UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period endedSeptember 30, 2018 | ||
or | ||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ________________ to ________________ |
Commission file number:File Number: 000-54785
INTEGRITY APPLICATIONS, INC.
(Exact name of Registrantregistrant as Specifiedspecified in Its Charter)
Delaware | 98-0668934 | |
(State or incorporation or | (I.R.S. Employer Identification No.) | |
19 Ha’Yahalomim Street P.O. Box 12163 Ashdod, Israel | L3 7760049 | |
(Address of | (Zip Code) |
972 (8) 675-7878 |
(Registrant’s telephone number, including area code) |
N/A |
(Former |
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.
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)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer [ ] | |
Non-accelerated filer [ ] | Smaller reporting company [X] | |
Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of November 14, 2017, 6,521,9932018, 8,864,612 shares of the Company’s common stock, par value $0.001 per share, were outstanding.
INTEGRITY APPLICATIONS, INC.
TABLE OF CONTENTS
Page | ||
PART I - FINANCIAL INFORMATION | 3 | |
3 | ||
3 | ||
4 | ||
5 | ||
6 | ||
8 | ||
30 | ||
Item 6. Exhibits. | 31 | |
SIGNATURES |
2
US dollars (except share data) | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | ||||||||
A S S E T S | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | 461,708 | 148,836 | ||||||
Accounts receivable, net | 119,123 | 92,061 | ||||||
Inventories | 1,494,208 | 1,419,604 | ||||||
Other current assets | 122,038 | 356,994 | ||||||
Total current assets | 2,197,077 | 2,017,495 | ||||||
Property and Equipment, Net | 230,309 | 240,452 | ||||||
Long-Term Restricted Cash | 38,868 | 35,673 | ||||||
Funds in Respect of Employee Rights Upon Retirement | 182,309 | 167,326 | ||||||
Total assets | 2,648,563 | 2,460,946 | ||||||
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
Current Liabilities | ||||||||
Accounts payable | 1,985,797 | 1,634,642 | ||||||
Other current liabilities | 958,065 | 713,549 | ||||||
Total current liabilities | 2,943,862 | 2,348,191 | ||||||
Long-Term Liabilities | ||||||||
Long-Term Loans from Stockholders | 176,870 | 162,034 | ||||||
Liability for Employee Rights Upon Retirement | 182,310 | 176,719 | ||||||
Warrants with down-round protection | 767,887 | 681,970 | ||||||
Total long-term liabilities | 1,127,067 | 1,020,723 | ||||||
Total liabilities | 4,070,929 | 3,368,914 | ||||||
Temporary Equity | ||||||||
Convertible Preferred Stock of $ 0.001 par value (“Preferred Stock”): | ||||||||
10,000,000 shares of Preferred Stock authorized as of September 30, 2017 and December 31, 2016; 376 shares of Series A Preferred Stock issued and outstanding as of June 30, 2017 and December 31, 2016 | 221,152 | 221,152 | ||||||
15,031 shares of Series B Preferred Stock issued and outstanding as of September 30, 2017 and December 31, 2016 | 6,715,844 | 6,715,844 | ||||||
12,004 and 5,829 shares of Series C Preferred Stock issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 6,484,337 | 3,104,466 | ||||||
Total temporary equity | 13,421,333 | 10,041,462 | ||||||
Stockholders’ Deficit | ||||||||
Common Stock of $ 0.001 par value (“Common Stock”): | ||||||||
40,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 6,521,993 and 6,026,527 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively | 6,525 | 6,028 | ||||||
Additional paid in capital | 29,310,432 | 24,586,142 | ||||||
Accumulated other comprehensive income | 114,936 | 62,576 | ||||||
Accumulated deficit | (44,275,592 | ) | (35,604,176 | ) | ||||
Total stockholders’ deficit | (14,843,699 | ) | (10,949,430 | ) | ||||
Total liabilities, temporary equity and stockholders’ deficit | 2,648,563 | 2,460,946 |
US dollars (except share data) | ||||||||
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
(unaudited) | ||||||||
A S S E T S | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | 941,869 | 53,782 | ||||||
Accounts receivable, net | 120,956 | 121,782 | ||||||
Inventories | 894,678 | 957,349 | ||||||
Other current assets | 122,130 | 94,137 | ||||||
Total current assets | 2,079,633 | 1,227,050 | ||||||
Property and Equipment, Net | 152,861 | 216,746 | ||||||
Long-Term Restricted Cash | 47,975 | 39,562 | ||||||
Funds in Respect of Employee Rights Upon Retirement | 177,384 | 185,570 | ||||||
Total assets | 2,457,853 | 1,668,928 | ||||||
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
Current Liabilities | ||||||||
Accounts payable | 2,194,540 | 2,419,988 | ||||||
Other current liabilities | 1,622,667 | 1,265,954 | ||||||
Total current liabilities | 3,817,207 | 3,685,942 | ||||||
Long-Term Liabilities | ||||||||
Long-Term Loans from Stockholders | 173,485 | 182,767 | ||||||
Liability for Employee Rights Upon Retirement | 177,384 | 185,570 | ||||||
Warrants with down-round protection | 864,349 | 768,249 | ||||||
Total long-term liabilities | 1,215,218 | 1,136,586 | ||||||
Total liabilities | 5,032,425 | 4,822,528 | ||||||
Temporary Equity | ||||||||
Convertible Preferred Stock of $ 0.001 par value (“Preferred Stock”): | ||||||||
10,000,000 shares of Preferred Stock authorized as of September 30, 2018 and December 31, 2017 | ||||||||
376 shares of Series A Preferred Stock issued and outstanding as of September 30, 2018 and December 31, 2017 | 221,152 | 221,152 | ||||||
15,031 shares of Series B Preferred Stock issued and outstanding as of September 30, 2018 and December 31, 2017 | 6,715,844 | 6,715,844 | ||||||
12,004 shares of Series C Preferred Stock issued and outstanding as of September 30, 2018 and December 31, 2017 | ||||||||
6,484,337 | 6,484,337 | |||||||
Total temporary equity | 13,421,333 | 13,421,333 | ||||||
Stockholders’ Deficit | ||||||||
Common Stock of $ 0.001 par value (“Common Stock”): | ||||||||
40,000,000 shares authorized as of September 30, 2018 and December 31, 2017; 8,864,612 and 6,821,792 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | 8,866 | 6,824 | ||||||
Additional paid in capital | 38,620,911 | 30,676,180 | ||||||
Accumulated other comprehensive income | 151,045 | 110,675 | ||||||
Accumulated deficit | (54,776,727 | ) | (47,368,612 | ) | ||||
Total stockholders’ deficit | (15,995,905 | ) | (16,574,933 | ) | ||||
Total liabilities, temporary equity and stockholders’ deficit | 2,457,853 | 1,668,928 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
US dollars (except share data) | ||||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenues | 125,881 | 482,177 | 20,900 | 11,299 | ||||||||||||
Research and development expenses | 1,833,841 | 2,226,833 | 635,478 | 695,437 | ||||||||||||
Selling and marketing expenses | 1,064,048 | 939.264 | 465,814 | 325,143 | ||||||||||||
General and administrative expenses | 5,124,048 | 1,650,240 | 1,567,970 | 477,052 | ||||||||||||
Total operating expenses | 8,021,937 | 4,816,337 | 2,669,262 | 1,497,632 | ||||||||||||
Operating loss | 7,896,056 | 4,334,160 | 2,648,362 | 1,486,333 | ||||||||||||
Financing income, net | 223,790 | 63,654 | 63,622 | 31,589 | ||||||||||||
Loss for the period | 7,672,266 | 4,270,506 | 2,584,740 | 1,454,744 | ||||||||||||
Other comprehensive (income) loss: | ||||||||||||||||
Foreign currency translation loss (income) | (52,360 | ) | 10,383 | 12,076 | (19,656 | ) | ||||||||||
Comprehensive loss for the period | 7,619,906 | 4,280,889 | 2,596,816 | 1,435,088 | ||||||||||||
Loss per share (Basic and Diluted) | (1.40 | ) | (0.84 | ) | (0.44 | ) | (0.30 | ) | ||||||||
Common shares used in computing loss per share (Basic and Diluted) | 6,207,844 | 5,746,838 | 6,386,772 | 5,806,724 |
US dollars (except share data) | ||||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenues | 43,488 | 125,881 | - | 20,900 | ||||||||||||
Research and development expenses | 1,818,108 | 1,833,841 | 534,317 | 635,478 | ||||||||||||
Selling and marketing expenses | 857,386 | 1,064,048 | 265,282 | 465,814 | ||||||||||||
General and administrative expenses | 2,894,553 | 5,124,048 | 811,695 | 1,567,970 | ||||||||||||
Total operating expenses | 5,570,847 | 8,021,937 | 1,611,294 | 2,669,262 | ||||||||||||
Operating loss | (5,527,171 | ) | (7,896,056 | ) | (1,611,106 | ) | (2,648,362 | ) | ||||||||
Financing income, net | 144,016 | 223,790 | 38,228 | 63,622 | ||||||||||||
Loss for the period | (5,383,155 | ) | (7,672,266 | ) | (1,572,878 | ) | (2,584,740 | ) | ||||||||
Other comprehensive income: | ||||||||||||||||
Foreign currency translation adjustment | 40,370 | 52,360 | 4,740 | (12,076 | ) | |||||||||||
Comprehensive loss for the period | (5,342,785 | ) | (7,619,906 | ) | (1,568,138 | ) | (2,596,816 | ) | ||||||||
Loss per share (Basic) | (0.96 | ) | (1.40 | ) | (0.31 | ) | (0.44 | ) | ||||||||
Loss per share (Diluted) | (0.96 | ) | (1.40 | ) | (0.31 | ) | (0.44 | ) | ||||||||
Common shares used in computing Basic income (loss) per share | 7,745,275 | 6,207,844 | 8,249,442 | 6,386,772 | ||||||||||||
Common shares used in computing Diluted income (loss) per share | 7,745,275 | 6,207,844 | 8,249,442 | 6,386,772 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
US dollars (except share data) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Number of shares | Common Stock Amount | Additional paid in capital | Accumulated other comprehensive income | Accumulated deficit | Total Stockholders’ deficit | |||||||||||||||||||
Balance as of January 1, 2017 | 6,026,527 | 6,028 | 24,586,142 | 62,576 | (35,604,176 | ) | (10,949,430 | ) | ||||||||||||||||
Loss for the period of nine months | (7,672,266 | ) | (7,672,266 | ) | ||||||||||||||||||||
Other comprehensive income | 52,360 | 52,360 | ||||||||||||||||||||||
Amounts allocated to Series C-1 and Series C-2 Warrants, net | 1,672,766 | 1,672,766 | ||||||||||||||||||||||
Stock dividend on Series C Preferred Stock | 154,869 | 156 | 370,169 | (370,325 | ) | |||||||||||||||||||
Stock dividend on Series B Preferred Stock | 256,450 | 257 | 609,325 | (609,582 | ) | |||||||||||||||||||
Cash dividend on Series A Preferred Stock | (19,243 | ) | (19,243 | ) | ||||||||||||||||||||
Stock-based compensation | 84,147 | 84 | 2,072,030 | 2,072,114 | ||||||||||||||||||||
Balance as of September 30, 2017 | 6,521,993 | 6,525 | 29,310,432 | 114,936 | (44,275,592 | ) | (14,843,699 | ) |
US dollars (except share data) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Common Stock | Additional | Accumulated other | Total | |||||||||||||||||||||
Number of shares | Amount | paid in capital | comprehensive income | Accumulated deficit | Stockholders’ deficit | |||||||||||||||||||
Balance as of January 1, 2018 | 6,821,792 | 6,824 | 30,676,180 | 110,675 | (47,368,612 | ) | (16,574,933 | ) | ||||||||||||||||
Loss for the period | (5,383,155 | ) | (5,383,155 | ) | ||||||||||||||||||||
Other comprehensive income | - | - | - | 40,370 | - | 40,370 | ||||||||||||||||||
Amounts allocated to Series D-1, D-2 and Series D-3 Warrants, net | - | - | 1,983,502 | - | - | 1,983,502 | ||||||||||||||||||
Stock dividend on Series C Preferred Stock | 364,451 | 364 | 892,905 | - | (893,269 | ) | - | |||||||||||||||||
Stock dividend on Series B Preferred Stock | 456,365 | 456 | 1,118,094 | - | (1,118,550 | ) | - | |||||||||||||||||
Cash dividend on Series A Preferred Stock | - | - | - | - | (13,141 | ) | (13,141 | ) | ||||||||||||||||
Amounts allocated to issuance of Common Stock from Series D offering | 1,206,444 | 1,206 | 2,373,230 | - | - | 2,374,436 | ||||||||||||||||||
Stock-based compensation | 15,560 | 16 | 1,577,000 | - | 1,577,016 | |||||||||||||||||||
Balance as of September 30, 2018 | 8,864,612 | 8,866 | 38,620,911 | 151,045 | (54,776,727 | ) | (15,995,905 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
INTEGRITY APPLICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
US dollars | ||||||||
Nine-month period ended September 30, | ||||||||
2018 | 2017 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Loss for the period | (5,383,155 | ) | (7,672,266 | ) | ||||
Adjustments to reconcile (loss) for the period to net cash used in operating activities: | ||||||||
Depreciation | 58,789 | 50,341 | ||||||
Stock-based compensation | 1,577,016 | 2,072,030 | ||||||
Change in the fair value of warrants with down-round protection | (251,790 | ) | (273,733 | ) | ||||
Linkage difference on principal of loans from stockholders | (1,266 | ) | 373 | |||||
Changes in assets and liabilities: | ||||||||
Decrease in accounts receivable | (5,590 | ) | (18,748 | ) | ||||
Increase in inventory | 20,979 | 49,255 | ||||||
(Decrease) increase in other current assets | (31,717 | ) | 256,997 | |||||
(Decrease) increase in accounts payable | (165,580 | ) | 235,138 | |||||
Increase in other current liabilities | 379,854 | 203,752 | ||||||
Decrease in liability for employee rights upon retirement | - | (10,148 | ) | |||||
Net cash used in operating activities | (3,802,460 | ) | (5,107,009 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (3,505 | ) | (19,467 | ) | ||||
Increase in long-term restricted cash | (10,164 | ) | ||||||
Net cash used in investing activities | (13,669 | ) | (19,467 | ) | ||||
Cash flows from financing activities | ||||||||
Cash dividend on Series A Preferred Stock | - | (5,143 | ) | |||||
Proceeds allocated to Series C Preferred Stock, net of cash issuance expenses | - | 3,598,254 | ||||||
Proceeds allocated to Series C Warrants, net of cash issuance expenses | - | 1,780,963 | ||||||
Proceeds allocated to Common Stock from Series D offering, net of cash issuance expenses | 2,563,839 | - | ||||||
Proceeds allocated to Series D Warrants, net of cash issuance expenses | 2,141,989 | - | ||||||
Net cash provided by (used in) financing activities | 4,705,828 | 5,374,074 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (1,612 | ) | 65,274 | |||||
Increase in cash and cash equivalents | 888,087 | 312,872 | ||||||
Cash and cash equivalents at beginning of the period | 53,782 | 148,836 | ||||||
Cash and cash equivalents at end of the period | 941,869 | 461,708 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
US dollars | ||||||||
Nine-month period ended September 30, | ||||||||
2017 | 2016 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Loss for the period | (7,672,266 | ) | (4,270,506 | ) | ||||
Adjustments to reconcile loss for the period to net cash used in operating activities: | ||||||||
Depreciation | 50,341 | 41,951 | ||||||
Stock-based compensation | 2,072,030 | 55,405 | ||||||
Remeasurement adjustment of warrants issued to placement agent | - | 211,077 | ||||||
Change in the fair value of Warrants with down-round protection | (240,613 | ) | (110,498 | ) | ||||
Linkage difference on principal of loans from stockholders | 373 | 27 | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) in accounts receivable | (18,748 | ) | (51,356 | ) | ||||
Decrease in inventory | 49,255 | 170,274 | ||||||
Decrease in other current assets | 256,997 | 157,149 | ||||||
(Decrease) increase in accounts payable | 235,138 | (815,795 | ) | |||||
Increase in other current liabilities | 170,632 | 265,983 | ||||||
Decrease in liability for employee rights upon retirement | (10,148 | ) | - | |||||
Net cash used in operating activities | (5,107,009 | ) | (4,346,289 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (19,467 | ) | (75,269 | ) | ||||
Net cash used in investing activities | (19,497 | ) | (75,269 | ) | ||||
Cash flows from financing activities: | ||||||||
Cash dividend on Series A Preferred Stock | (5,143 | ) | (13,529 | ) | ||||
Proceeds allocated to Series C Preferred Stock, net of cash issuance expenses | 3,598,254 | 3,021,063 | ||||||
Proceeds allocated to Series C Warrants, net of cash issuance expenses | 1,780,963 | 1,496,077 | ||||||
Net cash provided by financing activities | 5,374,074 | 4,503,611 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 65,274 | 5,405 | ||||||
Increase in cash and cash equivalents | 312,872 | 87,458 | ||||||
Cash and cash equivalents at beginning of the period | 148,836 | 608,701 | ||||||
Cash and cash equivalents at end of the period | 461,708 | 696,159 |
6
During the nine-month periodnine months ended September 30, 2017, $609,8522018, $1,118,550 and $370,325,$893,269, representing the fair value of the shares of Common Stock to be issued to owners of Series B Preferred Stock and owners of Series C Preferred Stock, respectively, were accounted forrecognized as stock dividends in the statement of changes in stockholders’ deficit and was charged to accumulated deficit against additional paid in capital and Common Stock therein.
During the nine-month periodnine months ended September 30, 2017, $359,650,2018, the Company accrued a cash dividend in the amount of $13,141, in the aggregate, to be paid to holders of its Series A Preferred Stock. The Company has not paid such dividends, plus interest at a rate of 9% per annum, as of the date of this filing.
During the nine months ended September 30, 2018, $347,890 representing the fair value of warrants issued as consideration for placement agent services was accounted for as Warrantswarrants with down-round protection within long-term liabilities. Of these direct issuance expenses, $141,267$158,487 was allocated to the Series C-1D-1, D-2 and Series C-2D-3 Warrants and was recorded as a reduction of additional paid in capital, and $218,383$189,403 was allocated to the shares of common stock issued in the Series C Preferred StockD offering and was recorded as a reduction of temporary equity.
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
NOTE 1– GENERAL
A. | Integrity Applications, Inc. (the “Company”) was incorporated on May 18, 2010 under the laws of the State of Delaware. On July 15, 2010, Integrity Acquisition Corp. Ltd. (hereinafter: “Integrity Acquisition”), a wholly owned Israeli subsidiary of the Company, which was established on May 23, 2010, completed a merger with A.D. Integrity Applications Ltd. (hereinafter: “Integrity Israel”), an Israeli |
B. | Going concern uncertainty | |
Since its incorporation, the Company did not conduct any material operations other than those carried out by Integrity Israel. The development and commercialization of Integrity Israel’s product is expected to require substantial expenditures. Integrity Israel and the Company (collectively, the “Group”) have not yet generated significant revenues from operations, and therefore they are dependent upon external sources for financing their operations. As of September 30, 2018, the Group has incurred accumulated deficit of $54,776,727, stockholder’s deficit of $15,995,905 negative operating cash flows and negative working capital. Management considered the significance of such conditions in relation to the Group’s ability to meet its current and future obligations and determined that these conditions raise substantial doubt about the Group’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. During the nine months ended September 30, 2018, the Company raised funds in an aggregate amount of approximately $4,705,828 (net of related cash expenses) through the issuance of 1,206,444 units (the “Series D Units”) each consisting of a) one share of Common Stock, Par Value $0.001 b) a five year warrant to purchase, at an exercise price of $4.50 per share, one share of Common Stock; c) a five year warrant to purchase, at an exercise price of $5.75 per share, one share of Common Stock; and d) a five year warrant to purchase, at an exercise price of $7.75 per share, one share of Common Stock. | ||
Until such time as the Group generates sufficient revenue to fund its operations (if ever), the Group plans to finance its operations through the sale of equity or equity-linked securities and/or debt securities and, to the extent available, short term and long-term loans. There can be no assurance that the Group will succeed in obtaining the necessary financing to continue its operations as a going concern. | ||
C. | Risk factors | |
As described in Note 1A and Note 1B above, the Group has a limited operating history and faces a number of risks and uncertainties, including risks and uncertainties regarding continuation of the development process, demand and market acceptance of the Group’s products, the effects of technological changes, competition and the development of products by competitors. Additionally, other risk factors also exist, such as the ability to manage growth and the effect of planned expansion of operations on the Group’s future results and the availability of necessary financing. In addition, the Group expects to continue incurring significant operating costs and losses in connection with the development of its products and marketing efforts. The Group has not yet generated material revenues from its operations to fund its activities and therefore is dependent on the receipt of additional funding from its stockholders and/ or new investors in order to continue its operations. |
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
NOTE 1– GENERAL (cont.)
D. | Use of estimates in the preparation of financial statements | |
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to (i) the fair value estimate of the warrants with down-round protection, (ii) the allocation of the proceeds and the related issuance costs of the Series D Units, (iii) the going concern assumptions, (iv) measurement of stock based compensation, and (v) determination of net realizable value of inventory. |
NOTE 2– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. | Basis of presentation | |
Accounting Principles | ||
The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with our consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2018. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC related to interim financial statements. As permitted under those rules, certain information and footnote disclosures normally required or included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are considered necessary to present fairly the results of the Company’s financial position and operating results for the interim periods. All such adjustments are of a normal recurring nature. | ||
The results for the nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period or for any future period. | ||
Principles of Consolidation | ||
The consolidated financial statements include the accounts of the Company and its subsidiary. Significant intercompany balances and transactions have been eliminated in consolidation. |
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
NOTE 2– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Warrants with down-round Protection September 30, | ||||||||
2017 | 2016 | |||||||
(unaudited) | ||||||||
Balance, Beginning of the period | 681,970 | 321,695 | ||||||
Warrants issued as consideration for placement services | 359,650 | 282,221 | ||||||
Amount classified out of stockholders’ deficit and presented as Warrants with down-round protection | - | 341,662 | ||||||
Change in fair value Warrants with down-round protection | (273,733 | ) | (110,498 | ) | ||||
Balance, End of period | 767,887 | 835,080 |
B. | Warrants with down-round protection | |
The Company has determined its derivative warrant liability with respect to the remaining Series A Warrants and warrants issued to its placement agent as part of the Series A Unit offering, the Series B Unit offering, Series C Unit offering and the Series D Unit offering to be a Level 3 fair value measurement and has used the option pricing model (“OPM”) to calculate its fair value. Because the warrants contain a down round protection feature, the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the valuation calculations. | ||
The changes in the fair value of the Level 3 liability are as follows (in US dollars): |
Warrants with down-round Protection | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
(unaudited) | ||||||||
Balance, Beginning of the period | 768,249 | 681,970 | ||||||
Warrants issued as consideration for placement services | 347,890 | 359,650 | ||||||
Change in fair value Warrants with Down-Round Protection | (251,790 | ) | (273,733 | ) | ||||
Balance, End of period | 864,349 | 767,887 |
The key inputs used in the fair value calculations were as follows:
September 30, | ||||||||
2017 | 2016 | |||||||
Dividend yield (%) | - | - | ||||||
Expected volatility (%) (*) | 56.59 | 62.16 | ||||||
Risk free interest rate (%) | 0.92 | 0.72-1.21 | ||||||
Expected term of options (years) | 0.45-4.83 | 1.45-5.00 | ||||||
Exercise price (US dollars) | 4.50, 7.75 | 4.50, 7.75 | ||||||
Share price (US dollars) (**) | 2.38 | 2.38 | ||||||
Fair value (US dollars) (***) | 0.02-0.74 | 0.26-0.60 |
September 30, | ||||||||
2018 | 2017 | |||||||
Dividend yield (%) | - | - | ||||||
Expected volatility (%) (*) | 56.59 | 56.59 | ||||||
Risk free interest rate (%) | 1.31 | 0.92 | ||||||
Expected term of options (years) | 1.25-4.86 | 0.45-4.83 | ||||||
Exercise price (US dollars) | 4.50 - 7.75 | 4.50, 7.75 | ||||||
Share price (US dollars) (**) | 2.45 | 2.38 | ||||||
Fair value (US dollars) | 0.04-0.80 | 0.02-0.74 |
(*) | Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on |
(**) | The Common Stock price, per share reflects the Company’s management’s estimation of the fair value per share of Common Stock as of September 30, |
| |
The below chart reflects the Fair Value for each of the |
Investors | AGI– Series A | AG- - Series B | AGI – Series C | AGI – Series C |
Minimum | Maximum | |||
0.02 | 0.36 | 0.36 | 0.29 | 0.74 |
Andrew Garrett, Inc. (“AGI”) - Series A | AGI - Series B | AGI - Series C | Placement Agent - Series D | |||||||||||||
Total quantity | 364,071 | 566,897 | 844,605 | 520,356 | ||||||||||||
Exercise price | 4.5 | 4.5, 7.75 | 4.5, 7.75 | 4.5, 5.75, 7.75 | ||||||||||||
Fair value | 0.17 | 0.04 – 0.19 | 0.18 – 0.65 | 0.41 – 0.80 |
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
NOTE 2– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
C. | Revenue recognition | |
The company recognize revenues from sales of the GlucoTrack® model DF-F and personal ear-clips (“PECs”) when control is transferred to the customer and collectability is probable. | ||
D. | Reclassified Amounts | |
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications did not have material effect on the reported results of operations, shareholder’s deficit or cash flows. |
E. | Recently issued accounting pronouncements |
1. | Accounting | |
Commencing January 1, 2018 the Company adopted Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). | ||
ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. | ||
An entity should apply the amendments in ASU 2014-09 using one of the following two methods: 1. Retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures. | ||
During 2016, the FASB issued several Accounting Standard Updates (“ASUs”) that focus on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements, Practical Expedients and technical corrections. | ||
In accordance with an amendment to ASU 2014-09, introduced by Accounting Standard 2015-14, “Revenue from contracts with Customers – Deferral of the Effective Date”, for a public entity, the amendments in ASU 2014-09 became effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). | ||
Since the company did not report significant revenues, the adoption of ASU 2014-09 did not have a significant impact on its consolidated financial statements. See also NOTE 2C above. |
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
NOTE 2– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Accounting Standard Update (ASU) No. 2017-11, | ||
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). | ||
Among others, Part I of ASU 2017-11 simplifies the accounting for certain financial instruments with down round features, which is a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. Current accounting guidance creates cost and complexity for organizations that issue financial instruments with down round features by requiring, on an ongoing basis, fair value measurement of the entire instrument or conversion option. | ||
ASU 2017-11 require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity. | ||
ASU 2017-11 also addresses navigational concerns within the FASB Accounting Standards Codification related to an indefinite deferral available to private companies. | ||
The provisions of the new ASU related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (fiscal 2019 for the Company). Early adoption is permitted for all entities. | ||
The Company is evaluating the impact of ASU 2017-11 on its financial statements. Although this process has not been completed, managements believes that its provisions might impact the accounting of the financial instruments issued by the Company that include down-round protection. See also NOTE 2B above. |
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
3. | Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting | |
In June 2018, the FASB issued Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). ASU 2018-07 aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. | ||
Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 will be measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the goods has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. Equity-classified nonemployee share-based payment awards will be measured at the grant date. | ||
With respect to awards with performance conditions, ASU 2018-07 concludes that, consistent with the accounting for employee share-based payment awards, an entity will consider the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions. | ||
ASU 2018-07 also requires that the classification of equity classified nonemployee share-based payment awards will continue to be subject to the requirements of Topic 718 unless the award was modified after the goods has been delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing goods or services. This eliminates the requirement to reassess classification of such awards upon vesting. | ||
In addition, ASU 2018-07 includes certain Non-public Entity-Specific Amendments. | ||
ASU 2018-07 is effective for Public entities in annual periods beginning after 15 December 2018, and interim periods within those years (first quarter of 2019 for the Company). Early adoption is permitted, including in an interim period, but not before an entity adopts the new revenue guidance (which was adopted by the Company in its interim financial statements for 2018). | ||
An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date. | ||
The Company is evaluating the impact of ASU 2018-07 on its financial statements. |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
NOTE 3– RECENT EVENTS
1. | |||
Pursuant to a placement agent agreement (the |
On February 15, 2018 and April 1, 2018, we issued ten-year non-qualified stock options to various employees, for the purchase of 767,500 and 15,000 shares of Common Stock at an exercise price of $4.50 per share, with three-year quarterly vesting commencing on the first quarter after the effective date. The total fair value of the stock options is $762,210 and $14,897, respectively. |
2. | On March 23, 2018, the Company held its 2018 Special Meeting of Stockholders. At the Meeting, the Company’s |
3. | After months of protracted negotiations with our China distributor we finally reached an impasse on several critical issues and decided that it would be in the best interests of the Company to terminate the existing agreements with such distributor due to various breaches of the distributor. On May 14, 2018, the Company sent notices to the distributor regarding the Company’s intention to terminate the agreement unless the breaches are cured within 30 days. On June 6, 2018, the Company received a response from the distributor denying all the allegations of breaches. On June 25, 2018, the Company sent a formal written notice to the distributor to terminate the agreement, effective immediately, to which the distributor responded on July 20, 2018 continuing to deny all the allegations of breaches. Notwithstanding the distributor’s denials, we are of the belief that the agreement has been terminated. The distributor played a critical role in assisting the Company to obtain regulatory approval by the China Food and Drug Administration (“CFDA”) for the GlucoTrack® model DF-F. As a result of the breaches of the distributor and the termination of such relationship, the Company may likely be unable to re-submit the file to the CFDA for the current product for a period of up to five years. While the Company is of the opinion that such termination will have little adverse effect on its future business opportunities in China, as it believes that it should be able to file applications with the CFDA for its next generation products through another distributor in China, there can be no assurance that the Company will be successful in this endeavor. If we were unable to partner with another distributor in China on terms mutually agreed upon by us and receive CFDA clearance to sell its future products in China, we would not have the ability to distribute our products in China and accordingly our business potential could be materially adversely affected. |
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
Year ended December 31, 2016 | Nine-month period ended September 30, 2017 | |||||||
Thousands of U.S. $ (except units sold) (unaudited) | ||||||||
Number of units sold | 5,828.9 | 6,174.9 | ||||||
Gross amount | 5,829 | 6,175 | ||||||
Net of related cash expenses | 4,951 | 5,379 | ||||||
Net amount | 4,642 | 5,019 |
NOTE 4– INVENTORIES
US dollars | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | ||||||||
Raw materials | 661,609 | 735,201 | ||||||
Work in process | 828,146 | 633,132 | ||||||
Finished products | 4,453 | 51,271 | ||||||
1,494,208 | 1,419,604 |
US dollars | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
(unaudited) | ||||||||
Raw materials | 13,522 | 12,734 | ||||||
Work in process | 1,569,981 | 1,556,256 | ||||||
Finished products | 67,309 | 144,493 | ||||||
1,650,812 | 1,713,483 | |||||||
Less – provision for slow moving inventory | (756,134 | ) | (756,134 | ) | ||||
894,678 | 957,349 |
NOTE 5– OTHER CURRENT LIABILITIES
US dollars | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | ||||||||
Employees and related institutions | 337,377 | 363,738 | ||||||
Accrued expenses | 607,595 | 261,651 | ||||||
Other current liabilities | 13,093 | 88,160 | ||||||
958,065 | 713,549 |
US dollars | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
(unaudited) | ||||||||
Employees and related institutions | 239,415 | 336,783 | ||||||
Accrued expenses | 1,383,252 | 929,171 | ||||||
1,622,667 | 1,265,954 |
NOTE 6– FINANCING INCOME, NET
US dollars | US dollars | |||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Israeli CPI linkage difference on principal of loans from stockholders | 1,266 | (373 | ) | (697 | ) | (347 | ) | |||||||||
Exchange rate differences | (14,410 | ) | (30,154 | ) | (8,789 | ) | (12,960 | ) | ||||||||
Change in fair value of warrants with down round protection | 251,790 | 273,733 | 91,762 | 82,658 | ||||||||||||
Interest expenses on credit from banks and other | (11,853 | ) | (19,416 | ) | (5,551 | ) | (5,729 | ) | ||||||||
Late fee penalty of dividend payments | (82,777 | ) | - | (38,497 | ) | - | ||||||||||
144,016 | 233,790 | 38,228 | 63,622 |
15 |
US dollars | US dollars | |||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Israeli CPI linkage difference on principal of loans from stockholders | 373 | 27 | 347 | 666 | ||||||||||||
Exchange rate differences | 30,154 | 33,329 | 12,960 | 9,118 | ||||||||||||
Change in fair value of Warrants with down-round protection | (273,733 | ) | (110,498 | ) | (82,658 | ) | (46,286 | ) | ||||||||
Interest expenses on credit from banks and other | 19,416 | 13,488 | 5,729 | 4,913 | ||||||||||||
(223,790 | ) | (63,654 | ) | (63,622 | ) | (31,589 | ) |
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
NOTE 7– LOSS PER SHARE
In periods of net loss, basic loss per share is computed by dividing net loss for the period after consideration of the effect of dividends on preferred stock by the weighted average number of shares outstanding during the period.
The loss and the weighted average number of shares used in computing basic and diluted loss per share for the nine and three-monththree month periods ended September 30, 20172018 and 20162017 are as follows:
US dollars | US dollars | |||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Loss for the period | (7,672,266 | ) | (4,270,506 | ) | (2,584,740 | ) | (1,454,744 | ) | ||||||||
Cash dividend on Series A Preferred Stock | (19,243 | ) | (13,529 | ) | (12,529 | ) | (4,076 | ) | ||||||||
Stock dividend on Series B Preferred Stock | (609,582 | ) | (449,051 | ) | (117,914 | ) | (194,950 | ) | ||||||||
Stock dividend on Series C Preferred Stock | (370,325 | ) | (80,082 | ) | (93,751 | ) | (59,727 | ) | ||||||||
Loss for the period attributable to common stockholders | (8,671,416 | ) | (4,813,168 | ) | (2,808,934 | ) | (1,713,497 | ) |
US dollars | US dollars | |||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Loss for the period | (5,383,155 | ) | (7,672,266 | ) | (1,572,878 | ) | (2,584,740 | ) | ||||||||
Cash dividend on Series A Preferred Stock | (13,141 | ) | (19,243 | ) | (4,171 | ) | (12,529 | ) | ||||||||
Stock dividend on Series B Preferred Stock | (1,118,550 | ) | (609,582 | ) | (533,229 | ) | (117,914 | ) | ||||||||
Stock dividend on Series C Preferred Stock | (893,269 | ) | (370,325 | ) | (425,836 | ) | (93,751 | ) | ||||||||
Loss for the period attributable to common stockholders | (7,408,115 | ) | (8,671,416 | ) | (2,536,114 | ) | (2,808,934 | ) |
Number of shares | Number of shares | |||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Number of shares: | ||||||||||||||||
Common shares used in computing basic income (loss) per share | 6,207,844 | 5,746,838 | 6,386,772 | 5,806,724 | ||||||||||||
Common shares used in computing diluted income (loss) per share | 6,207,844 | 5,746,838 | 6,386,772 | 5,806,724 | ||||||||||||
Total weighted average number of common shares related to outstanding convertible Preferred Stock, options and warrants excluded from the calculations of diluted income (loss) per share (*) | 20,304,950 | 12,125,368 | 23,378,950 | 13,915,740 |
US dollars | US dollars | |||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Number of shares: | ||||||||||||||||
Common shares used in computing basic income (loss) per share | 7,745,275 | 6,207,844 | 8,249,442 | 6,386,772 | ||||||||||||
Common shares used in computing diluted income (loss) per share | 7,745,275 | 6,207,844 | 8,249,442 | 6,386,772 | ||||||||||||
Total weighted average number of common shares related to outstanding convertible Preferred Stock, options and warrants excluded from the calculations of diluted income (loss) per share (*) | 26,938,336 | 20,304,950 | 28,470,324 | 23,378,950 |
(*) | All outstanding convertible Preferred Stock, stock options and warrants have been excluded from the calculation of the diluted net loss per share for all the reported periods, because the effect of the common shares issuable as a result of the exercise or conversion of these instruments was determined to be anti-dilutive. |
19NOTE 8 – SUBSEQUENT EVENTS
On October 2, 2018, John Graham notified the Company of his resignation as CEO and Chairman of the Company for personal reasons, to be effective as of October 31, 2018. David Podwalski was appointed as President and Chief Operating Officer of the Company by its Board, effective October 9, 2018, and is appointed as a Director effective as of October 31, 2018 to fill the vacancy to be created by Mr. Graham’s resignation.
Effective November 1, 2018, the Board approved an increase in David Podwalski’s annual base salary to $275,000; and the Board will re-evaluate his bonus payout as part of the annual compensation review at its January 2019 Board meeting, with new goals to be effective January 1, 2019. With respect to his $70,000 salary due in arrears, $50,000 shall be issued in RSUs, based on the price of the conversion of the outstanding preferred stock, and $20,000 shall be paid in cash as soon as practicable; and he shall be granted an addition 75,000 stock options with a three year term and three year vesting schedule with an exercise price based upon the price for the conversion of the existing preferred stock.
The Board also approved that no later than December 31, 2018, the Company shall pay to John Graham his salary arrears as follows: (i) $320,000 in RSUs based on the price of the conversion of the existing preferred stock, and (ii) $61,335 to be paid in cash; and all of his existing options shall expire on January 30, 2019, if not exercised by that date
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-lookingforward looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies and prospects. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including statements regarding our future activities, events or developments, including such things as future revenues, capital raising and financing, product development, clinical trials, regulatory approval, market acceptance, responses from competitors, capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of our business and operations, plans, references to future success, projected performance and trends, and other such matters, are forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “may,” “will,” “could,” “would,” “should” and other similar words and phrases, are intended to identify forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q are based on certain historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. These statements relate only to events as of the date on which the statements are made and we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. All of the forward-looking statements made in this Quarterly Report on Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to or effects on us or our business or operations. Whether actual results will conform to our expectations and predictions is subject to a number of risks and uncertainties that may cause actual results to differ materially. Risks and uncertainties, the occurrence of which could adversely affect our business, include the risks identified under the caption “Risk Factors” included in our Annual Reportannual report on Form 10-K for the year ended December 31, 2016.2017. The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.
Overview
Incorporated in Delaware in May 2010, we are a medical device company focused on the design, development and commercialization of non‑invasivenon-invasive glucose monitoring devices for use by people with diabetes and pre-diabetics. On July 15, 2010, we completed a reverse triangular merger with Integrity Israel and Integrity Acquisition, an Israeli corporation and a wholly owned subsidiary of ours, pursuant to which Integrity Acquisition merged with and into Integrity Israel and all of the stockholders and option holders of Integrity Israel received shares and options in us in exchange for their shares and options in Integrity Israel (the “Reorganization”). Following the Reorganization, the former equity holders of Integrity Israel were entitled to the same proportional ownership in us as they had in Integrity Israel prior to the Reorganization. As a result of the Reorganization, Integrity Israel became a wholly owned subsidiary of ours. We operate primarily through Integrity Israel.
Integrity Israel was founded in 2001 with a mission to develop, produce and market non-invasive glucose monitors for home use by diabetics. We have developed a non-invasive glucose monitor, the GlucoTrack® model DF-F glucose monitoring device, which is designed to help people with diabetes and individuals with pre-diabetics obtain glucose level readings without the pain, inconvenience, cost and difficulty of conventional (invasive) spot finger stick devices. The GlucoTrack® model DF-F utilizes a patented combination of ultrasound, electromagnetic and thermal technologies to obtain glucose measurements in less than one minute via a small sensor that is clipped onto one’s earlobe and connected to a small, handheld control and display unit, all without drawing blood or interstitial fluid.
In June 2013, we received the initial CEConformité Européene (CE) Mark (marking(indicating the conformity of the Company’s declaration thatproduct with health, safety, and environmental protection standards for products sold within the product meets the requirements of the applicable European Union directives)Economic Area) approval for the GlucoTrack® model DF-F non-invasive glucose monitoring device from DEKRA Certification B.V., our European notified body (the “Notified Body”). , which is an entity that has been accredited by a member state of the European Union (“EU”) to assess whether a product to be placed on the market meets certain preordained standards.
This original approval required that the device be re-calibrated every 30 days, with each such re- calibration taking between 2.5 and 3 hours to complete. In March 2014, we received CE Mark approval for six months’ calibration validity of the same device. This approval eliminates the need for monthly re-calibrations and enables the calibration process to be conducted only when the sensor is replaced, once every 6 months. We believe that this is a significant feature of the GlucoTrack® model DF-F. On August 31, 2015, we received a further approval from the Notified Body for improvements to the GlucoTrack® model DF-F to simplify and shorten the initial calibration process for the device (from approximately 2.5 hours to approximately half an hour). All these improvements enhance the competitiveness of the device and its commercial viability. In addition, we received approval from the Notified Body on the updated intended use for the device, which expands the intended user population to include not only Type 2 diabetics, but also people suffering from pre-diabetes conditions, which we believe represents a material expansion of the potential market for the device. In December 2015, we received approval from the Notified Body for further improvements to the GlucoTrack® model DF-F that increase the accuracy and efficacy of the device. As a result of these incremental, but important, enhancements to the performance of the device we believe that the product is ready for commercial launch in specific market segments.
Receipt of the CE Mark allows us to market and sell the GlucoTrack® model DF-F glucose monitoring device in European Union (“EU”)EU member countries that have adopted the European Medical Device Directive (the “MDD”) without being subject to additional national regulations with regard to demonstration of performance and safety. However, although the MDD is applicable throughout the EU, in practice it does not ensure uniform regulation throughout the EU. Accordingly, member countries may apply and enforce the MDD’s terms differently, and certain EU member countries may request or require performance and/or safety data in addition to the MDD’s requirements from time to time, on a case-by-case basis. The CE Mark also permits the sale in countries that have an MDD Mutual Recognition Agreement with the EU.
Safety and quality are non-negotiables in the Notified Bodymedical devices industry. Regulatory requirements are increasingly stringent throughout every step of a product’s life cycle, including service and delivery. It becomes more often that organizations in the industry are expected to demonstrate their quality management processes and ensure best practice in everything they do. ISO 13485 is an internationally agreed upon standard that sets out the requirements for improvementsa quality management system specific to the GlucoTrack® model DF-F to simplify and shorten (from approximately 2.5 hours to approximately half an hour) the initial calibration process for the device. These improvements are intended to reduce the backlog created as purchasers of the device await calibration. In addition, we received approval from the Notified Body on the updated intended use for the device, which expands the intended user population to include not only Type 2 diabetics, but also people suffering from pre-diabetes conditions as well, which we believe represents a material expansion of the potential market for the device. In December 2015, we received approval from the Notified Body for further improvements to the GlucoTrack® model DF-F that increase the accuracy and efficacy of the device.medical devices industry. On February 19, 2016, we received an extension of our ISO 13485:2003 certificate and Annex II certification from the EU. The ISO 13485:2003 certification signifies that we have met the standards required for company-wide implementation of device quality management system(s).systems. The scope of the certification is design, development, manufacture and service of non-invasive glucose monitoring systems for home use. Annex II also addresses quality control systems. The certification allows us to self-certify certain modifications and changes and simplifies some of the reporting to and review by the relevant Notified Body. This can shorten the CE-mark review process of future GlucoTrack® model DF-F enhancements or revisions, including software updates and other improvements of the device that do not affect the intended use and/or safety performance. Without an Annex II certification, each new device enhancement or modified version would be subject to the full EU CE-mark review process. The ISO 13485:2003 and Annex II certifications enable us to potentially reduce the time to market for product sales on new, enhanced or modified GlucoTrack® model DF-F devices.
The GlucoTrack® model DF-F has not yet been approved for commercial sale in the United States. On August 10, 2015, we submitted pre-submissionpre- submission documents to the FDAU.S. Food and Drug Administration (the “FDA”) in connection with our proposed future application for FDA approval of our U.S. clinical trial protocol. The pre‑submissionpre-submission documentation was submitted to the FDA in order to obtain the FDA’s guidance regarding the U.S. regulatory pathway for the GlucoTrack® model DF-F, the proper approach to refining the trial protocol and preparing the pre-marketing application. On October 19, 2015, we met with the FDA to discuss the pre-submission documents, including the approach to and details of the clinical trial protocol for the GlucoTrack® model DF-F. On May 10, 2016, we submitted a pre-submission supplement (including clinical trial protocol) to the FDA which reflects the feedback received from the FDA at our October 2015 meeting. On July 18, 2016, we completed a teleconference with the FDA to further discuss our pre-submission supplement. At the end of this discussion, we received verbal confirmation from the FDA that clinical trials of the GlucoTrack® model DF-F constitute non‑significantnon-significant risk device studies, which allows the trials to proceed without an Investigational Device Exemption (IDE) application. Such trials are assessed by the FDA and not considered to present a potential for serious risk to the health, safety or the welfare of subjects. We have identified and are currently negotiating agreements with two diabetes and endocrinology institutionsexpect that the regulatory pathway would be that of ade novo 510k, requiring a clinical trial design based on feedback from the agency. The initiation of clinical trials in the United States, as well as prominent endocrinologistsUSA is subject to conduct the clinical trials as primary investigators. Subject to finalizing these agreements and raising adequate financing to fund the clinical program through completion. If we are unable to raise additional capital of at least $10 million, we do so, wenot expect to begincommence such clinical trials in the United States in the second half of 2018.
Clinical trials conducted in Germany by Pfutzner Science & Health Institute, GmbH, headed by Prof. Dr. Andreas Pfutzner, on subjects with Type 2 diabetes and pre-diabetics, as well as at Soroka University Medical Center, Beer-Sheva, Israel, demonstrated favorable results, which were presented on November 10, 2016 by the Company at the 16th annual Diabetes Technology Meeting (DTM), Bethesda, MD in an invited presentation. Most notably, the presentation included data validating that GlucoTrack’s accuracy has increased significantly. Results from the trials show 99.7% of the study data points within the clinically accepted A and B zones of the Consensus Error Grid (which is a new tool for evaluating the accuracy of a blood glucose meter) (Type 2), 99.3% of the study data points were within the clinically accepted A and B zones of the Clarke Error Grid (which is a tool used to quantify the clinical accuracy of blood glucose estimates generated by meters as compared to a reference value), 17.0% Mean Absolute Relative Difference, and 12.9% Median Absolute Relative Difference. In addition, the German trial concluded that the data confirms the performance of the GlucoTrack® among its intended users, including pre-diabetic patients.
In addition,the second half of 2017 we are developingconducted a wireless module (“WLM”)strategic review of our previous commercial activities. We established a cross-functional task force with embedded Bluetooth Low-Energy (BLE) and Wi-Fi technologies, which we expect will enable transmissionthe goal of measurement data captured byreviewing the GlucoTrack® model DF-F to a cloud based server. We expect this module and the related applications, if successfully developed, to facilitate sharing, viewing and analysis of GlucoTrack® model DF-F glucose measurements and profile by clinicians and others.
We have entered intostarted the implementation of this new commercial program by selecting two countries where we will pilot this approach as our proof-of-concept; the Netherlands and Israel. These countries were chosen based on the relatively smaller size of these marketplaces that will allow us to be able to rapidly assess our performance and make adjustments as necessary. On December 22, 2017 we signed an exclusive distribution agreementsagreement with more than 15 distributors,a new partner in the Netherlands (MediReva B.V.) and we are continuingunderway with launch preparations for 2018. We have been working closely with our new distributor and have accomplished: product and disease area training across the organization; segmentation of the local target audiences including key opinion leaders, treating physicians, and diabetes nurses. We received our first order of 30 units from MediReva and this has been shipped and received in their warehouse. The most important aspect of our launch preparations are the discussions being held with many health insurance companies. Approval of full or partial reimbursement by the health insurance companies will be a key factor in enabling us to achieve significant sales volume. We are currently working with several of these companies to initiate pilots with GlucoTrack® before the end of this year as the first step towards reimbursement approval.
We have been in negotiations with distributors in additional territories. The effectivenessa new strategic partner for Israel with the goal of these agreements, in many cases, is subjectidentifying a new distributor to replace the receipt of local regulatory approval or registration, if required, for the commencement of sales of the GlucoTrack® model DF-F in the subject territory. We cannot provide any assurance that we will receive the required local regulatory approvals in any of the countries in which such approvals are required, and therefore we may never be permitted to commence commercial sales of our products in such territories. Additional discussions with other potential distributors are also in progress. Among other jurisdictions, we are in the process of seeking regulatory approval for the GlucoTrack® model DF-F in Chinaprevious distributor where we are in the process of re-negotiatingterminated our distribution agreement and are awaiting local regulatory approval.due to a lack of performance over the last two years. At the same time, we have been in direct discussions with a potential new distributor with a Mutual NDA signed on May 31, 2018. In the eventmeantime, we are exploring the use of direct-to-consumer web campaigns and direct-to-prescriber promotion to physicians and diabetes nurses to evaluate the potential of a direct commercial approach for Israel.
On July 3, 2018 we signed a new exclusive distribution agreement for GlucoTrack® with CuraTec Nordic for the Scandinavian countries (Denmark, Sweden, Norway, and Finland). We anticipate that our re-negotiation with the distributor in China is successful, we expect to receive the regulatory approval in China in the first half of 2018. If the renegotiation is unsuccessful, we plan to seek another distributor in China which may further significantly delay the process of obtaining regulatory approval in China. We currently are not seeking regulatory approval in Japan. We may also seek regulatory approval to market the GlucoTrack® devices in other foreign countries that do not rely on the CE Mark. To the extent that we seek to market our devices in other non-CE Mark countries in the future, wethey will be requireda strong partner due to complytheir previous experience in diabetes, strong sales presence in all four countries, and established relationships with key opinion leaders. Launch preparations are underway to enter the applicable regulatory requirementsmarkets in each such country. Such regulatory requirements vary by country and may be onerous. As a result, no assurance can be given that we will be able to satisfy the regulatory requirements to sell our products in any such country.
On May 25, 2018 we signed distribution agreements currently representa Mutual NDA with a potential market opportunitydistributor in Hungary. Discussions on a go-to-market strategy started during Q3 and will continue during Q4.
On July 18, 2018 we signed a Mutual NDA with a potential distributor in Romania. Discussions on a go-to-market strategy started during Q3 and will continue during Q4.
On July 25, 2018 we signed a Mutual NDA with a potential distributor in Japan. On September 12, 2018 we signed a Mutual NDA with a second potential distributor in Japan. Discussions on a go-to-market strategy started during Q3 and will continue during Q4.
In the meantime, we have assessed the performance of upall of our current distributors in Europe and Asia. A number of these agreements have been terminated given that they did not perform in the past and had minimal or no sales over the course of 2017. We are also initiating discussions with our distributors in the remaining countries to approximately 141 million diagnosed diabetics (inclusivefocus on changes needed to address the CSF’s for future success with implementation plans foreseen in the second half of both Type 12018.
On October 2, 2018, John Graham notified the Company of his resignation as CEO and Type 2 diabetes patients). This represents approximately 34%Chairman of the potential worldwide marketCompany for personal reasons. to be effective as of approximately 414 million people,October 31, 2018. David Podwalski was appointed as President and Chief Operating Officer of the Company by its Board, effective October 9, 2018, and is appointed as a Director effective as of October 31, 2018 to fill the vacancy created by Mr. Graham’s resignation.
Effective November 1, 2018, the Board approved an increase in David Podwalski’s annual base salary to $275,000; and the Board will re-evaluate his bonus payout as part of the annual compensation review at its January 2019 Board meeting, with new goals to be effective January 1, 2019. With respect to his $70,000 salary due in arrears, $50,000 shall be issued in RSUs, based on estimates included in the International Diabetes Federation’s (IDF) Diabetes Atlas, 7th edition, 2015. Of these territories, the territories in which the GlucoTrack® model DF-F has been approved for sale currently represent a potential market opportunity of up to approximately 23 million diagnosed diabetics (inclusive of both Type 1 and Type 2 diabetes patients), or 5.6%price of the potential worldwide market. While we do not have reliable statisticsconversion of the outstanding preferred stock, and $20,000 shall be paid in cash as soon as practicable; and he shall be granted an addition 75,000 stock options with a three year term and three year vesting schedule with an exercise price based upon the price for the conversion of the existing preferred stock.
The Board also approved that bifurcateno later than December 30, 2018, the market opportunity among Type 1 and Type 2 diabetics, we believe that on average approximately 87% of all people suffering from diabetes have Type 2 diabetes. Apart from the diagnosed patients, approximately 192 million people are estimatedCompany shall pay to suffer from diabetes that has not yet been diagnosed. Based on estimates includedJohn Graham his salary arrears as follows: (i) $320,000 in the International Diabetes Federation’s (IDF) Diabetes Atlas, 7th edition, 2015, the market opportunity for undiagnosed diabetics is 71 million people in the territories covered by our signed distribution agreements, of which 11 million people are in the territories in which the GlucoTrack® model DF-F has been approved for sale. BasedRSUs based on the IDF Diabetes Atlas, 7th edition, 2015, the world prevalence of pre-diabetics was 6.4%price of the worldwide population, whileconversion of the prevalenceexisting preferred stock, and (ii) $61,335 to be paid in cash; and all of diagnosed people with diabetes was 7.7%.
We do not own commercial manufacturing facilities and do not intend to build commercial manufacturing facilities of our own in the foreseeable future. We currently utilize a third-party manufacturer in Israel to manufacture the GlucoTrack® model DF-F. InMoreover, in July 2014, we entered into a manufacturing agreement with Wistron Corp. (“Wistron”), a Taiwanese entity and the manufacturing arm of Acer Inc. Pursuant to such agreement, Wistron has agreed to mass produce and service, on a non-exclusive basis, the GlucoTrack® model DF-F and any future products, if any, introduced by us. Pursuant to such agreement, Wistron has also agreed to provide full turn-key manufacturing services for the GlucoTrack® model DF- F, including components procurement, unit assembly, device integration, testing, packaging and delivery to customers (distributors). In November 2015, we sent a delegation to Wistron’s main production facility in Taiwan to, among other things, inspect the readiness of Wistron’s production line for the GlucoTrack® model DF-F. Wistron has produced a small pilot batch and recently produced a second pilot batch of the GlucoTrack® model DF-F device. AFollowing the receipt of an official clearance from the Taiwanese authorities on January 11, 2017 and the successful completion of a GMP (Good Manufacturing Practice) audit by the local regulatory authorities in Taiwan was conducted in September 2016 and successfully completed. TheJuly 2017, the production line for the GlucoTrack® model DF-F is now ready and we expect to receive an official clearance from the Taiwanese authorities shortly.operational. We intend to utilize the services of both Wistron and the Israeli third-party manufacturer to produce the GlucoTrack® model DF-F.
In support of the commercialization effort, we intend to conduct further post-market clinical trials, as well as publish scientific and clinical studies, case studies, and white papers. To that end, we have engaged with a leading clinic in Germany, Pfutzner Science & Health Institute, GmbH, headed by Prof. Dr. Andreas Pfutzner, to conduct additional clinical trials on subjects with Type 2 diabetes and pre-diabetics. We are in negotiations with another site in Israel and anticipate adding additional sites in Europe.
In connection with the foregoing, we have approached certain leading companies in the field of diabetes and glucose monitoring, as well as other relevant companies that may have an interest in expanding their fields of interest. We cannot guarantee that such activities will conclude in positive results to the Company, if any.
In December 2016, we had a poster at the 9th Annual World Congress on Prevention of Diabetes and its Complications (WCPD, in Atlanta, GA). This Congress provided the Company with an opportunity to showcase GlucoTrack® model DF-F as a tool to fight diabetes and its complications, as well as using GlucoTrack® model DF-F as a tool to assist pre-diabetics.
In February 2017, the Company presented at the 10th International Conference on Advanced Technologies & Treatments for Diabetes (ATTD 2017) in Paris, France. The Company presented key findings including (1) the latest generation GlucoTrack® algorithm, which compensates for the tissue-lagging effect relative to blood glucose changes post-meal intake, significantly improves GlucoTrack® accuracy at different post-prandial (post- meal) states, and equalizes accuracy for pre- and post-meal glucose readings; (2) GlucoTrack® clinical accuracy as measured by Consensus Error Grid (CEG) showed 100% of the pre-prandial readings in the A+B zones, and 98.2% of the post-prandial readings in the A+B zones; (3) GlucoTrack® Model DF-F demonstrates consistent glucose measurement repeatability between different GlucoTrack® devices and on each earlobe of the same subject; (4) the repeatability of different GlucoTrack® devices is similar at all tested glucose ranges and post-prandial time periods; and (5) the GlucoTrack® mean precision absolute relative difference (PARD) of 8.2% is equivalent or better than the independently reported PARD values of commercially available continuous glucose monitoring systems.
On June 12, 2017, we announced new data demonstrating the clinical performance of GlucoTrack®, further supporting its suitability for people with type 2 diabetes across various medication regimes. The data was recently presented at the American Diabetes Association’s (ADA) 77th Scientific Sessions in San Diego, CA.
In September 2017, we presented key findings at the European Association for the Study of Diabetes Congress (EASD) in Lisbon, Portugal. The study evaluated GlucoTrack’sGlucoTrack®’s accuracy in 172 adults with type 2 diabetes who were prescribed one or more medications for major medical conditions associated with diabetes. The experiment stratified participants into five medication groups, focusing on anti-cholesterolemia, anti-hypertension, anti-thrombotic, and anti-diabetic (prolonged duration and short and mixed duration) medications.
In February 2018, the Company presented at the 11th International Conference on Advanced Technologies & Treatments for Diabetes (ATTD 2018) in Vienna, Austria. The Company presented data on the performance of a non-invasive glucose monitoring device (GlucoTrack®) with regard to accuracy and precision. Device accuracy data was presented for 37 people with type 2 diabetes using the consensus error grid analysis for type 2 diabetes and measuring the median absolute relative difference (ARD). The results showed that 99.6% of 257 measurements were incorporated in Delaware in May 2010. On July 15, 2010, we completed a reverse triangular merger with Integrity Israelzones A and Integrity Acquisition Corp. Ltd., an Israeli corporation and a wholly owned subsidiary of ours, pursuant to which Integrity Acquisition Corp. Ltd. merged with and into Integrity Israel and allB of the stockholders and option holders of Integrity Israel became entitled to receive shares and options in us in exchange for their shares and options in Integrity Israel (the “Reorganization”). Following the Reorganization, the former equity holders of Integrity Israel were entitled to the same proportional ownership in us as they had in Integrity Israel prior to the Reorganization. As a resultConsensus error grid, with 90.3% of the Reorganization, Integrity Israel became a wholly owned subsidiarymeasurements in zone A, the mean and median ARD were 17.2% and 12.9%, respectively, and at various glucose levels, mean PARD ranged from 7.7%-8.7%. Data was also presented on sensor to sensor precision in 20 people with type 2 diabetes where ~19 simultaneous measurements using two GlucoTrack® devices, one on each earlobe. The results show that GlucoTrack® is highly accurate with sensor-to-sensor precision is comparable to that of ours. We operate primarily through Integrity Israel.
We have not yet generated any material revenues from our operations and, as of September 30, 2017,2018, have incurred an accumulated deficit of $44,275,592,$54,776,727, stockholders’ deficit of $14,843,699$15,995,905 and negative operating cash flows. We currently have no material sources of recurring revenue and therefore are dependent upon external sources for financing our operations. There can be no assurance that we will succeed in obtaining the necessary financing to continue our operations. As a result, substantial doubt exists regarding our ability to continue as a going concern.
Recent Developments
During the Company, entered intofirst nine months of 2018, we received aggregate net proceeds of approximately $4.7 million (net of related cash expenses), from the issuance and sale in a securities purchase agreement with certain accredited investors pursuant to which, the Company issued to the purchasers an aggregateprivate placement transaction of 1,0001,206,444 Series CD Units. The sharesAs of Series C Preferred Stock comprising the Units are convertible into an aggregate of 222,236 shares of Common Stock, andSeptember 30, 2018, the Series C-1D Warrants (issued on December 1, 2017 and Series C-2 Warrants comprisingon the Unitsfirst nine months of 2018) are exercisable for an aggregate of 444,4723,902,667 shares of Common Stock, in each case subject to adjustment in certain adjustments. The Company received aggregate gross proceeds of $1,000,000 from the sale of the Series C Units.
Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with Andrew Garrett, Inc. (“AGI”), the placement agent, for the offering of the Series C Units,, at the closing of the sale of the Series C Units the Company paid AGI,the placement agent, as a commission, an amount (payable in cash and Common Stock) equal to 10% of the aggregate sales price of the Series CD Units sold in each closing, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Series C Units.D Units sold in such closing. In addition, pursuant to the Placement Agent Agreement, in connection with the closings in the first nine months of 2018, the Company is required to issue to AGI:the placement agent: (a) 5 year5-year warrants to purchase up to 44,445241,289 shares of Common Stock at an exercise price of $4.50 per share, and (b) 5 year5-year warrants to purchase up to 22,223120,644 shares of Common Stock at an exercise price of $5.75 per share, and (c) 5-year warrants to purchase up to 120,644 shares of Common Stock at an exercise price of $7.75 per share. The terms of thesesuch warrants will beare substantially similar to the Series D Warrants except that the warrants issued to the investors except that the AGI warrants will also beplacement agent are exercisable on a cashless basis and will include full ratchet anti-dilution protection.
On March 23, 2018, the Company held its 2018 Special Meeting of Stockholders. At the Meeting, the Company’s stockholders voted on the proposal to approve and ratify the increase of the total number of shares authorized for issuance under the Company’s Compensation Plan to 7,000,000 shares, including an amendment to the Incentive Plan on April 7, 2017 to increase from 1,000,000 shares to 5,625,000 shares and another amendment on February 15, 2018 to increase from 5,625,000 shares to 7,000,000 shares.
We recently laid out our strategic priorities in terms of product enhancements and a future generation of products. As a result of the initial issuancereview of our corporate strategy, we have decided to concentrate our research and saledevelopment activities around 4 main strategic pillars:
1. | Wireless Connectivity |
We have developed a wireless module (“WLM”) with embedded Bluetooth Low-Energy (BLE), which enables the transmission of measurement data captured by the GlucoTrack® model DF-F to a cloud-based server or a smart device. We expect this module and the related applications to facilitate viewing of glucose related data and correlate it closely with lifestyle choices made by the users, be that dietary choices or activity-based choices, among other things. The wireless module will also facilitate sharing, viewing and analysis of GlucoTrack® measurements and profile by clinicians and others caregivers.
2. | Digital Health Applications |
We intend to develop smart device applications (“Apps”) to facilitate the interaction of users with Glucotrack® DF-F and the glucose data collected. We intend to develop Apps that support the management of Type 2 diabetics and pre-diabetic patients by provided immediate feedback and insights as to the glucose measurements. The goal is to provide relevant information to guide patients to change behavior and improve the management of their condition. The Apps are expected to have a user-directed capability to connect with third party healthcare providers (physicians, dieticians, and nurse practitioners), in order to receive professional guidance based on the accumulated information ultimately leading to improved management of the Series C Units, pursuantcondition and better disease outcomes.
3. | Accuracy |
While the accuracy of the Glucotrack® DF-F is sufficient for the management of Type 2 diabetics and pre-diabetic patients (and approved as such by the EU authorities), we strive to further improve the product in future iterations and maximize its potential by expanding the addressable market, e.g. into Type 1 diabetes. The research projects include further improving the algorithms involved in computing our glucose measurement data, as well as deeper research on the existing sensing technologies to improve sensitivity. The ultimate goal being to eventually commercialize a non-invasive device for all types of diabetics.
4. | Miniaturization |
The objective of this project is to reduce the existing device to a simple, aesthetically designed, wireless ear-clip which would measure glucose and communicate the results seamlessly to any other platform whether through a wireless connection to the termscloud or a Bluetooth connection to a smart device such as a smartphone, tablet or computer. As a result, the current handheld display would be eliminated completely. The result would be a user- friendly, inconspicuous measuring device for the management of diabetes and pre-diabetes, with a significantly cheaper cost to manufacture than our current device. Simultaneously we will be working to further simplify the calibration process eventually enabling self-calibration.
After months of protracted negotiations with our China distributor we finally reached an impasse on several critical issues and decided that it would be in the best interests of the warrants issued by usCompany to purchasers of units consisting of shares of its Series A 5% Convertible Preferred Stock (the “Series A Preferred Stock”) and warrantsterminate the existing agreements with such distributor due to purchase shares of Common Stock (the “Series A Warrants”), on April 8, 2016, the exercise price per sharevarious breaches of the Series A Warrants decreaseddistributor. On May 14, 2018, the Company sent notices to the distributor regarding the Company’s intention to terminate the agreement unless the breaches are cured within 30 days. On June 6, 2018, the Company received a response from $5.80 per sharethe distributor denying all the allegations of breaches. On June 25, 2018, the Company sent a formal written notice to $4.50 per share and the numberdistributor to terminate the agreement, effective immediately, to which the distributor responded on July 20, 2018 continuing to deny all the allegations of shares of Common Stock issuable upon exercise of eachbreaches. Notwithstanding the distributor’s denials, we are of the Series A Warrants, in the aggregate, increased suchbelief that the aggregate exercise price payable thereunder, after taking into accountagreement has been terminated. The distributor played a critical role in assisting the decrease inCompany to obtain regulatory approval by the exercise price, will be equal toChina Food and Drug Administration (“CFDA”) for the aggregate exercise price prior to such adjustment. Also asGlucoTrack® model DF-F. As a result of the initial issuance and salebreaches of the Series C Units, pursuantdistributor and the termination of such relationship, the Company may likely be unable to re-submit the file to the termsCFDA for the current product for a period of up to five years. While the Company is of the certificates of designationsopinion that such termination will have little adverse effect on its future business opportunities in China, as it believes that it should be able to file applications with the CFDA for our Series A Preferred Stock and Series B 5.5% Convertible Preferred Stock (the “Series B Preferred Stock”), on April 8, 2016, the conversion price per share of Series A Preferred Stock and Series B Preferred Stock decreased to $4.50 per share.
Significant Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Our management believes that, as for the financial statements for the interim periods included in this report, the estimatesgoing concern assessment and assumptions relatingrelate to (i) the fair value estimate of the Warrantswarrants with down-round protection, (ii) the allocation of the proceeds and the related issuance costs of the Series CD Units, (iii) measurement of stock based compensation, and (iii) the going concern assumption(iv) determination of net realizable value of inventory are considered as critical accounting policies. However, due to the early stage of operations of the Company, there are no other accounting policies that are considered to be critical accounting policies by management.
Going Concern Uncertainty
The development and commercialization of our product will require substantial expenditures. We have not yet generated any material revenues and have incurred a substantial accumulated deficit and negative operating cash flows. We currently have no sources of recurring revenue and are therefore dependent upon external sources for financing our operations. There can be no assurance that we will succeed in obtaining the necessary financing to continue our operations. Management’s plans concerning these matters are described in Note 1B to our Annual Report on Form 10-K for the year ended December 31, 2016.2017. (See also Note 1B to our interim financial statements for the period ended September 30, 2018). As a result, our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.concern in our Annual Report on Form 10-K for year ended December 31, 2017. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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1. Accounting StandardsStandard Update 2014-09, “Revenue from Contracts with Customers”
Commencing January 1, 2018, the FinancialCompany adopted Accounting Standards Board (“FASB”) issued Accounting StandardsStandard Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).
ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
An entity should apply the amendments in ASU 2014-09 using one of the following two methods: 1. Retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures.
During 2016, the FASB issued several Accounting Standards Updates (“ASUs”)ASUs that focus on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements, Practical Expedients and technical corrections.
In accordance with an amendment to ASU 2014-09, introduced by Accounting Standard 2015-14, “Revenue from contracts with Customers – Deferral of the Effective Date”, for a public entity, the amendments in ASU 2014-09 arebecame effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
Since the companyCompany did not report significant revenues, management believes that the adoption of ASU 2014-09 willdid not have a significant impact on its consolidated financial statements.
2. Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory”
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”).
Among others, Part I of ASU 2017-11 simplifies the accounting for certain financial instruments with down round features, which is a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. Current accounting guidance creates cost and complexity for organizations that issue financial instruments with down round features by requiring, on an ongoing basis, fair value measurement of the entire instrument or conversion option.
ASU 2017-11 require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity.
ASU 2017-11 also addresses navigational concerns within the FASB Accounting Standards Codification related to an indefinite deferral available to private companies.
The provisions of the new ASU related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (fiscal 2019 for the Company). Early adoption is permitted for all entities.
The Company is evaluating the impact of ASU 2017-11 on its financial statements. Although this process has not been completed, managementsmanagement believes that its provisions might impact the accounting of the financial instruments issued by the Company that include down-round protection.
3. Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). ASU 2018-07 aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions.
Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 will be measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. Equity-classified nonemployee share-based payment awards will be measured at the grant date.
With respect to awards with performance conditions ASU 2018-07 concludes that, consistent with the accounting for employee share-based payment awards, an entity will consider the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions.
ASU 2018-07 also requires that the classification of equity classified nonemployee share-based payment awards will continue to be subject to the requirements of Topic 718 unless the award was modified after the good has been delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing goods or services. This eliminates the requirement to reassess classification of such awards upon vesting.
In addition, ASU 2018-07 includes certain Non-public Entity-Specific Amendments
ASU 2018-07 is effective for Public entities in annual periods beginning after December 15, 2018, and interim periods within those years (first quarter of 2019 for the company). Early adoption is permitted, including in an interim period, but not before an entity adopts the new revenue guidance (which was adopted by the Company in its interim financial statements for 2018).
An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date.
The Company is evaluating the impact of ASU 2018-07 on its financial statements.
Results of Operations
The following discussion of our operating results explains material changes in our results of operations for the three and nine-month periodsperiod ended September 30, 20172018 compared with the same period ended September 30, 2016.2017. The discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report.
Nine Months Endedended September 30, 2018 compared to Nine Months ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Revenues
During the nine-month period ended September 30, 2017,2018, we had revenues of $125,881$43,488 from orders for our GlucoTrack® model DF-F glucose monitoring device and personal ear-clip (“PEC”) that are replaced every six months, as compared with $482,177$125,881 for the prior-year period. The decrease in revenues is due primarily to the fact that during the nine-month period ended September 30, 2016first quarter of 2017 we had revenues which resultedreceived an initial order from the approval of the Notified Bodya customer in late 2015.
We recognize revenues from sales of the GlucoTrack® model DF-F and PECs when delivery has occurred, persuasive evidence of an agreement exists,control is transferred to the fee is fixedcustomer and determinable, collectability is reasonably assured and no further obligations exist.
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Research and development expenses were $1,833,841$1,818,814 for the nine-month period ended September 30, 2017,2018, as compared to $2,226,833$1,833,935 for the prior-year period. The decrease is attributable primarily tothe completion of the clinical trials performed at the Soroka Facility in the first quarter of 2018 and the decrease in our cost of revenues which is in line with the decrease in revenues. Additionally,revenues offset by the stock based compensation issued to all employees during the nine-month period ended September 30, 2016first quarter of 2018 and the Company had higher materials expenses primarily as a resultcontinued development of the engagement of research and development in the initial manufacturing of the GlucoTrack DF-F, and higher regulation related expenses relating primarily to our efforts in seeking regulatory approval for the GlucoTrack® model DF-F in China.
Research and development expenses consist primarily of salaries and other personnel-related expenses, including materials, travel expenses, clinical trials and other expenses. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect research and development expenses to increase during the remainder of 20172018 and beyond, primarily due to hiring additional personnel and developing our product line, as well as improvement of the GlucoTrack® model DF-F; however, we may adjust or allocate the level of our research and development expenses based on available financial resources and based on our commercial needs including the FDA registration process, specific requirements from customers, development of new GlucoTrack® models and others.
Selling and marketing expenses
Selling and marketing expenses were $1,064,048$857,386 for the nine-month period ended September 30, 2017,2018, as compared to $939,264$1,064,048 for the prior-year period. The increasedecrease is attributable to the additionreduction in our Chief Commercialization Officerbusiness development personnel during the first quarter of 2018 and the relatedreduction in the number of trade shows we have participated in 2018 offset by the stock based compensation which he received.
Selling and marketing expenses consist primarily of salaries, travel expenses and other related expenses. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect selling and marketing expenses to increase during the remainder of 20172018 and beyond as we continue our focus on marketing and sales of the GlucoTrack®GlucoTrack® model DF-F; however, we may adjust or allocate the level of our marketing based on available financial resources and based on our commercial needs including the FDA registration process, specific requirements from customers, development of new GlucoTrack® models and others.
General and administrative expenses
General and administrative expenses were $5,124,048$2,894,553 for the nine-month period ended September 30, 2017,2018, as compared to $1,650,240$5,124,048 for the prior-year period. The increasedecrease is primarily attributable to severance paid to our former Chairman and CEO and former CFO of approximately $162,000 as well as stock-basedstock based compensation in the amount of $152,000.$152,000 during the nine months ending September 30, 2017. In addition, the increasedecrease is attributable to a one time signing bonus of $412,500 and a $225,000 guaranteed bonus for 2017 including employer payroll taxes, and stock-basedstock based compensation in the amount of approximately $1,939,000$1,399,000 paid to our new Chairman and CEO, recruiting fees of $195,000 and the related professional fees associated with the changes in management. The company also incurred approximately $245,000 related to stock-based compensation and feesmanagement paid to our Board members.
General and administrative expenses consist primarily of professional services, salaries, travel expenses and other related expenses for executive, finance and administrative personnel, including stock-based compensation expenses. Other general and administrative costs and expenses include facility-related costs not otherwise included in research and development costs and expenses, and professional fees for legal and accounting services. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect selling, general and administrative expenses to increase during the remainder of 20172018 and beyond.
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Financing income, net was $223,790$144,016 for the nine-month period ended September 30, 2017,2018, as compared to $63,654$223,790 for the prior-year period. The change is primarily attributable to changes in fair market value adjustments relating to our warrants which all includewith down-round protection. In accordance with U.S. GAAP, we mark the warrants to market on a quarterly basis based on the fair value estimate derived by using a binomialan option pricing model, with the changes in fair value recognized as finance expense or income, as applicable, in our consolidated statement of operations. The decrease in the estimated fair value of our warrants with down-round protection during the nine-month period ended September 30, 20172018 and 20162017 amounted to $273,733$251,790 and $110,498,$273,733, respectively, resulting primarily from the decrease in the expected term of warrants and the changes in the estimated expected volatility.
Net Loss
Net loss was $7,672,266$5,383,155 for the nine-month period ended September 30, 2017,2018, as compared to $4,270,506$7,672,266 for the prior-year period. The increasedecrease in net loss is attributable primarily to the increasedecrease in our general and administrative expenses, as described above.
Three Months Endedended September 30, 2018 compared to Three Months ended September 30, 2017 Compared to Three Months Ended September 30, 2016
Revenues
During the three-month period ended September 30, 2017,2018, we haddid not have any revenues of $20,900 from orders for our GlucoTrack® model DF-F glucose monitoring device and PECsPEC that are replaced every six months, as compared with $11,299$20,900 for the prior-year period.
We recognize revenues from sales of the GlucoTrack® model DF-F and PECs when delivery has occurred, persuasive evidence of an agreement exists,control is transferred to the fee is fixedcustomer and determinable, collectability is reasonably assured and no further obligations exist.
Research and development expenses
Research and development expenses were $635,478$534,317 for the three-month period ended September 30, 2017,2018, as compared to $695,437$635,478 for the prior-year period. The decrease is attributable the completion of the clinical trials performed at the Soroka Facility in the first quarter of 2018 and the decrease in our cost of revenues which is in line with the decrease in revenues offset by the stock based compensation issued to the fact thatall employees during the three-month period September 30, 2016first quarter of 2018 and the Company had higher materials expenses primarily as a resultcontinued development of the engagement of research and development in the initial manufacturing of the GlucoTrack DF-F, and higher regulation related expenses relating primarily to our efforts in seeking regulatory approval for the GlucoTrack® model DF-F in China.
Research and development expenses consist primarily of salaries and other personnel-related expenses, including materials, travel expenses, clinical trials and other expenses. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect research and development expenses to increase during the remainder of 20172018 and beyond, primarily due to hiring additional personnel and developing our product line, as well as improvement of the GlucoTrack® model DF-F; however, we may adjust or allocate the level of our research and development expenses based on available financial resources and based on our commercial needs including the FDA registration process, specific requirements from customers, development of new GlucoTrack® models and others.
Selling and marketing expenses
Selling and marketing expenses were $465,814$265,282 for the three-month period ended September 30, 2017,2018, as compared to $325,143$465,814 for the prior-year period. The increasedecrease is attributable to the additionreduction in our Chief Commercialization Officerbusiness development personnel during the first quarter of 2018 and the related stock based compensation which he received
Selling and marketing expenses consist primarily of salaries, travel expenses and other related expenses. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect selling and marketing expenses to increase during the remainder of 20172018 and beyond as we continue our focus on marketing and sales of the GlucoTrack®GlucoTrack® model DF-F; however, we may adjust or allocate the level of our marketing based on available financial resources and based on our commercial needs including the FDA registration process, specific requirements from customers, development of new GlucoTrack® models and others.
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General and administrative expenses were $1,567,970$811,695 for the three-month period ended September 30, 2017,2018, as compared to $477,052$1,567,970 for the prior-year period. The increasedecrease is primarily attributable to compensation and stock-basedthe reduction in stock based compensation paid to our currentformer Chairman and CEO, of approximately $724,345 during the three-month period ended September 30, 2017. In addition, we incurred an increase of our legal fees of approximately $212,000 during the three-month period ended September 30, 2017.
General and administrative expenses consist primarily of professional services, salaries, travel expenses and other related expenses for executive, finance and administrative personnel, including stock-based compensation expenses. Other general and administrative costs and expenses include facility-related costs not otherwise included in research and development costs and expenses, and professional fees for legal and accounting services. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect selling, general and administrative expenses to increase during the remainder of 20172018 and beyond.
Financing income.netincome, net
Financing income, net was $63,622$38,228 for the three-month period ended September 30, 2017,2018, as compared to a loss of $31,589$63,622 for the prior-year period. The changedecrease in income is primarily attributable to changes in fair market value adjustments relating to our warrants. In accordance with U.S. GAAP, we mark the warrants to market on a quarterly basis based on the fair value estimate derived by using a binomial pricing model, with the changes in fair value recognized as financean expense or income, as applicable, in our consolidated statement of operations. The decrease in the estimated fair valueamount of our warrants during$38,497 related to the three-month period ended September 30, 2017 and 2016 amounted to $82,658 and $46,286, respectively,late fee penalty resulting primarily from the decrease innon-issuance of dividend payments at the expected term of warrants and the changes in the estimated expected volatility.
Net Loss
Net loss was $2,584,740$1,572,878 for the three-month period ended September 30, 2017,2018, as compared to $1,454,744$2,584,740 for the prior-year period. The increasedecrease in net loss is attributable primarily to the increasedecrease in our general and administrative expenses, as described above.
Liquidity and Capital Resources
As of September 30, 2017,November 14, 2018, cash on hand was approximately $462,000.$114,000. During the first nine months of 20172018 we received aggregate net proceeds of approximately $5.4$4.7 million (net of related cash expenses) from the issuance and sale of Series CD Units. During the first nine months of 2017,2018, we did not collect a material amount in cash proceeds from the fulfillment of orders for our improved GlucoTrack® model DF-F. While we expect to generate additional cash from sales, we do not anticipate that our income from operations will be sufficient to sustain our operations in the next 12 months. Based on our current cash burn rate, strategy and operating plan, we believe that our cash and cash equivalents will enable us to operate for a period of less than three months from the date of this report. In order to fund our anticipated liquidity needs beyond such period (or possibly earlier if our current cash burn rate, strategy or operating plan change in a way that accelerates or increases our liquidity needs), we will need to raise additional capital.
Messrs. Avner Gal and Zvi Cohen collectively loaned Integrity Israel NIS 176,000 ($49,87248,525 based on the same exchange rate) on May 15, 2002 pursuant to Boarda board approval. Messrs. Nir Tarlovsky, Yitzhak Fisher and Asher Kugler loaned Integrity Israel NIS 336,300 ($95,29692,721 based on the same exchange rate) on March 16, 2004. These loans are not required to be repaid until the first year in which we realize profits in our annual statement of operations (accounting profit). At such time, the loans are to be repaid on a quarterly basis in an amount equal to 10% of our total sales in the relevant quarter, beginning on the quarter following the first year in which we realize profits in our annual statement of operations. The total amount to be repaid by us to each lender shall be an amount equal to the aggregate principal amount loaned by such lender to us, plus an amount equal to the product of the amount of each payment made by us in respect of such loan multiplied by the percentage difference between the Israeli Consumer Price Index on the date on which the loan was made and the Israeli Consumer Price Index on the date of such payment. However, notwithstanding the above-mentioned mechanism, we will not be required to repay the loans during any time when such repayment would cause a deficit in our working capital. Our Board of Directors is entitled to modify the repayment terms of these loans, so long as such modification does not discriminate against any particular lender, and provided that all payments must be allocated among the lenders on a pro-rata basis.
Integrity Israel is required to pay royalties to the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the State of Israel at a rate ranging between 3-5% of the proceeds from the sale of the Company’s products arising from the development plan up to an amount equal to $93,300, plus interest at LIBOR from the date of grant. As of September 30, 2017,2018, the contingent liability with respect to royalty payment on future sales equaled approximately $52,453,$33,166 excluding interest.
Net Cash Used in Operating Activities for the Nine-Month Periods Ended September 30, 20172018 and September 30, 2016
Net cash used in operating activities was $5,107,009$3,802,460 and $4,346,289$5,107,009 for the nine-monthNine-month periods ended September 30, 20172018 and 2016,2017, respectively. Net cash used in operating activities primarily reflects the net loss for those periods of $7,672,266$5,383,155 and $4,270,506,$7,672,266, respectively, increased by non-cash changes in fair value of warrants with down-round protection of $240,613$251,790 and $110,498, respectively and partially offset by the decrease of $2,072,052 related to stock-based compensation as described above in general and administrative expenses.$273,733, respectively. Net cash used in operating activities was also partially offset by changes in operating assets and liabilities in the aggregate amounts of $683,125$197,946 and $273,745$716,246, respectively.
Net Cash Used in Investing Activities for the Nine-Month Periods Ended September 30, 20172018 and September 30, 2016
Net cash used in investing activities was $19,469$13,669 and $75,269$19,467 for the nine-month periods ended September 30, 2017,2018 and 2016,2017, respectively, and was used to purchase equipment (such as computers, R&Dresearch and development, and office equipment).
Net Cash Provided by Financing Activities for the Nine-Month Periods Ended September 30, 20172018 and September 30, 2016
Net cash provided by financing activities was $5,374,074$4,705,828 and $4,503,611$ 5,374,074 for the nine-month period ended, September 30 2018 and 2017, respectively. Cash provided by financing activities for the nine-month period ended September 30, 2018 reflected net capital raised from the issuance of Series D Units. Cash used in financing activities for the nine-month period ended September 30, 2017 and 2016, respectively. Cash provided by financing activities for the nine-month period ended September 30, 2017 and 2016 reflected net capital raised from the issuance of Series C Units.
Off-Balance Sheet Arrangements
As of September 30, 2017,2018, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Not required for smaller reporting companies.
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Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of JuneSeptember 30, 2017,2018, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Offering of Series D Units
On July 16, 2018, July 27, 2018 and August 10, 2018 the Company received aggregate gross proceeds of $2,632,000 in the seventh, eighth and ninth closings of the private placement of its securities from 25 accredited investors. The Company issued to the investors an aggregate of 584,889 units of the Company (each a “Series DUnit”), each consisting of (a) one share of the Company’s Common Stock, (b) a five year warrant to purchase, at an exercise price of $4.50 per share, one share of Common Stock, (c) a five year warrant to purchase, at an exercise price of $5.75 per share, one share of Common Stock, and (d) a five year warrant to purchase, at an exercise price of $7.75 per share, one share of Common Stock. These private placements were made under an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
Issuance of Non-Qualified Stock Options to Employees
On February 15, 2018 and April 1, 2018, we issued a ten-year non-qualified stock option to various employees, for the purchase of 767,500 and 15,000, respectively, shares of Common Stock at an exercise price of $4.50 per share, with three-year quarterly vesting commencing on the first quarter after the effective date.
Item 5. Other Information
None.
Exhibit No. | Description | |
2.1 | ||
3.1 | Certificate of Incorporation of Integrity Applications, Inc. (1) | |
31.1 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Schema Document | |
101.CAL | XBRL Calculation Linkbase Document | |
101.LAB | XBRL Label Linkbase Document | |
101.PRE | XBRL Presentation Linkbase Document | |
101.DEF | XBRL Definition Linkbase Document |
(1) | Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, as filed with the SEC on August 22, 2011, which exhibit is incorporated herein by reference. |
(2) |
Pursuant to Rule |
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.
Dated: November 14, 2017
INTEGRITY APPLICATIONS, INC. | ||
By: | ||
Name: | David Podwalski | |
Title | President and Chief Operating Officer (Principal Executive Officer) |
By: | /s/ Sami Sassoun | |
Name: | Sami Sassoun | |
Title | Chief Financial Officer (Principal |