED AND MORE RECOGNIZED COMPANIES AND WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE WITH SUCH COMPANIES.

The market for our products and services is highly competitive. Many of our competitors have far greater financial, human, and other resources. Barriers to entry in our business are relatively insubstantial and companies with substantially greater financial, technical, marketing, manufacturing and human resources, as well as those with far greater name recognition than us, may also attempt to enter the market. We believe that our ability to compete depends on our technology and price, as well as on our distribution channels and the quality of products and services. If we do not successfully compete, we will not generate significant revenues or profits. Visible barcodes in particular are considered an authentication technology, and are essentially free.

Lack of financial, personnel and other resources has adversely affected our ability to compete. In the nine months ended September 30, 2013 we only had two dedicated sales people. Latin America, Africa and much of Asia are effectively lacking proper sales coverage. The audience that can be reached through print ads, direct mail and e-mail, trade shows, conferences and trade group memberships is limited by our limited marketing resources.

WE DEPEND ON THIRD PARTIES FOR INFRASTRUCTURE AND SUPPLIES, THE LOSS OF WHICH COULD ADVERSELY AFFECT OUR OPERATIONS.

With regard to our products, we are dependent in part on the availability of equipment, supplies and services provided by independent third parties. Currently we use a limited number of suppliers in order to take advantage of volume discounts. If one of our suppliers were unable to meet our supply demands and we could not quickly replace the source of supply, it could have a material adverse effect on our business, operating results and financial condition for several reasons, including a delay of receipt of revenues and damage to our business reputation. Certain taggants we use in the production of our inks are rare. If these are not available, production may be delayed which could result in lost sales or additional costs.

WE DEPEND ON OUR SENIOR MANAGEMENT AND KEY EMPLOYEES, THE LOSS OF WHICH COULD ADVERSELY AFFECT OUR OPERATIONS.

Our success depends to a large degree upon the skills of our senior management team and current key employees. We may be unable to retain our existing key personnel or attract and retain additional key personnel. We do not maintain key person life insurance for any of our officers or key employees. We require our executives and key employees to enter non-competition agreements with us. Due to our reliance on our senior management and key employees, the loss of any of our key executives, the use of proprietary or trade secret data by former employees who compete with us, or the failure to attract, integrate, motivate, and retain additional key employees could have a material adverse effect on our business, operating results and financial condition.

OUR SPECIALTY INKS INCLUDE VARIOUS CHEMICALS AND ARE SUBJECT TO CERTAIN ENVIRONMENTAL REGULATIONS, FOR WHICH WE COULD INCUR SIGNIFICANT LIABILITIES FOR PROBLEMS RELATING TO THEIR SHIPPING AND STORAGE.

Our operations are subject to federal, state, local, and foreign environmental laws and regulations. Our specialty inks include various chemicals, some of which may be hazardous substances and subject to various government regulations relating to their transfer, handling, packaging, use, and disposal. From time to time, we may store these chemicals or inks at our facilities in the United States and Israel or at our subcontracted manufacturer's facilities, and a shipping company ships them at our direction. We could face liability for problems that may arise when we store or ship these inks or chemical components. To the extent future laws and regulations are adopted or interpretations of existing laws and regulations change, new requirements may be imposed on our future activities or may create liability retroactively. Failure to comply with applicable rules and regulations could subject us to monetary damages and injunctive action, which could have a material adverse effect on our business, financial condition or results of operations.

CONDITIONS IN ISRAEL AFFECT THE OPERATIONS OF OUR SUBSIDIARY IN ISRAEL AND MAY LIMIT OUR ABILITY TO SELL OUR PRODUCTS AND SERVICES.

InkSure Ltd., our principal operating subsidiary, is incorporated under Israeli law and its principal office, manufacturing facility and research and development facility are located in Israel. Accordingly, political, economic, security and military conditions in the Middle East in general, and in Israel in particular, directly affect InkSure Ltd.'s operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Despite negotiations to effect peace between Israel and its Arab neighbors, the future of these peace efforts is uncertain. In recent years there have been extensive hostilities with Hezbollah in Lebanon and with Hamas, which effectively took control of the Gaza Strip.

Since early 2011, riots and popular uprisings in various countries in the Middle East, some of which have common borders with Israel, have led to severe political instability in those countries. This instability may lead to deterioration of the political and trade relationships that exist between the State of Israel and these countries. In addition, this instability may affect the global economy and marketplace. Any armed conflicts or political instability in the region, including acts of terrorism or any other hostilities involving or threatening Israel, would likely negatively affect business conditions and could make it more difficult for us to conduct our operations in Israel, which could increase our costs and adversely affect our financial results. Furthermore, several countries still restrict trade with Israeli companies, which limit our ability to make sales to, or purchase components from, those countries. Any future armed conflict, political instability, continued violence in the region or restrictions could limit our ability to operate our business and could have a material adverse effect on our business, operating results and financial condition.

OUR OPERATIONS COULD BE DISRUPTED AS A RESULT OF THE OBLIGATION OF MANAGEMENT OR KEY PERSONNEL OF INKSURE LTD. TO PERFORM MILITARY SERVICE.

Generally, all male adult citizens and permanent residents of Israel under the age of 45 are, unless exempt, obligated to perform up to 36 days of military reserve duty annually. Additionally, all Israeli residents of this age are subject to being called to active duty at any time under emergency circumstances. Some of the officers and employees of InkSure Ltd. are currently obligated to perform annual reserve duty. Our operations could be disrupted by the absence for a significant period of one or more of InkSure Ltd.'s officers or key employees due to military service. Any such disruption could limit our ability to operate our business and could affect our business, results and financial condition.

UNDER CURRENT ISRAELI LAW, INKSURE LTD. MAY NOT BE ABLE TO ENFORCE COVENANTS NOT TO COMPETE WHICH COULD HAVE A NEGATIVE EFFECT ON OUR OPERATIONS IN ISRAEL.

InkSure Ltd. has non-competition agreements with all of its employees. These agreements prohibit its employees, if they cease working for InkSure Ltd., from directly competing with it or working for its competitors, generally, for up to twelve months. However, we have been advised by Israeli counsel that Israeli courts are reluctant to enforce non-compete undertakings of former employees. In specific cases, our competitive position could be greatly harmed if we could not enforce these agreements.

FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN THE U.S. DOLLAR AND FOREIGN CURRENCIES MAY ADVERSELY AFFECT OUR OPERATING RESULTS.

We incur expenses for our operations in Israel in New Israeli Shekels (NIS) and translate these amounts into U.S. dollars for purposes of reporting consolidated results. As a result, fluctuations in foreign currency exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Fluctuations may adversely affect the comparability of period-to-period results. In addition, we hold foreign currency balances, primarily British Pounds, Euros and NIS, that will create foreign exchange gains or losses, depending upon the relative values of the foreign currency at the beginning and end of the reporting period, affecting our net income and earnings per share. Although we may use hedging techniques in the future (which we currently do not use), we may not be able to eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations could have a material adverse impact on our operating results and stock price.

WE ARE EXPOSED TO SPECIAL RISKS IN FOREIGN MARKETS WHICH MAY RESTRICT OUR ABILITY TO CONVERT LOCAL CURRENCY INTO U.S. DOLLARS AND THEREBY FORCE US TO CURTAIL OUR BUSINESS OPERATIONS.

In conducting our business in foreign countries, we are subject to political, economic, legal, operational and other risks that are inherent in operating in other countries. These risks range from difficulties in settling transactions in emerging markets to possible nationalization, expropriation, price controls and other restrictive governmental actions. We also face the risk that exchange controls or similar restrictions imposed by foreign governmental authorities may restrict our ability to convert local currency received or held by it in their countries into U.S. dollars or other currencies, or to take those dollars or other currencies out of those countries.

UNDER ISRAELI LAW, OUR STOCKHOLDERS MAY FACE DIFFICULTIES IN THE ENFORCEMENT OF CIVIL LIABILITIES AGAINST OUR SUBSIDIARY INKSURE LTD., ITS OFFICERS, DIRECTORS OR PROFESSIONAL ADVISORS.

InkSure Ltd. is incorporated under Israeli law and its principal office, manufacturing facility and research and development facility are located in Israel. Certain of the directors and InkSure Ltd.'s professional advisors are residents of Israel or otherwise reside outside of the United States. All or a substantial portion of the assets of such persons are or may be located outside of the United States. It may be difficult to effect service of process within the United States upon InkSure Ltd. or upon any such directors or professional advisors or to realize in the United States upon judgments of United States' courts predicated upon civil liability of InkSure Ltd. or such persons under United States federal securities laws. InkSure Ltd. has been advised by Israeli counsel, that Israeli courts may not (1) enforce judgments of United States' courts obtained against InkSure Ltd. or such directors or professional advisors predicated solely upon the civil liabilities provisions of United States' federal securities laws, or (2) impose liabilities in original actions against InkSure Ltd. or such directors and professional advisors predicated solely upon such United States' laws. However, subject to certain time limitations, Israeli courts will enforce foreign (including United States) final judgments for liquidated amounts in civil matters, obtained after due trial before a court of competent jurisdiction which recognizes similar Israeli judgments, provided that (1) due process has been observed, (2) such judgments or the execution thereof are not contrary to Israeli law, public policy, security or sovereignty, (3) such judgments were not obtained by fraud and do not conflict with any other valid judgment in the same matter between the same parties and (4) an action between the same parties in the same matter is not pending in any Israeli court at the time the law suit is instituted in the foreign court.

WE HAVE A STOCKHOLDER THAT MAY BE ABLE TO EXERCISE SUBSTANTIAL INFLUENCE OVER US AND ALL MATTERS SUBMITTED TO OUR STOCKHOLDERS WHICH MAY MAKE US DIFFICULT TO BE ACQUIRED AND LESS ATTRACTIVE TO NEW INVESTORS.

ICTS International, N.V. and its affiliates, or ICTS, beneficially own, 9,915,555 shares of our common stock, representing, as of September 30, 2013, approximately 22.97% of our outstanding common stock. Such ownership interest provides ICTS and its affiliates with substantial influence over the outcome of all matters submitted to our stockholders, including the election of directors and the adoption of a merger agreement, and such influence could make us a less attractive acquisition or investment target. To date ICTS has not exercised any such influence in a way that would materially or adverse affect the Company.

However, ICTS entered into a voting agreement with Spectra contemporaneously with the execution and delivery of the APA. Pursuant to the agreement, ICTS agreed to vote all shares of Company common stock beneficially owned by it in favor of the approval of the APA and the transactions contemplated by the APA and related agreements and against any actions that would interfere with such transactions.

OUR CERTIFICATE OF INCORPORATION CONTAINS ANTI-TAKEOVER PROVISIONS WHICH COULD ADVERSELY AFFECT THE VOTING POWER OR OTHER RIGHTS OF THE HOLDERS OF OUR COMMON STOCK.

Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock and our board of directors is empowered, without stockholder approval, to issue a new series of preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock. Such authority, together with certain provisions of Delaware law and of our certificate of incorporation and bylaws, may have the effect of delaying, deterring or preventing a change in control of us, may discourage bids for the common stock at a premium over the market price and may adversely affect the market price, and the voting and other rights of the holders of the common stock. Although we have no present intention to issue any additional shares of our preferred stock, we may do so in the future. The board of directors of a Delaware corporation may issue rights, options, warrants or other convertible securities, or rights entitling its holders to purchase, receive or acquire shares or fractions of shares of the corporation or assets or debts or other obligations of the corporation, upon such terms as are determined by the board of directors. Our board of directors is free, subject to their fiduciary duties to stockholders, to structure the issuance or exercise of the rights in a manner which may exclude significant stockholders from being entitled to receive such rights or to exercise such rights or in a way which may effectively prevent a takeover of the corporation by persons deemed hostile to management. Nothing contained in our certificate of incorporation will prohibit our board of directors from using these types of rights in this manner.

WE HAVE NEVER PAID COMMON STOCK DIVIDENDS AND ARE UNLIKELY TO DO SO FOR THE FORESEEABLE FUTURE.

We have never paid cash or other dividends on our common stock. It is our intention to retain any earnings to finance the operation and expansion of our business, and therefore, we do not expect to pay any cash dividends on our common stock in the foreseeable future. Investors seeking dividend income should not invest in our common stock.

THE TRADING OF OUR COMMON STOCK IS ILLIQUID AND VOLATILE WHICH MAY PREVENT STOCKHOLDERS FROM SELLING THEIR STOCKS AT THE TIME OR PRICE THEY DESIRE.

Our common stock is traded on the over-the-counter market with quotations published on the OTC Bulletin Board under the symbol "INKS". The trading volume of our common stock historically has been limited and sporadic, and the stock prices have been volatile. For example, during the nine months prior to September 30, 2013, our common stock traded at prices ranging from $0.04 to $0.09. As a result of the limited and sporadic trading activity, the quoted price for our common stock on the over-the-counter market is not necessarily a reliable indicator of its fair market value. The price at which our common stock will trade in the future may be highly volatile and may fluctuate as a result of a number of factors, including, without limitation, quarterly variations in our operating results (which have historically been, and we expect to continue to be, substantial) and actual or anticipated announcements of new products or services by us, other business partners, or competitors as well as the number of shares available for sale in the market.

"PENNY STOCK" RULES MAY RESTRICT THE MARKET FOR OUR COMMON STOCK AND MAY AFFECT OUR STOCKHOLDERS' ABILITY TO SELL THEIR SHARES IN THE SECONDARY MARKET.

Our common stock is subject to rules promulgated by the SEC, relating to "penny stocks," which apply to companies whose shares are not traded on a national stock exchange or national market system, trade at less than $5.00 per share, or who do not meet certain other financial requirements specified by the SEC. These rules require brokers who sell "penny stocks" to persons other than established customers and "accredited investors" to complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in such penny stocks. These rules may discourage or restrict the ability of brokers to sell our common stock and may affect the secondary market for our common stock. These rules could also hamper our ability to raise funds in the primary market for our common stock and may affect our stockholders' ability to sell their shares in the secondary market.

ALTHOUGH OUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER EVALUATED OUR INTERNAL CONTROL OVER FINANCIAL REPORTING AND CONSIDERED IT EFFECTIVE AS OF DECEMBER 31, 2012, THERE IS NO ASSURANCE THAT OUR INTERNAL CONTROL OVER FINANCIAL REPORTING WILL CONTINUE TO BE EFFECTIVE IN THE FUTURE, WHICH COULD RESULT IN OUR FINANCIAL STATEMENTS BEING UNRELIABLE, GOVERNMENT INVESTIGATIONS OR LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish an annual report by our management assessing the effectiveness of our internal control over financial reporting. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Management's report as of the end of fiscal year 2012 concluded that our internal control over financial reporting was effective. There is, however, no assurance that we will be able to maintain such effective internal control over financial reporting in the future. Ineffective internal control over financial reporting can result in errors or other problems in our financial statements. In addition, our internal control over financial reporting is not required to be audited by our independent registered public accounting firm. In the future, if we are unable to assert that our internal controls are effective, our investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline. Failure to maintain effective internal control over financial reporting could also result in investigation or sanctions by regulatory authorities.

Risks Related to Asset Sale

WHETHER OR NOT THE ASSET SALE IS COMPLETED, THE COMPANY MAY NOT BE ABLE TO PAY, OR PROVIDE FOR THE PAYMENT OF, ALL OF ITS LIABILITIES AND OBLIGATIONS. IF SUCH SALE IS NOT COMPLETED, IT IS POSSIBLE THAT THE COMPANY WILL FILE FOR, OR WILL BE FORCED TO RESORT TO, BANKRUPTCY BY ITS CREDITORS AND NO ASSETS MAY BE AVAILABLE FOR PAYMENT TO UNSECURED CREDITORS OR FOR DISTRIBUTION TO COMPANY STOCKHOLDERS.

If the Asset Sale is not completed, the Company believes that it is likely that it will file for, or will be forced to resort to, bankruptcy protection. In this event, it is extremely unlikely that the Company would be able to pay, or provide for the payment of, all of its liabilities and obligations because the Company's obligations could exceed the amount of available cash and other liquid assets of the business, and, therefore, there would be no assets available for distribution to unsecured creditors or to the Company's stockholders. Even if the parties complete the Asset Sale, the proceeds that may be provided under the APA, together with the Company's other assets, may not be sufficient to pay, or provide for the payment of, all of the Company's known and unknown liabilities and obligations. If the proceeds from the Asset Sale together with the Company's other assets are insufficient to pay or provide for the payment of the Company's liabilities and other obligations, it is likely that the Company could be required to file for, or be forced to resort to, bankruptcy protection. Further, if there are insufficient proceeds from the Asset Sale to pay or otherwise provide for the liabilities and obligations of the Company, there will be no assets available for distribution to the Company's stockholders.

EVEN IF THE COMPANY'S STOCKHOLDERS APPROVE THE ASSET SALE, THE ASSET SALE MAY NOT BE COMPLETED.

The completion of the Asset Sale is subject to numerous conditions (see section entitled "Principal Provisions of the Asset Purchase Agreement" of the Proxy Statement), many of which are outside the control of Spectra, the Company and its subsidiaries. Even if stockholders of the Company holding a majority of the outstanding shares of Company stock vote to approve the Asset Sale, there can be no assurance that the Asset Sale will be completed. If it is not completed, the Company would likely not be able to sell the assets that would have been purchased by Spectra to another buyer on terms as favorable as those provided in the APA, or at all, which would mean that it is possible that the Company could be required to file for or be forced to resort to bankruptcy protection.

IF THE SELLER DOES NOT RECEIVE CONSENT FROM OCS TO ASSIGN ITS SCANSURE PRODUCTS AND SERVICES TO SPECTRA, THE ASSET SALE MAY NOT BE COMPLETED.

The ScanSure products and services, developed by the Seller with grant funding from the OCS, are assets intended to be acquired by Spectra under the APA. As a condition to Closing, all ScanSure products must be transferred from the Seller to Spectra without any restrictions or limitations whatsoever. To effectuate this transfer, Seller must obtain consent from the OCS, and must pay a fee to the OCS. While the Company believes that the OCS will grant its consent to transfer the ScanSure assets to Seller, there can be no assurances that the OCS will do so, as the actions of the OCS are outside of the control of the Seller and Spectra.

FAILURE TO COMPLETE THE ASSET SALE COULD CAUSE THE COMPANY'S STOCK PRICE TO DECLINE.

If the Asset Sale is not completed, the Company's stock price may decline due to any or all of the following potential consequences:

the Seller may not be able to dispose of its assets for values equaling or exceeding those currently estimated; in particular, the assets that are the subject of the Asset Sale will likely be substantially diminished in value;

the Company may file for, or be forced to resort to, bankruptcy; and

the Company may have difficulty retaining its remaining personnel.

In addition, if the Asset Sale is not completed, the Company's stock price may decline to the extent that the current market price of the Company's common stock reflects a market assumption that such sale will be completed.

FOLLOWING THE COMPLETION OF THE ASSET SALE, THE COMPANY WILL NO LONGER HAVE ACCESS TO CERTAIN INTELLECTUAL PROPERTY ASSETS OR THE HUMAN RESOURCES, INCLUDING THE SERVICES OF CERTAIN KEY EMPLOYEES, NECESSARY TO FULFILL ITS OBLIGATIONS UNDER EXISTING AGREEMENTS WITH THIRD PARTIES.

Upon the completion of the Asset Sale, the Seller will have sold its rights, title and interest in substantially all of its intellectual property and operating assets, including those related to the development of ScanSure products and services. Because of this, the Company may no longer be able to comply with its existing contractual obligations or commitments under certain agreements with third parties that are not to be transferred to Spectra in the Asset Sale. In addition, the three remaining employees of the Company are "at will" and may terminate their employment status with the Company at any time or the Company may elect to terminate such employees (with or without entering into alternative arrangements to retain such individuals' services) after the closing of the Asset Sale in connection with the Company's wind-down and settlement activities or other post-closing activities. (For the avoidance of doubt, this does not include the transitional consulting services provided to Spectra by Tal Gilat under his consulting agreement with Spectra.) The loss of the services of any of the remaining employees of the Company could prevent the Company from effectively continuing its operations and fulfilling its contractual obligations with third parties under existing agreements or distributing APA proceeds to stockholders of the Company to the extent possible after satisfaction of liabilities and obligations to third parties.

THE CONTINGENT PAYMENTS UNDER THE APA RELATED TO CERTAIN POST-CLOSING CONDITIONS MAY NEVER BE MET BY SPECTRA. SPECTRA HAS NO DILIGENCE OBLIGATIONS UNDER THE APA AND, THEREFORE, THE DETERMINATION OF WHETHER TO PURSUE FURTHER DEVELOPMENT OF THE SELLER'S EXISTING BUSINESS RELATIONSHIPS IS IN SPECTRA'S SOLE DISCRETION. AS A RESULT OF THE FOREGOING, THERE CAN BE NO ASSURANCE THAT ANY CONTINGENT AMOUNTS WILL BE PAID TO THE SELLER.

The terms of the APA provide for the following conditional payments:

$35,000 if and when orders placed by Holostik, a customer of the Company, with Spectra return to an average monthly level of $16,666.67 during any continuous period of six months after the closing date of the Asset Sale, or the Closing;

$150,000 if and when (1) the Seller enters into an IP Purchase and Assignment Agreement and Supply Agreement with K-fee System GmbH, Swisstech 360 GmbH and Eugster/Frismag AG, or the K-fee Agreement, and Spectra is properly assigned the Seller's rights and assumes the Seller's obligations under the K-fee Agreement, or (2) Spectra enters into a K-fee Agreement directly with any of the aforementioned counterparties at any time prior to December 31, 2013; and/or

an amount equal to 50% of all collections of the accounts receivable received by Spectra after the Closing.

The APA does not impose any diligence requirements or contractual obligations on Spectra to achieve these conditions, and, as a result, the decision of how much effort to direct towards the Seller's business endeavors, if any, will be determined by Spectra in its sole discretion. If Spectra does not pursue, or does not devote sufficient resources to, development of Seller's business endeavors, these conditions will not be met and the Seller will not receive any of the contingent payments.

THE COMPANY'S STOCKHOLDERS MAY NOT RECEIVE ANY OF THE PROCEEDS OF THE ASSET SALE.

If the Asset Sale is consummated, the cash purchase price will be paid directly to the Company (other than $200,000 will be deposited into escrow with the Escrow Agent at Closing for up to twelve months to cover indemnification claims made by Spectra under the APA during such post-Closing period). It is probable that none of the net proceeds of the purchase price will be received by the Company's stockholders, unless the Board of Directors ultimately proposes a distribution to the stockholders.

ITEM 6. EXHIBITS

The following exhibits are being filed or furnished with this Report:

EXHIBIT NUMBER	DESCRIPTION
2.1	Asset Purchase Agreement, dated as of October 1, 2013, by and among InkSure Technologies Inc., InkSure Inc., InkSure Ltd., and Spectra Systems Corporation (previously filed as Exhibit 2.1 to our Current Report on Form 8-K filed on October 3, 2013).
2.2	Form of Stockholder Voting Agreement, dated as of October 1, 2013, by and among InkSure Technologies Inc., Spectra Systems Corporation, and the stockholders party thereto (previously filed as Exhibit 2.2 to our Current Report on Form 8-K filed on October 3, 2013).
31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.*
31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.*
32.1	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.**
101.1	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting language): (i) the Condensed Consolidated Balance Sheet, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes to these financial statements, tagged as blocks of text and in detail.*

* Filed herewith

**Furnished herewith

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.

	INKSURE TECHNOLOGIES INC.

Dated: November 12, 2013	By: /s/ Tal Gilat
	Tal Gilat
	President and Chief Executive Officer
	(Principal Executive Officer)


Dated: November 12, 2013	By: /s/ David (Dadi) Avner
	David (Dadi) Avner
	Chief Financial Officer
	(Principal Financial Officer)