This Annual Report on Form 10-K includes forward-looking statements. These forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. All statements other than statements of historical fact included in this Annual Report on Form 10-K, including statements regarding our future activities, events or developments, including such things as future revenues, 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,” “intend,” “anticipate,” “estimate,” “plan,” “may,” “will,” “could,” “would,” “should” and other similar words and phrases or the negative of such terms, are intended to identify forward-looking statements. The forward-looking statements made in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 in this Annual Report on Form 10-K under the caption “Risk Factors,” beginning on page 30. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report unless required by law.
| 3 |
4
Overview
Incorporated in Delaware in May 2010, we are a medical device company focused on the design, development and commercialization of non-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 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 all 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 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 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 Conformité Européene (CE) Mark (indicating the conformity of the Company’s product with health, safety, and environmental protection standards for products sold within the European 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 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. This would include some countries in South East Asia as well as Latin America opening new potential markets for Integrity on a global basis.
| 4 |
Safety and quality are non-negotiables in the medical devices industry. Regulatory requirements are increasingly stringent throughout every step of a product’s life cycle, including service and delivery. More and more, 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 standard that sets out the requirements for a quality management system specific to the 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). 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. 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- submission documents to the U.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-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-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 expect 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 USA is subject to ,raisingraising adequate financing to fund the clinical program through completion. If we are unable to raise additional capital of at least $10 million, we do not expect to commence such clinical trials.
Clinical trials conducted recently 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(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(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 patientspatients.
In September 2016, we had a booth at the 52nd annual conference of the European Association for Study of Diabetes (EASD) in Munich.
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.
| 5 |
In the second half of 2017 we conducted a strategic review of our previous commercial activities. We established a cross-functional task force with the goal of reviewing the current commercial performance in all countries and identifying the critical success factors (CSF’s) necessary for successful commercialization. The CSF’s that were determined to be most important to our future commercial success include: 1) selecting the right distribution partner within countries that have knowledge and experience in diabetes, the appropriate capabilities and proven performance in the sales, marketing, and customer service in support of medical devices, and a commitment to investing the appropriate resources required for a successful launch and building of the business; 2) segmenting and targeting the right customers including key opinion leaders, treating physicians, and diabetes nurses within the healthcare provider communities as well as those patient groups that will benefit most from the use of a non-invasive device; 3) revising the cost structure for GlucoTrack® so that it will be more affordable on a monthly basis for patients; and 4) working with government authorities and health insurance companies to achieve full or partial reimbursement for GlucoTrack® within covered medical plans.
We have started 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 agreement with a new partner in the Netherlands (MediReva B.V.) and are underwayunderway. 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. During the second quarter of 2018 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 2019 as the first step towards reimbursement approval.
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 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 GlucoTracker 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. The study demonstrated that the use of these common concomitant medications in diabetes had no effect on the performance of GlucoTrack®. We also had a display booth at this conference that was well attended by hundreds of treating physicians and diabetes nurses.
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 in zones A and B of the Consensus error grid, with 90.3% of the measurements 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 CGMs (GlucoTrack: 8.1%, Dexcom G6: 9.0%, Freestyle Navigator: 9.6%).
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 they will be a strong partner due to their 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 markets in the first half of 2019. On August 6, 2018 we received our first order of 100 units, some of which were delivered in the first quarter of 2019 and are available for the start of the second quarter of 2018. We are also in negotiations with a new partner for Israel with the goal of launching by the end of the second quarter of 2018. As soon as these two pilots demonstrate that our new strategic approach is successful, we plan to rapidly rollout this approach across major and other European countriescommercialization in the second half of 2018.Scandinavian countries.
| 6 |
In the meantime, we have assessed the performance of all 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 focus on changes needed to address the CSF’s for future success with implementation plans foreseen in the second half of 2019.
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.
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 a 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 was 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 30, 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 already isuued, and (ii) $61,335 to be paid in cash; and all of his existing options expired on January 30, 2019, in accordance with the Company’s Employee Stock Option Plan, and as a result of his former contractual provisions.
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. Moreover, 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. Following 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 July 2017, the production line for the GlucoTrack® model DF-F is now operational. We intend to utilize the services of both Wistron and the Israeli third-party manufacturer to produce the GlucoTrack® model DF-F.
We have not yet generated any material revenues from our operations and, as of December 31, 2017,2018, have incurred an accumulated deficit of $47,368,612,$87,186,783 stockholders’ deficit of $16,574,933$2,873,301 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.
Market Opportunity
Diabetes
Diabetes is a chronic, life-threatening disease for which there is no known cure. Diabetes is caused by the body’s inability to produce or effectively utilize the hormone insulin. This inability prevents the body from adequately regulating blood glucose levels. Glucose, the primary source of energy for cells, must be maintained at certain concentrations in the blood in order to permit optimal cell function and health. Normally, the pancreas provides control of blood glucose levels by secreting the hormone insulin to decrease blood glucose levels when concentrations are too high. In people with diabetes, blood glucose levels fluctuate between very high levels, a condition known as hyperglycemia, and very low levels, a condition known as hypoglycemia. Hyperglycemia can lead to serious long-term complications, such as blindness, kidney disease, nervous system disease, amputations, stroke and cardiovascular disease. Hypoglycemia can lead to confusion, loss of consciousness or death.
| 7 |
Diabetes is typically classified into two major groups: Type 1 and Type 2. Type 1 diabetes is characterized by the body’s inability to produce insulin, resulting from destruction of the insulin producing cells of the pancreas. Individuals with Type 1 diabetes must rely on frequent insulin injections in order to regulate and maintain blood glucose levels. Type 1 diabetes is frequently diagnosed during childhood or adolescence, although disease onset can occur at any age. Type 2 diabetes, the more common form of diabetes, is characterized by the body’s inability to either properly utilize insulin or produce enough insulin. Type 2 diabetes is associated with older age, obesity, family history of diabetes, history of gestational diabetes, impaired glucose metabolism, physical inactivity and race or ethnicity. Depending on the severity of Type 2 diabetes, individuals may require diet and nutrition management, exercise, oral medications or insulin injections to regulate blood glucose levels.
According to the Diabetes Atlas (Eighth(Eighth Edition) published by the International Diabetes Federation in 2017, approximately 425 million adults worldwide, between the ages of 20 and 79, or over 9% of the world’s adult population, were estimated to suffer from diabetes in 2017 (not including those persons who suffer from impaired glucose tolerance or gestational diabetes, diabetic conditions first arising during pregnancy). The International Diabetes Federation estimates that this number will grow to approximately 629 million adults worldwide by 2045, a 48% increase from 2017. By 2045, the number of adults suffering from diabetes is estimated to increase by 156% in Africa, 110% in the Middle East and North Africa, 84% in Southeast Asia, 62% in South and Central America, 15% in the Western Pacific, 35% in North America and the Caribbean and 16% in Europe, over such regions’ respective 2017 levels.
Glucose Monitoring
Blood glucose levels can be affected by many factors, including the carbohydrate and fat content of meals, exercise, stress, illness or impending illness, hormonal releases, variability in insulin absorption and changes in the effects of insulin in the body. Given the many factors that affect blood glucose levels, maintaining glucose within a normal range can be difficult. Diabetics generally manage their blood glucose levels by administering insulin or ingesting carbohydrates throughout the day to maintain blood glucose within normal ranges. Normal ranges in diabetics vary from person to person. In order to maintain blood glucose levels within normal ranges, diabetics must first measure their blood glucose levels so that they can make the proper therapeutic adjustments. As adjustments are made, additional blood glucose measurements may be necessary to gauge the individual’s response to the adjustments. More frequent testing of blood glucose levels provides patients with information that can be used to better understand and manage their diabetes. Testing of blood glucose levels is usually done before meals, after meals and before going to sleep. Diabetics who take insulin usually need to test more often than those who do not take insulin.
Clinical data supports the recommendation that frequent monitoring of blood glucose levels is an important component of effective diabetes management. The Diabetes Control and Complications Trial1, consisting of patients with Type 2 diabetes, and the 1993 UK Prospective Diabetes Study2, consisting of patients with Type 2 diabetes, demonstrated that patients who intensely managed blood glucose levels delayed the onset and slowed the progression of diabetes-related complications. In the Diabetes Control and Complications Trial, a major component of intensive management was monitoring blood glucose levels at least four times per day using conventional spot finger stick blood glucose meters. The Diabetes Control and Complications Trial demonstrated that intensive management reduced the risk of complications by 76% for eye disease, 60% for nerve disease and 50% for kidney disease. Furthermore, a recent meta-analysis of over 25 prospective studies concluded that chronic hyperglycemia in type 2 diabetes is associated with increased risks of all-cause mortality and cardiovascular outcomes independently from other conventional risk factors.3 However, despite the evidence that intensive glucose management reduces the long-term complications associated with diabetes, Karter et al. reported in the 2000 issue of Diabetes Care that 67% of people with type 2 diabetes fail to routinely monitor their glucose levels.4
Spot finger stick devices are the most prevalent devices for blood glucose monitoring. These devices require users to insert a strip into a glucose meter, take a blood sample with a finger stick and place a drop of blood on a test strip that yields a single point in time blood glucose measurement. Despite continued developments in the field of blood glucose monitors, the routine measurement of glucose levels remains invasive, painful, inconvenient, difficult and costly. This has resulted in a sub-optimal and irregular measurement regimen for many diabetics.
2Diabetes Control and Complications Research Group; others The effect of intensive treatment of diabetes on the development and progression of long-term complications in insulin-dependent diabetes mellitus.N Engl J Med1993,329, 977–986.
3hang, Y.; Hu, G.; Yuan, Z.; Chen, L. Glycosylated Hemoglobin in Relationship to Cardiovascular Outcomes and Death in Patients with Type 2 Diabetes: A Systematic Review and Meta-Analysis.PLOS ONE2012,7, e42551, doi:10.1371/journal.pone.0042551.
4Karter, A. J.; Ferrara, A.; Darbinian, J. A.; Ackerson, L. M.; Selby, J. V. Self-monitoring of blood glucose: language and financialbarriers in a managed care population with diabetes. Diabetes Care2000, 23, 477–483.
| 8 |
The FDA has approved continuous glucose monitoring system (“CGMS”) devices for blood glucose monitoring, when prescribed by a doctor. CGMS devices use sensors inserted under the skin to check glucose levels in interstitial fluid. The sensor stays in place for severalup to ten days to a week and then must be replaced. A transmitter sends information about glucose levels via radio waves from the sensor to a pager-like wireless monitor. According to the National Institute of Diabetes and Digestive and Kidney Diseases at the National Institutes of Health, CGMS device users must check blood samples with a conventional glucose meter to calibrate the CGMS devices, and because currently approved CGMS devices are not as accurate as standard blood glucose meters, users should confirm glucose levels with a conventional glucose meter when making treatment decisions.
To our knowledge, onlywith the exception of one device other thandevice, the GlucoTrack® model DF-F is currently the only approved device for use in the EU for spot non-invasive blood glucose measurement. The FDA has previously approved a single non-invasive product for glucose trend analysis, the GlucoWatch®, so long as the device was used with conventional finger stick glucose monitoring devices. However, the device is no longer available commercially. We are not aware of any other devices that have been approved for use in either the United Stated or the EU for spot or continuous non-invasive blood glucose measurement.
We believe that a significant market opportunity exists for a reliable, inexpensive, non-invasive blood glucose measurement device and that such a device could greatly increase compliance with blood glucose measurement recommendations and help many diabetics better manage their disease, providing significant benefits to both patients and payors.
The Product
Our non-invasive blood glucose monitor, the GlucoTrack® model DF-F, utilizes a patented combination of ultrasound, electromagnetic and thermal technologies to obtain blood glucose measurements in less than one minute via a small sensor that is clipped onto one’s earlobe and connected to a handheld control and display unit. See Figure A, below.
Figure A
We believe that the GlucoTrack® model DF-F addresses the unmet need for more frequent monitoring of blood glucose among people with diabetes by overcoming two of the most significant challenges facing the market:
| pain, as the GlucoTrack® model DF-F is a truly non-invasive device; and |
| ● | cost, as, despite the relatively high upfront cost of purchasing a GlucoTrack® model DF-F, we anticipate that the total cost of purchasing a device and purchasing replacement ear clips every six months (anticipated to be the only recurring cost, other than calibration costs, which are expected to be minimal) over the useful life of the device will be significantly lower than the cost of purchasing single use glucose sticks over that same period. |
We believe that the overall costs associated with owning and using a GlucoTrack® model DF-F device are expected to be substantially lower than the cost of purchasing and using single use invasive devices over an extended period of time. Nonetheless, the significant initial purchase price of a GlucoTrack® model DF-F might present a barrier to adoption of the GlucoTrack® system among some patients. In light of this fact, we are suggesting to distributors of the GlucoTrack® model DF-F that they consider offering end users financing and/or leasing options to lessen the initial financial burden associated with purchasing a GlucoTrack® model DF-F. There can be no assurance that any such alternatives will be made available to end users. In addition, we intend to seek reimbursement approval for the GlucoTrack® model DF-F from third-party payors, including government payors (such as the Medicare and Medicaid programs in the United States, in the event the GlucoTrack® model DF-F is approved for commercial sale in the United States), managed care organizations and other third-party payors. There can be no assurance that such third party-payors will provide reimbursement coverage for the GlucoTrack® model DF-F or, if so, whether such reimbursement coverage will be adequate. See “Risk Factors - If the GlucoTrack® model DF-F or our future product candidates, if any, fail to achieve market acceptance or reimbursement coverage from managed care organizations or third partythird-party payors, we may not be able to generate significant revenue or achieve or sustain profitability”.
Instead of directly measuring the glucose level of a user’s blood, as conventional spot finger stick devices do, the GlucoTrack® model DF-F uses a small, non-invasive sensor that is clipped onto a user’s earlobe to obtain certain body measurements using three technologies, which are then analyzed using a proprietary algorithm on a small, handheld control and display unit. Within one minute, the GlucoTrack® model DF-F will produce a blood glucose measurement that can be simultaneously audibly announced and displayed on the control unit, as well as recorded on internal flash memory. The two units of the device (main unit and personal ear-clip) are connected through a multi-wire flexible cable. When and if we develop a continuous measurement model, we plan for this connection to be wireless.
Since the GlucoTrack® model DF-F non-invasive measurement does not directly measure glucose levels in the blood, but rather measures a series of physiological characteristics that correlate with glucose levels, each patient must be calibrated by using a reference to a measurement obtained from an invasive device. Calibration consists of comparing an individual patient’s physiological measurements obtained using the GlucoTrack® model DF-F to measurements obtained from an invasive device under different circumstances over a defined period 30 minute30-minute period (3(three measurements that require approximately 10 minutes each).
The three different technologies used by GlucoTrack® model DF-F, ultrasound, electromagnetic and thermal, simultaneously measure three independent criteria. These three measurements (criteria) are combined together by a unique (on line) algorithm to produce an acceptable measurement of a user’s blood glucose level.
The technologies operate as follows:
Ultrasound: The GlucoTrack® model DF-F uses ultrasound technology to measure the change of speed of sound through the earlobe, which is impacted by the glucose concentration in the capillary blood vessels. |
| ● | Electromagnetic: The GlucoTrack® model DF-F’s electromagnetic technology uses a measurement of conductivity to measure the change in tissue impedance, which is a function of glucose concentration. The GlucoTrack® model DF-F’s electromagnetic technology analyzes criteria similar to those analyzed by conventional invasive devices, such as spot finger stick devices, but does so in a non-invasive manner. |
| ● | Thermal: The GlucoTrack® model DF-F’s thermal technology uses a measurement of heat capacity characteristics of the tissue, which are influenced by glucose concentration. |
Non-invasive devices (under different stages of development) generally require frequent recalibration. The main reasons for calibration are that tissue parameters generally fluctuate in the area of the measurement and are sensitive to the location of the sensor and the impact of potential disturbances. Disturbances are less frequent in the earlobes, where the GlucoTrack® model DF-F takes its measurements. Utilizing three channels simultaneously reduces the noise contribution in the measurement. In addition, the personal ear-clip contains sensors to help users attach the device to the proper part of the ear lobe. The Notified Body for our CE Mark approval has determined that the initial calibration of the GlucoTrack® model DF-F device is valid for a period of six months which we believe is a significant competitive advantage, while to our knowledge, competing products require recalibration significantly much more frequently. Therefore, we expect the GlucoTrack® model DF-F will require only an initial calibration upon use of a new personal ear-clip (to be replaced every six months) and will not require further recalibration.
| 10 |
The GlucoTrack® model DF-F does not use any optical method (either Infra RedInfra-Red (IR) or Near Infra RedInfra-Red (NIR) technology), which we understand are being used by other developers of non-invasive blood glucose measurement devices. We believe that optical technologies are less reliable than the GlucoTrack® model DF-F’s combination of ultrasound, electromagnetic and thermal technologies due to inherent physiological limitations with optical technology. More specifically, optical technology is based on dispersion of a beam that is analyzed by spectrometric methods. As such devices are non-invasive, the beam passes through other components in the fingertip, such as skin, bone, muscle and fat tissue, which interfere with the measurements. Generally, most of these interferences have been overcome, but not the epidermis, primarily due to roughness, pigmentation and perspiration, which act like lenses in optical wavelengths.
Unlike conventional spot finger stick devices, which require single-use glucose test strips, the GlucoTrack® model DF-F requires no short- term disposables. We believe that the personal ear-clip that accompanies each GlucoTrack® model DF-F will need to be replaced only once every six months, although regulatory authorities may require that replacement occur more frequently. Since there is no additional cost or pain involved with each blood glucose measurement using the GlucoTrack® model DF-F, we believe that users of our device would be encouraged to take multiple blood glucose measurements per day, significantly increasing compliance with blood glucose measurement recommendations and helping diabetics better manage their disease. More frequent testing of blood glucose levels may provide a patient with information that can be used to determine optimal timing and dosage for corrective treatments such as insulin, and can also direct a patient to seek a clinical analysis or detailed testing and diagnosis.
The GlucoTrack® model DF-F has received CE Mark approval, which allows us to market and sell the GlucoTrack® model DF-F glucose monitoring device in EU member countries that have adopted the MDD without being subject to additional national regulations with regard to demonstration of performance and safety. While the MDD is applicable throughout the EU, it requires only a minimum level of harmonization among member countries. 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 additional to the MDD’s requirements from time to time, on a case-by-case basis. Moreover, the MDD notwithstanding, because the regulatory regimes of the EU member countries are significantly diverse, it is difficult to predict future regulatory developments and risks. The GlucoTrack® model DF-F has not yet been cleared or approved for commercial sale in the United States. See “Government Regulatory - Regulation of the Design, Manufacture and Distribution of Medical Devices” below for a discussion of the approval process for commercial sale in the United States. There can be no assurance that approval for commercial sale in any additional jurisdiction will be obtained on a timely basis or at all.
We do not have 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 and a manufacturer in Taiwan to manufacture the GlucoTrack® model DF-F. Our suppliers and their manufacturing facilities must comply with applicable regulations in the jurisdictions in which the GlucoTrack® model DF-F is being marketed (including ISO 13485 in the EU), current quality system regulations, which include current good manufacturing practices, and to the extent laboratory analysis is involved, current good laboratory practices. There can be no assurance that we will be able to enter into agreements with qualified manufacturers on terms acceptable to us, or at all, or that, once contracted, such manufacturers will perform as expected.
Furthermore, the manufacturing of the GlucoTrack® model DF-F may be impacted by the Recast Directive on the Restriction of Hazardous Substances in Electrical and Electronic Equipment, 2011/65/EU (“RoHS 2”). RoHS 2 is a new EU directive that came into force on July 22, 2014. Like the MDD, RoHS 2, a recast of Directive 2002/95/EC that will cover electrical and electronic medical devices, is relevant in order to obtain CE Marking for certain products. RoHS 2 compliance requires medical device manufacturers to: draw up required technical documentation; conduct an internal control procedure in accordance with Module A of Annex II to Decision No. 768/2008/EC; prepare a Declaration of Conformity; and affix CE Marking to a finished product. Although these requirements are similar to those of the MDD, RoHS 2 does not require a Notified Body assessment of compliance. However, if they are not compliant with RoHS 2, medical device manufacturers face the risk of being barred from selling medical devices in the EU after July 22, 2014.
Sales & Marketing
We have a limited number of dedicated sales and marketing personnel, as we intend to collaborate with third parties with established sales and marketing operations in the medical device industry (such as the distributors described below) to market and sell the GlucoTrack® model DF-F to point of sale end users and/or local distributors.
| 11 |
The GlucoTrack® model DF-F has been cleared and approved for commercial sale in the following jurisdictions: EU (subject to registration by the local distributors with the respective countries), Israel, Turkey, South Korea, Hong Kong, New Zealand and some Arab countries.countries. 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. Further discussions with other potential distributors are in different stages. However, there can be no assurance that we will be able to enter into additional distribution agreements on terms acceptable to us or at all or that, once contracted, our distributors will perform as expected.
Our distribution agreements entered into to date generally appoint the counterparty as the exclusive distributor of the GlucoTrack® model DF- F in a stated territory. Where local regulatory approval of the device is required, such appointment is generally conditioned upon receipt of such approval.
Research & Development
We focus significant time and resources on research and development in connection with our efforts to continue to develop, improve and commercialize the GlucoTrack® model DF-F, as well as in connection with our development of other GlucoTrack® models. Our continuing research and development activities are primarily focused on software and algorithm improvements intended to improve the accuracy of the device, clinical trials to test the performance of the GlucoTrack® device when used by children and teenagers between the ages of six and 18, preparation for future FDA trials, testing new characteristics of the device, development of a new device in the GlucoTrack® family and seeking to streamline and continue to simplify the calibration process. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operation – Results of Operation” below for a discussion of the research and development expenses for the fiscal years ended 2017,20162018 and 2015.
Our strategic priorities in termsinclude the research and development of product enhancements that will improve the ease and usability of GlucoTrack for patients with a future generation of products. As a result of the corporate strategic review we have decided to concentrateWe are focusing our R&Dresearch and development activities around 4 main strategic pillars;
| 1. | Wireless Connectivity |
We have developed a wireless module (“WLM”GlucoTrack Link”) with embedded Bluetooth Low-Energy (BLE) and Wi-Fi technologies,, 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 thisThis module and the related applications to facilitate the 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 profileglucose profiles by clinicians and othersother caregivers.
| 2. | Digital Health Applications |
We willintend to develop smart device applications (“Apps”) to facilitate the interaction of users with GlucotrackGlucotrack® DF-F and the glucose data collected. The Apps will be compatible with both IOS and Android operating systems. We intend to develop Apps that support the management of Type 2 diabeticsdiabetes and pre-diabetic patients by providedproviding immediate feedback and insights asthat can be derived from glucose measurements. Enhanced capabilities within the Apps may include goal setting, alarms and reminders, and diabetes management tips and tools. It will also be designed to the glucose measurements.provide analyses of trends over multiple time periods. The goal is to provide relevant information to guide patients in their journey to change behaviorbehaviors and improve the management of their condition. The Apps willare 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 condition and better disease outcomes.
| 3. |
The current version of Glucotrack® DF-F requires each patient to be calibrated in a face-to-face session with a certified trained calibrator. The calibration requires patients to participate in a one-hour session when first using their new device and again every six months when the personal ear clip is replaced. We are developing a self-calibration module for Glucotrack® DF-F which will allow all patients to set up the device on their own without the need for a trained calibrator. This enhancement will allow patients to set up Glucotrack® DF-F themselves easier and faster without support from a calibrator. For our distributors, this will lower patient initiation and support costs allowing them to re-deploy these funds into their marketing and sales efforts. It will also provide them with a substantial opportunity to open up additional distribution channels including pharmacies, clinics and online.
| 12 |
| 4. | Miniaturization |
The objective of this project is to reducetransform the existing device tointo a simple, aesthetically designed,easy to use wireless ear-clip which would measure glucose and communicate the results seamlessly to any other platform whether through a wireless connection to the cloud or a Bluetooth connection to a smart device such as a smartphone, tablet or computer. As a result,computer, eliminating the current handheld display would be eliminated completely.display. The result would be a user- friendly,user-friendly, inconspicuous measuring device for the management of diabetes and pre-diabetes. WithWe expect this new device to have much greater patient desire to purchase and user acceptance. We also expect this new device will have a significantly cheaperlower cost to manufacture than our current device.
Government Regulatory
Healthcare is heavily regulated by federal, state and local governments in the United States, and by similar authorities in other countries. Any product that we develop must receive all relevant regulatory approvals or clearances, as the case may be, before it may be marketed in a particular country. The laws and regulations affecting healthcare change regularly, thereby increasing the uncertainty and risk associated with any healthcare- related venture. The United States government has in the past considered, is currently considering and may in the future consider healthcare policies and proposals intended to curb rising healthcare costs, including those that could significantly and adversely affect reimbursement for healthcare products such as GlucoTrack® devices. These policies have included, and may in the future include: basing reimbursement policies and rates on clinical outcomes, the comparative effectiveness and costs of different treatment technologies and modalities; imposing price controls and taxes on medical device providers; and other measures. Future significant changes in the healthcare systems in any jurisdiction in which the GlucoTrack® model DF-F or our future products, if any, may be cleared for sale could also have a negative impact on the demand for the GlucoTrack® model DF-F or our future products, if any. These include changes that may reduce reimbursement or payment rates for such products.
In the United States, the federal government regulates healthcare through various agencies, including but not limited to the following: (i) the FDA, which administers the Food, Drug, and Cosmetic Act, as well as other relevant laws; (ii) the Centers for Medicare & Medicaid Services (“CMS”), which administers the Medicare and Medicaid programs; (iii) the Office of Inspector General, which enforces various laws aimed at curtailing fraudulent or abusive practices including, by way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly referred to as the Stark Law, the Anti-Inducement Law, the Civil Money Penalty Law, and the laws that authorize the Office of Inspector General to exclude health care providers and others from participating in federal healthcare programs; and (iv) the Office of Civil Rights which administers the privacy and security aspects of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). All of the aforementioned are agencies within the Department of Health and Human Services. Healthcare is also provided or regulated, as the case may be, by the Department of Defense through its TriCare program, the Department of Veterans Affairs under, among other laws, the Veterans Health Care Act of 1992, the Public Health Service within the Department of Health and Human Services under the Public Health Service Act, the Department of Justice through the Federal False Claims Act and various criminal statutes, and state governments under the Medicaid program and their internal laws regulating all healthcare activities. If and when we receive FDA approval to market the GlucoTrack® DF-F in the United States, we will be subject to regulation by some or all of the foregoing agencies.
The applicable regulatory schemes in the EU are significantly more diverse than those in the United States and do not lend themselves to similar summary. Although the CE Mark system and the MDD require a minimum level of harmonization in the EU, each EU member country may impose additional regulatory requirements. Because there are numerous EU member countries with distinct legal systems, the scope of potential regulatory requirements in each of the EU countries (additional to the harmonized EU requirements) is difficult to summarize or predict.
Regulation of the Design, Manufacture and Distribution of Medical Devices
Any product that we develop must receive all relevant regulatory clearances or approvals, as the case may be, before it may be marketed in a particular country.
| 13 |
Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. These laws and regulations range from simple product registration requirements in some countries to complex clearance and production controls in others. As a result, the processes and time periods required to obtain foreign marketing approval may be longer or shorter than those necessary to obtain FDA approval (as described below). These differences may affect the efficiency and timeliness of international market introduction of GlucoTrack® model DF-F. For countries in the EU, medical devices must display a CE Mark before they may be imported or sold and must comply with the requirements of the MDD or the Active Implantable Medical Device Directive. On June 4, 2013, we received our CE Mark approval for the GlucoTrack® model DF-F non-invasive glucose monitoring device from the Notified Body. Receipt of the CE Mark allows us to market and sell the GlucoTrack® model DF-F glucose monitoring device in EU member countries that have adopted 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. Rather, the MDD requires only a minimum level of harmonization in 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. On August 31, 2015, we received approval from the Notified Body for improvements to the GlucoTrack® model DF-F which 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 persons 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. 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). 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 CE-mark review process of future GlucoTrack® model DF-F enhancements or revisions. 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 improve the time to market for product sales on new, enhanced or modified GlucoTrack® model DF-F devices.
On May 4, 2016 we received regulatory approval from the Korean Ministry of Food and Drug Safety (KMFDS, formerly KFDA) for the GlucoTrack® model DF-F. In October 2016, we received the final approval from South Korea, which enables us to commence sales of the GlucoTrack® model DF-F in South Korea.
We are in the process of seeking regulatory approval for the GlucoTrack® model DF-F in China where we are in the process of re-negotiatingnegotiating our distribution agreement and are awaiting local regulatory approval. If the renegotiationnegotiation 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, we will be required to comply with the applicable regulatory requirements 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.
In the United States, under Section 201(h) of the Food, Drug, and Cosmetic Act, a medical device is an article which, among other things, is intended for use in the diagnosis of disease or other conditions or in the cure, mitigation, treatment or prevention of disease in man or other animals. We believe that GlucoTrack® devices will be classified as medical devices and subject to regulation by numerous agencies and legislative bodies, including the FDA and its foreign counterparts. Devices are subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation be conducted before a device receives approval for commercial distribution. The FDA classifies medical devices into one of three classes. Class I devices are relatively simple and can be manufactured and distributed with general controls. Class II devices are somewhat more complex and require greater scrutiny. Class III devices are new and frequently help sustain life.
| 14 |
In the United States, a company generally can obtain permission to distribute a new device in two ways – through a so-called “510(k)” premarket notification application or through a Section 515 premarket approval (“PMA”) application. The 510(k) submission applies to any device that is substantially equivalent to a device first marketed prior to May 28, 1976 or to another device marketed after that date, but which was substantially equivalent to a pre-May 28, 1976 device. These devices are either Class I or Class II devices. Under the 510(k) submission process, the FDA will issue an order finding substantial equivalence to a predicate device (pre-May 28, 1976 or post-May 28, 1976 device that was substantially equivalent to a pre- May 28, 1976 device) and permitting commercial distribution of that device for its intended use. A 510(k) submission must provide information supporting its claim of substantial equivalence to the predicate device. The FDA permits certain low risk medical devices to be marketed without requiring the manufacturer to submit a premarket notification. In other instances, the FDA may require that a premarket notification not only be submitted, but also be accompanied by clinical data. If clinical data from human experiments are required to support the 510(k) submissions, these data must be gathered in compliance with investigational device exemption regulations for investigations performed in the United States. The FDA review process for premarket notifications submitted pursuant to section 510(k) should take about 90 days, but it can take substantially longer if the FDA has concerns, and there is no guarantee that the FDA will clear the device for marketing, in which case the device cannot be lawfully distributed in the United States. If the FDA finds that the device subject to the premarket notification is substantially equivalent to a proper predicate device, then the FDA may “clear” that device for marketing. These devices are not “approved” by the FDA. There is no guarantee, however, that the FDA will deem the device subject to the 510(k) process, as opposed to the more time-consuming, resource intensive and problematic PMA application process described below.
The more comprehensive PMA process applies to a new device that either is not substantially equivalent to a pre-May 28, 1976 product or is to be used in supporting or sustaining life or preventing impairment. These devices are normally Class III devices and can only be marketed following approval of a PMA application. For example, most implantable devices are subject to the PMA approval process. Two steps of FDA approval generally are required before a company can market a product in the U.S. that is subject to Section 515 PMA approval, as compared to a Section 510(k) clearance. First, a company must comply with investigational device exemption regulations in connection with any human clinical investigation of the device; however, those regulations permit a company to undertake a clinical study of a “non-significant risk” device without formal FDA approval. Prior express FDA approval is required if the device is a significant risk device. If there is any doubt as to whether a device is a “non-significant risk” device, companies normally seek prior approval from the FDA. Normally, clinical studies of new diagnostic products are conducted in tandem with a cleared or approved device and treatment decisions are based on the results from the existing diagnostic device. In such a setting, the FDA may consider the clinical trial as one not posing a significant risk. However, FDA action is always uncertain and dependent on the contours of the design of the clinical trial and the device and there is no assurance that the FDA would consider any proposed clinical trial as one posing a non-significant risk. Moreover, before undertaking any clinical trial, the company sponsoring the trial and the investigator conducting the trial are required by federal law to seek and obtain the approval of institutional review boards (“IRB”). An IRB weighs the risks and benefits of a proposed trial to ensure that the human subjects are not exposed to unnecessary risk and reviews the informed consent form to ensure that it meets federal requirements and accurately describes the risks and benefits, if any, of the clinical trial. IRB review occurs annually, and annual re-approval is required. University medical centers as well as other entities maintain and operate IRB. Second, the FDA must review a company’s PMA, which contains, among other things, clinical information acquired under the investigational device exemption. The FDA will approve the PMA if it finds there is reasonable assurance that the device is safe and effective for its intended use. The premarket approval process takes substantially longer than the 510(k) process.
The GlucoTrack® model DF-F has not yet been approved for commercial sale in the United States. In discussions with the FDA regarding the regulatory pathway, the FDA is not yet entirely sure whether a de novo pathway is acceptable and recommended that the Company should plan to support this approach through risk analysis and an explanation of why the new measurement paradigm it is proposing does not introduce greater risks. FDA noted that no decision has been made that a PMA will be required.
On August 10, 2015, we submitted pre-submission documents to the FDA in connection with our proposed future application for FDA approval of our U.S. clinical trial protocol. The pre-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 modifies the pre-submission documentation to reflect the feedback received from the FDA at the 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-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. Subject to raising adequate financing, we would expect to be able to begin clinical trials in the United States quite rapidly thereafter.
| 15 |
Even when a clinical study has been approved or cleared by the FDA or a notified body or deemed approved, the study is subject to factors beyond a manufacturer’s control, including, but not limited to the fact that the IRB at a given clinical site might not approve the study, might decline to renew approval which is required annually, or might suspend or terminate the study before the study has been completed. Also, the interim results of a study may not be satisfactory, in which case the sponsor may terminate or suspend the study on its own initiative or the FDA or a notified body may terminate or suspend the study. There is no assurance that a clinical study at any given site will progress as anticipated; there may be an insufficient number of patients who qualify for the study or who agree to participate in the study, or the investigator at the site may have priorities other than the study. Also, there can be no assurance that the clinical study will provide sufficient evidence to assure the FDA or a notified body that the product is safe and effective, a prerequisite for FDA approval of a PMA, or substantially equivalent in terms of safety and effectiveness to a predicate device, a prerequisite for clearance under 510(k). Even if the FDA or a notified body approves or clears a device, it may limit its intended uses in such a way that manufacturing and distributing the device may not be commercially feasible.
After clearance or approval to market is given, the FDA and foreign regulatory agencies, upon the occurrence of certain events, are authorized under various circumstances to withdraw the clearance or approval or require changes to a device, its manufacturing process or its labeling or additional proof that regulatory requirements have been met.
A manufacturer of a device approved through the PMA process is not permitted to make changes to the device which affects its safety or effectiveness without first submitting a supplement application to its PMA and obtaining FDA approval for that supplement. In some instances, the FDA may require clinical trials to support a supplement application. A manufacturer of a device cleared through a 510(k) submission must submit another premarket notification if it intends to make a change or modification in the device that could significantly affect the safety or effectiveness of the device, such as a significant change or modification in design, material, chemical composition, energy source or manufacturing process. Any change in the intended uses of a PMA device or a 510(k) device requires an approval supplement or cleared premarket notification. Exported devices are subject to the regulatory requirements of each country to which the device is exported, as well as certain FDA export requirements.
The Patient Protection and Affordable Care Act was signed into law on March 23, 2010, and on March 30, 2010, a reconciliation bill that modifies certain provisions of the same was signed into law. These two laws are jointly referred to as the “Affordable Care Act” or “ACA.”
The principal aim of the ACA was to expand health insurance coverage to approximately 32 million Americans who were uninsured. The law’s most far-reaching changes did not take effect until 2014, including a requirement that most Americans carry health insurance. The consequences of these significant coverage expansions on the sales of our products is still unknown and speculative at this point, although the ACA and certain state initiatives may compel private insurers to reduce coverage or reimbursement for various items and services, including medical devices of the type that we contemplate distributing.
This legislation contains many provisions designed to generate the revenues necessary to fund the coverage expansions. The most relevant of these provisions are those that impose fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013, each medical device manufacturer is required to pay an excise tax (or sales tax) in an amount equal to 2.3% of the price for which such manufacturer sells its medical devices. The tax applies to all medical devices, including our products and product candidates. The ACA also provides for increased enforcement of the fraud and abuse regulations previously mentioned.
In January 2017, Congress voted in favor of a budget resolution that will produce legislation that would repeal certain aspects of theACAif enacted into law. Congress is also considering subsequent legislation to replace or repeal elements or all of the ACA.ACA. In addition, there have been recent public announcements by members of Congress and the new presidential administration regarding their plans to repeal and replace the ACA.ACA. Further, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under theACAto waive, defer, grant exemptions from, or delay the implementation of any provision of theACAthat would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. At this time, it is not clear whether theACAwill be repealed in whole or in part, and, if it is repealed, whether it will be replaced in whole or in part by another plan, and what impact those changes will have on coverage and reimbursement for healthcare items and services covered by plans that were authorized by the ACA.ACA. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, and also indirectly affect the amounts that private payers are willing to pay. In addition, any healthcare reforms enacted in the future may be phased in over a number of years but, if enacted, could impact our revenue, increase our costs, or require us to revise the ways in which we conduct business or put us at risk for loss of business. In addition, our future results of operations, financial position and cash flows could be materially adversely affected by changes under theACAand changes under any federal or state legislation adopted in the future.
| 16 |
There are ongoing discussions in the EU regarding amending the relevant regulatory framework. It is difficult to predict what effect any amendments to the existing EU legislation may have. Furthermore, each individual EU member country has the authority to amend its regulations and requirements additional to the minimum harmonization required by the MDD. Because the EU member countries have diverse legal systems, it is difficult to predict what, if any, amendments may be implemented in each of the EU member countries and whether they may adversely affect us.
We anticipate that sales volumes and prices of the GlucoTrack® model DF-F and any other products we commercialize will depend in large part on the availability of reimbursement from third-party payors. Third-party payors include governmental programs such as Medicare and Medicaid, private insurance plans and workers’ compensation plans. These third-party payors may deny reimbursement for a product or therapy if they determine that the product was not medically appropriate or necessary. Also, third-party payors are increasingly challenging the prices charged for medical products and services. Some third-party payors must also approve coverage for new or innovative devices before they will reimburse health care providers who use the products. Even though a new product may have been cleared for commercial distribution, it may find limited demand for the device until reimbursement approval has been obtained from governmental and private third-party payors.
Inasmuch as a percentage of the projected patient population that could potentially benefit from the GlucoTrack® model DF-F is elderly, Medicare would likely be a potential source of reimbursement in the United States. Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, certain disabled persons, persons with end-stage renal disease and those suffering from Lou Gehrig’s Disease.disease. In contrast, Medicaid is a medical assistance program jointly funded by United States federal and state governments and administered by each state pursuant to which benefits are available to certain indigent patients. The Medicare and Medicaid statutory framework is subject to administrative rulings, interpretations and discretion that affect the amount and timing of reimbursement made under Medicare and Medicaid.
Medicare reimburses for medical devices in a variety of ways depending on where and how the device is used. However, Medicare only provides reimbursement if CMS determines that the device should be covered and that the use of the device is consistent with the coverage criteria. A coverage determination can be made at the local level by the Medicare administrative contractor (formerly called carriers and fiscal intermediaries) or a private contractor that processes and pays claims on behalf of CMS for the geographic area where the services were rendered, or at the national level by CMS. There are new statutory provisions intended to facilitate coverage determinations for new technologies under the Medicare Prescription Drug Improvement and Modernization Act of 2003 §731 and §942, but it is unclear how these new provisions will be implemented. Coverage presupposes that the device has been cleared or approved by the FDA and, further, that the coverage will be no broader than the approved intended uses of the device (i.e., the device’s label) as cleared or approved by the FDA, but coverage can be narrower. In that regard, a narrow Medicare coverage determination may undermine the commercial viability of a device.
Obtaining a coverage determination, whether local or national, is a time-consuming, expensive and highly uncertain proposition, especially for a new technology, and inconsistent local determinations are possible. On average, according to an industry report, Medicare coverage determinations for medical devices lag 15 months to five years or more behind FDA approval for respective devices. Moreover, Medicaid programs and private insurers are frequently influenced by Medicare coverage determinations. A key component in the reimbursement decision by most private insurers will be whether the GlucoTrack® model DF-F is reimbursed by virtue of a national coverage determination by CMS. We may negotiate contracted rates for the GlucoTrack® model DF-F with private insurance providers for the purchase of the GlucoTrack® model DF-F by their members pending a coverage determination by CMS. Our inability to obtain a favorable coverage determination for the GlucoTrack® model DF-F may adversely affect our ability to market the GlucoTrack® model DF-F and thus, the commercial viability of the product. In international markets, reimbursement and healthcare payment systems vary significantly by country and many countries have instituted price ceilings on specific product lines. Distributors expressly support the reimbursement process and, depending on the distribution agreement and geographic area, may assume responsibility for the process.
| 17 |
We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services. Furthermore, deficit reduction and austerity measures in the United States and abroad may put further pressure on governments to limit coverage of, and reimbursement for, our products. There can be no assurance that third-party reimbursement and coverage will be available or adequate, or that future legislation, regulation, or reimbursement policies of third-party payors will not adversely affect the demand for our products or our ability to sell these products on a profitable basis. The unavailability or inadequacy of third-party payor coverage or reimbursement could have a material adverse effect on our business, operating results and financial condition. Until reimbursement or insurance coverage is established, patients will have to bear the financial cost of GlucoTrack®. Third-party coverage may be particularly difficult to obtain while the GlucoTrack® model DF-F is not approved by the FDA as a replacement for existing single-point finger stick devices.
Outside the United States, availability of reimbursement from third parties varies widely from country to country. Within the EU, member countries’ medical reimbursement and healthcare coverage regulations and systems differ significantly. It is, therefore, difficult to analyze and predict the prospect of consistent availability of adequate reimbursement in the various EU member countries.
Until a reimbursement code is achieved, in order to reduce out of pocket expenses for users and increase the number of devices sold, we are suggesting to distributors of the GlucoTrack® model DF-F in the United States (and would anticipate suggesting to our distributors in the United States in the future if and when we receive FDA approval to market the GlucoTrack® model DF-F in the United States) that they consider offering end users financing and/or leasing options to lessen the initial financial burden associated with purchasing a GlucoTrack® device. There can be no assurance that any such alternatives will be made available to end users.
Anti-Fraud and Abuse Rule
There are extensive United States federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant criminal and civil penalties that can materially affect us, if and when we receive FDA approval to market the GlucoTrack® model DF-F in the United States. These federal laws include, by way of example, the following:
| The anti-kickback statute (Section 1128B(b) of the Social Security Act), which prohibits certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare, Medicaid and other federal healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other governmental programs; |
| ● | The physician self-referral prohibition (Ethics in Patient Referral Act of 1989, as amended, commonly referred to as the Stark Law, Section 1877 of the Social Security Act), which prohibits referrals by physicians of Medicare or Medicaid patients to providers of a broad range of designated healthcare services in which the physicians (or their immediate family members) have ownership interests or with which they have certain other financial arrangements; |
| ● | The anti-inducement provisions of the Civil Monetary Penalties Law (Section 1128A(a)(5) of the Social Security Act), which prohibit providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program; |
| ● | The False Claims Act (31 U.S.C. § 3729 et seq.), which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment to the federal government (including the Medicare and Medicaid programs); and |
| ● | The Civil Monetary Penalties Law (Section 1128A of the Social Security Act), which authorizes the United States Department of Health and Human Services to impose civil penalties administratively for fraudulent or abusive acts. |
Sanctions for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, monetary penalties, imprisonment and/or denial of Medicare and Medicaid payments or exclusion from the Medicare and Medicaid programs, or both. These laws also impose an affirmative duty on those receiving Medicare or Medicaid funding to ensure that they do not employ or contract with persons excluded from the Medicare and other government programs.
| 18 |
Many states have adopted or are considering legislative proposals similar to the federal fraud and abuse laws, some of which extend beyond the Medicare and Medicaid programs, to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of whether the service was reimbursed by Medicare or Medicaid. Many states have also adopted or are considering legislative proposals to increase patient protections, such as limiting the use and disclosure of patient specific health information. These state laws also impose criminal and civil penalties similar to the federal laws.
Similarly, the EU and EU member countries may have similar fraud and abuse laws which would regulate our business in those jurisdictions. However, given the diversity of legal systems within the EU, it is difficult to predict with specificity what anti-fraud legislation and regulations may be implemented and the penalties that they impose.
In the ordinary course of their business, medical device manufacturers and suppliers have been and are subject regularly to inquiries, investigations and audits by federal and state agencies that oversee these laws and regulations. Recent federal and state legislation has greatly increased funding for investigations and enforcement actions, which have increased dramatically over the past several years. This trend is expected to continue. Private enforcement of healthcare fraud also has increased due in large part to amendments to the civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. These whistleblower suits by private persons, known as qui tam relators, may be filed by almost anyone, including present and former patients or nurses and other employees, as well as competitors. HIPAA, in addition to its privacy provisions, created a series of new healthcare-related crimes.
As federal and state budget pressures continue, federal and state administrative agencies may also continue to escalate investigation and enforcement efforts to root out waste and to control fraud and abuse in governmental healthcare programs. A violation of any of these federal and state fraud and abuse laws and regulations could have a material adverse effect on a supplier’s liquidity and financial condition. An investigation into the use of a device by physicians may dissuade physicians from recommending that their patients use the device. This could have a material adverse effect on our ability to commercialize the GlucoTrack® model DF-F.
The Privacy Provisions of HIPAA
In the United States, HIPAA, among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure. HIPAA directly regulates “covered entities,” such as healthcare providers, insurers and clearinghouses, and regulates “business associates,” with respect to the privacy of patients’ medical information. All entities that receive and process protected health information are required to adopt certain procedures to safeguard the security of that information. It is uncertain whether we would be deemed to be a covered entity under HIPAA and, owing to changes in the law, it is uncertain, based on our current business model, whether we would be a business associate. Nevertheless, we will likely be contractually required to physically safeguard the integrity and security of any patient information that we receive, store, create or transmit in the United States. If we fail to adhere to our contractual commitments, then our physician, hospital or insurance customers may be subject to civil monetary penalties, which could adversely affect our ability to market our devices. Changes in the law wrought by the provisions of Health Information Technology for Economic and Clinical Health (HITECH) Act, enacted as part of the American Recovery and Reinvestment Act of 2009, increase the duties of business associates and covered entities with respect to protected health information that thereby subject them to direct government regulation, increasing its compliance costs and exposure to civil monetary penalties and other government sanctions. While HITECH does not alter the definition of a business associate, it makes it more likely that covered entities with whom we are likely to do business in the United States, if and when we receive FDA approval to market the GlucoTrack® model DF-F in the United States, will require us to enter into business associate agreements.
| 19 |
20
We have received the following patents:
A Method Of Monitoring Glucose Level
Country | Patent Number |
| Australia | 2004264570 |
| Canada | 2,536,133 |
| China | ZL200480023885.1 |
| Europe | 1656065 |
| India | 249084 |
| Israel | 173695 |
| Japan | 4538691 |
| Korea | 926155 |
| Mexico | 279290 |
| Philippines | 1-2006-500331 |
| Russia | 2376927 |
| South Africa | 2006/00989 |
| USA | 6,954,662 |
Device For Non-Invasively Measuring Glucose
| Country | Patent Number |
| Australia | 2011246910 |
| China | ZL 201180021344.5 |
| Europe | EP 2 563 222 |
| Hong Kong | 1180204 |
| Israel | 222464 |
| Japan | 5585801 |
| Korea | 10-1754941 |
| Russia | 2532498 |
| South Africa | 2012/07766 |
| Taiwan | I 445519 |
| USA | 8235897 |
| Canada | 2797623 |
Individual Measuring Channels For Non-Invasively Measuring Glucose
Country | Patent Number |
| Australia | 2014202341 |
| China | 2014 10289 7261 |
| Japan | 6032444 |
| Taiwan | 103121838 |
| Hong Kong | 15100403.4 |
Ear Clip For Medical Monitoring Device
Country | Patent Number |
| Australia | 2014229190 |
| China | 2014 8000 17994 |
| Europe | 2967345 |
| Israel | 225182 |
| Korea | 10-1650910 |
| USA | 9713446 |
| Japan | 6202290 |
| 20 |
21
Design Registrations
Hinge Pin Joint
Country | Patent Number |
| China | ZL 201330108244.8 |
| China | ZL 201330108248.6 |
| Europe | 2216028-0001 |
| Europe | 2216028-0002 |
| India | 256225 |
| Israel | 53821 |
| Japan | 2013-021104 |
| Korea | 30-2013-0046668 |
| Philippines | 3-2013-001024 |
| Taiwan | 102305953 |
| USA | D747173 |
Ear Clip
Country | Patent Number |
| China | 2013 3051 28883 |
| Europe | 2321547-0001 |
| India | 257578 |
| Japan | 1503898 |
| Korea | 30-0789229 |
| Philippines | 3-2013-001218 |
| Taiwan | 102307257 |
| Brazil | BR30 2013 005388 1 |
Measuring Device
Country | Patent Number |
| China | ZL201330512460.9 |
Temperature Sensor
Country | Patent Number |
| China | ZL 201330512636.0 |
| Europe | 2341057-0001 |
We believe that intellectual property is important to our business and to the medical device industry overall. We rely on a combination of patent, copyright and other intellectual property laws, trade secrets, nondisclosure agreements and other measures to protect our intellectual property and proprietary rights.
We understand the importance of obtaining patent and trade secret protection for new technologies, products and processes. Our success will depend in large part on our ability to file for and obtain patent protection of our principal products and procedures, to defend existing or future patents, to maintain trade secrets and to operate without infringing upon the proprietary rights of others.
| 21 |
We have obtained the above-mentioned issued patents covering our technologies related to the GlucoTrack® measurement process and our devices in the United States, and depending on the patent, in various countries in Europe, the Far East, the Pacific, Africa and Latin America. Our patents expire between 2023 and 2031. Patent applications for these products are pending in several jurisdictions. We have also obtained a patent for our ear clip in a smaller number of jurisdictions and have applications pending for this product in a number of jurisdictions. We also have design patents granted and pending for various aspects of our device.
We have obtained trademark registrations for GlucoTrack® in 24 countries, including the US, Europe, China and Israel, and also own an allowed trademark applications for GlucoTrack® in Canada. Trademark registrations were issued in ten countries for "JUST“JUST CLIP IT,,"” including France and China, and additional applications are pending in three countries, including the United States. In addition, trademark registrations were issued in seven countries for "YOUR“YOUR TRACK TO HEALTH,,",” including France and China, and additional applications are pending in three countries,, including the United States.States. Trademark registrations have been issued in Israel to register "Integrity,"“Integrity,” the Company'sCompany’s logo and the GlucoTrack logo. Registration have issued in Hong Kong and Taiwan and are pending in China and Singapore to register GlucoTrack in Chinese characters. Our application in South Korea to register GlucoTrack in Korean characters has been allowed.
We believe that our patents and products do not and will not infringe patents or violate proprietary rights of others, although it is possible that our existing patent rights may not be valid or that infringement of existing or future patents or proprietary rights may occur. Litigation may be necessary to defend or enforce our patent rights or to determine the scope and validity of the proprietary rights of others. Defense and enforcement of patent claims can be expensive and time consuming, even in those instances in which the outcome is favorable, and could result in the diversion of substantial resources and management time and attention from our other activities. An adverse outcome could subject us to significant liability to third parties, require us to obtain licenses from third parties, require us to alter our products or processes, or require that we cease altogether any related research and development activities or product sales.
Patent protection is highly uncertain and involves complex legal and factual questions and issues. The patent application and issuance process can be expected to take several years and entails considerable expense. There can be no assurance that patents will be issued as a result of any applications or that any patents resulting from such applications or our existing patents will be sufficiently broad to afford protection against competitors with similar or competing technology. Patents that we obtain may be challenged, invalidated or circumvented, or the rights granted under such patents may not provide us with any competitive advantages.
Competition
The market for blood glucose monitoring devices is intensely competitive, subject to rapid change and significantly affected by new product introductions. Four companies, Roche Diesetronic, a division of Roche Diagnostics;Roche; LifeScan, Inc., a division of Johnson & Johnson; Abbott Laboratories; and Ascensia, a spin off from the Bayer Corporation, currently account for substantially all of the worldwide sales of self-monitored glucose testing systems. Thesesystems.These competitors’ products use a meter and disposable test strips to test blood obtained by pricking the finger or, in some cases, the palm or forearm.
Within the last few years, Continuous Glucose Monitoring (CGM) devices have been introduced into the market and will compete with the GlucoTrack® model DF-F and our future devices, if any.devices. Currently, three different brands have obtained FDA clearance to market and are selling CGM devices in the U.S. and EU markets. These brands are sold by Medtronic plc., Abbott Laboratories (not available in the U.S.) and Dexcom, Inc..Inc. CGM devices are invasive devices, in which a needle is inserted under the skin (either in the abdomen or the upper arm) and measures interstitial fluid. Although we cannot predict what standards will be employed by applicable regulatory authorities as we seek FDA clearance, the results achieved by the GlucoTrack® model DF-F in our safety and performance clinical trial conducted in 2012 and 2013 were similar to the results obtained from the CGM devices that have been introduced to the market, as of the time of their introduction
| 22 |
In addition, other companies are developing non-invasive glucose testing devices and technologies that could compete with our devices. There are also a number of academic and other institutions involved in various phases of technology development regarding blood glucose monitoring devices. We believe that the majority of non-invasive glucose monitors in development require frequent calibrations (from a few hours to a few days, compared to the GlucoTrack® model DF-F, which has a demonstrated efficacy period of six months from the initial calibration). Among the companies developing non-invasive glucose testing devices is Echo Therapeutics, Inc. Other companies developing continuous measurement devices, based on minimally invasive methods, such as implants or subdermal needles include Medtronic, Inc., Abbot Laboratories and Dexcom, Inc.
Some of our competitors are either publicly traded or are divisions of publicly-traded companies, and they enjoy several competitive advantages, including:
| significantly greater name recognition; |
| ● | established relations with healthcare professionals, customers and third-party payors; |
| ● | established distribution networks; |
| ● | additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive advantage; |
| ● | greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory approval for products and marketing approved products; and |
| ● | greater financial and human resources for product development, sales and marketing, and patent litigation. |
Some of our other non-publicly traded competitors also enjoy these competitive advantages. As a result, we cannot assure that we will be able to compete effectively against these companies or their products.
To our knowledge, a summary of potential competitors with non-invasive products in development is set forth below in Figure B.
| 23 |
Figure B
| Company | Calibration Required | Measurement Type | Technology Description | |||||||
| Mediwise | Glucowise | Radiowave spectroscopy | Yes | Spot | Measures blood glucose in capillaries using Integrates a range of measurements including exercise, diet, body mass index, medication and illness and includes cloud-based data management system to store historical Glucowise data. | |||||
| Cnoga | TensorTip CGM Combo | Optical lookup table | Yes | Spot | Four LED signals are beamed through the finger; color image sensor executes a special algorithm | |||||
| Diamontech | DMT DMT Band | Mid-infrared absorption spectroscopy | Yes | Spot | Uses mid-infrared pulses from an infrared laser to excite glucose molecules in the interstitial layer of skin. Absorption of these pulses depends on the concentration of glucose and results in a heat wave migrating to the skin surface, where it is picked up by photo-thermal detection. | |||||
| ESER | GlucoGenius | Metabolic heat confirmation (MHC) | Yes | Spot | Combination of 9 independent measurements that are performed simultaneously and based on method of metabolic heat conformation (MHC) by radiation, convection and evaporation with electromagnetic technologies. The device integrates 3 types of sensors: temperature, humidity and infrared. |
The GlucoTrack® model DF-F does not directly measure the glucose level concentration in the blood. Rather, it measures several physiological phenomena that are correlated with the glucose level. In order to correlate between the measured signal and the glucose level, a translation is needed. This translation is accomplished through the individual calibration of the device by reference to a measurement obtained from an invasive device.
Non-invasive devices under different stages of development generally require frequent recalibration. For example, GlucoWatch, a single non-invasive product for glucose trend analysis that was previously approved for sale by the FDA, but which is no longer available commercially, required recalibrations approximately every 13 hours. The main reasons for calibration are that tissue parameters generally fluctuate in the area of the measurement and are sensitive to the location of the sensor and the impact of potential disturbances. Disturbances are less frequent in the earlobes, where the GlucoTrack® model DF-F takes its measurements. Utilizing three channels simultaneously reduces the noise contribution in the measurement. In addition, the personal ear clip contains sensors to help users attach the device to the proper part of the ear lobe.
The GlucoTrack® model DF-F has received CE Mark approval, which allows us to market and sell the GlucoTrack® model DF-F glucose monitoring device in EU member countries that have adopted the MDD without being subject to additional national regulations with regard to demonstration of performance and safety. While the MDD is applicable throughout the EU, it requires only a minimum level of harmonization among member countries. 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 additional to the MDD’s requirements from time to time, on a case-by-case basis. Moreover, the MDD notwithstanding, because the regulatory regimes of the EU member countries are significantly diverse, it is difficult to predict future regulatory developments and risks. The GlucoTrack® model DF-F has not yet been cleared or approved for commercial sale in any other jurisdiction, including the United States. See “Government Regulation - Regulation of the Design, Manufacture and Distribution of Medical Devices” below for a discussion of the approval process for commercial sale in the United States. There can be no assurance that approval for commercial sale in any additional jurisdiction will be obtained on a timely basis or at all.
| 24 |
Recent Corporate Developments
During 2018 and 2017, we received aggregate net proceeds of approximately $5.3 million (net of related cash expenses), from the Boardissuance and sale in a private placement transaction of Directors1,367,557 Series D Units. As of December 31, 2018, the Series D Warrants (issued on December 1, 2017 and during 2018) are exercisable for an aggregate of 4,102,667 shares of Common Stock, in each case subject to adjustment in certain circumstances.
Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with the placement agent, the Company (the “Board”) appointed Angela Strand, who has served as one of Company’s directors since March 2016, as Vice Chairperson ofpaid the Board.
On December 31, 2018 as a result of the Forced Conversion all of the outstanding warrants with down round protection (approximately 2,787,323) were exchanged. As of December 31, 2018, the number of warrants with down round protection held by the Placement Agent and two parties associated with the Placement Agent was 51,001,332 at an exercise price of $0.258. In addition, subsequent to December 31, 2018, the Placement Agent, elected to transfer 28,463,398 warrants to two parties associated with the Placement Agent.
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.
On July 3, 2018, the Company entered into an exclusive distribution agreement with CuraTec Nordic, a Scandinavian medical device distributor, for the sale of GlucoTrack®, the Company’s non-invasive glucose monitor for people with type 2 diabetes and pre-diabetes, in Denmark, Sweden, Finland and Norway.
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 were 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 was 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 30, 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, issued and (ii) $61,335 to be paid in cash; and all of his existing options expired on January 30, 2019, if not exercised by that date based on his contract.
On December 21, 2018, the Company held an annual meeting of shareholders (the “Meeting”). The number of shares of the Corporation’s capital stock outstanding, as of November 23, 2018, the Record Date, was(1) 7,748,586 shares of Common Stock; (2) 376 shares of Series A Preferred Stock; (3) 15,031 shares of Series B Preferred Stock; and (4) 12,004 shares of Series C Preferred Stock on the Record Date, with shares of Series A Preferred Stock convertible into an aggregate of 83,556 shares of Common Stock, shares of Series B Preferred Stock convertible into an aggregate of 3,340,251 shares of Common Stock and shares of Series C Preferred Stock convertible into an aggregate of 2,667,511 shares of Common Stock.
The number of shares represented at the modification date);Meeting in person or by proxy was as follows:5,443,047 shares of Common Stock; (2) 250 shares of Series A Preferred Stock; (3) 8,845 shares of Series B Preferred Stock; and (e) received 361,875 options as certain additional equity awards pursuant(4) 8,026 shares of Series C Preferred Stock on the Record Date, with shares of Series A Preferred Stock convertible into an aggregate of 55,556 shares of Common Stock, shares of Series B Preferred Stock convertible into an aggregate of 1,965,556 shares of Common Stock and shares of Series C Preferred Stock convertible into an aggregate of 1,783,556 shares of Common Stock.The number of shares present constituted a quorum for the business to be conducted at the Meeting.
| 25 |
At the Meeting, the Company’s stockholders approved the following proposals:
After review and tabulation, the ballots and proxies’ case for and against granting authority to the PlanBoard of Directors to effect a reverse split:
| Votes For | Votes Against | Abstentions | ||
| 8,005,594 | 1,234,120 | 8,000 |
After review and undertabulation, the ballots and proxies cast for and against the increase in authorized shares:
| Votes For | Votes Against | Abstentions | ||
| 8,047,313 | 1,190,541 | 8,000 |
After review and tabulation, the ballots and proxies cast for and against the reelection of each of the following current directors of the Company, who were candidates for reelection:
| Name | Votes For | Votes Against | Abstentions | |||
| Angela Strand | 7,343,829 | 51,370 | 1,179,859 | |||
| Robert Fischell | 7,345,789 | 51,270 | 1,179,859 | |||
| Michael Hauck | 7,343,829 | 51,370 | 1,179,859 | |||
| David Podwalski | 7,343,829 | 51,370 | 1,179,859 | |||
| Revan Schwartz | 7,343,929 | 51,270 | 1,179,859 |
After review and tabulation, the ballots and proxies case for and against the ratification of the appointment of Fahn Kanne as the Corporations independent registered public accountants for fiscal 2018:
| Votes For | Votes Against | Abstentions | ||
| 8,056,027 | 10,968 | 1,179,859 |
After review and tabulation, the ballots and proxies case for and against a non-binding, advisory basis, at least once every three years, the compensation of our named executive officers as disclosed in the Corporation’s Proxy Statement:
| Votes For | Votes Against | Abstentions | ||
| 7,392,779 | 2,420 | 1,179,859 |
After review and tabulation, the ballots and proxies cast for and against the amendment of the Corporation’s certificate of incorporation to permit holders of designated series of its preferred stock to amend their certificates of designation without the approval of holders of our common stock:
| Votes For | Votes Against | Abstentions | ||
| 7,335,773 | 1,224,729 | 9,000 |
After review and tabulation, the ballots and proxies cast for and against the amendment ofthe Series A Certificate of Designation by replacing Section 8 in its entirety with a forced conversion at the sole discretion of the Corporation:
Common and Series A Preferred as One Class
| Votes For | Votes Against | Abstentions | ||
| 7,336,273 | 1,230,785 | 8,000 |
Series A Preferred
| Votes For | Votes Against | Abstentions | ||
| 55,556 | 0 | 0 |
| 26 |
After review and tabulation, the ballots and proxies cast for and against the amendment ofthe Series B Certificate of Designation byreplacingSection 8 in its entirety with a forced conversion at the sole discretion of the Corporation:
Common and Series B Preferred as One Class
| Votes For | Votes Against | Abstentions | ||
| 7,336,273 | 1,230,785 | 8,000 |
Series B Preferred
| Votes For | Votes Against | Abstentions | ||
| 1,960,000 | 5,556 | 0 |
After review and tabulation, the ballots and proxies cast for and against the amendment ofthe Series C Certificate of Designation by replacing Section 8 in its entirety with a forced conversion at the sole discretion of the Corporation:
Common and Series C Preferred as One Class
| Votes For | Votes Against | Abstentions | ||
| 7,336,273 | 1,230,785 | 8,000 |
Series C Preferred
| Votes For | Votes Against | Abstentions | ||
| 1,783,556 | 0 | 0 |
On December 21, 2018, the Company’s shareholders approved amendments to its Series A, Series B and Series C Preferred Stock, to permit a forced conversion of those instruments into shares of its common stock at a conversion price equal to the lower of $1.00 and the volume average weighted price of the Company’s common stock on the forty five (45) prior trading days, which, as of the Forced Conversion Date of December 31, 2018, was $.258 (the “Forced Conversion Price”).
Furthermore, the purchase price for common stock issued by the Company in a series of private placement transactions since December 1, 2017 in an amount of $6,154,000 and the remaining $3,846,000 intended to be sold in connection therewith (known as the “D Round”) will also be reset to reflect the Forced Conversion Price. As a result, for each share of stock sold in the D Round, additional shares of common stock will be issued to the purchaser in an amount equal to the number of shares required so that the average per share price is reduced from $4.50 to the per share Forced Conversion Price, less the one (1) share already issued. For each unit purchased by a shareholder of the Corporation in each of the rounds in which Series A preferred stock was issued (the “A Round”, in which Series B preferred stock was issued (the “B Round”, in which Series C preferred stock was issued (the “C Round”) and in the D Round, the warrants issued with respect to that unit (i.e.: for the A Round, the A Warrants, for the B Round, the B-1 and B-2 Warrants, for the C Round, the C-1 and C-2 Warrants and for the D Round, the D-1, D-2 and D-3 Warrants), shall be cancelled, and instead the investor will receive per unit, three warrants, one with an exercise price of $1.80, one with an exercise price of $3.60 and one with an exercise price of $5.40, which warrants will otherwise contain the same terms and conditions as set forththe warrants issued in the Malka Employment Agreement. In addition,D Round. Lastly, as disclosed in the Malka Employment Agreement providesCompany’s Definitive Schedule 14A, filed on November 23, 2018, the warrants issued to Andrew Garrett, Inc. (“AGI Warrants”) by the Company contain full ratchet provisions pursuant to which as a result of the Forced Conversion Price, the exercise price of those warrants will be decreased, and the number of warrants increased proportionately.
| 27 |
Director Appointments
On March 17, 2016, the Board approved an increase in the size of the Board from four directors to five directors and appointed Leslie Seff and Angela Strand to serve as directors of the Company to fill the vacancies created by the resignation of Zvi Cohen and by the increase in the size of the Board, effective upon their acceptance of such appointments. Mr. Seff and Ms. Strand accepted their appointments effective March 23, 2016.
On November 9, 2016, the Board approved an increase in the size of the Board from five directors to seven directors and appointed Philip Darivoff and Revan Schwartz to serve as directors of the Company to fill the vacancies created by the increase in the size of the Board, effective on that date.
There are no arrangements or understandings between Mr. Darivoff, Ms. Strand and Mr. Seff and any other person pursuant to which Mr. Darivoff, Ms. Strand and Mr. Seff were selected as directors. Mr. Schwartz was appointed to the Board by Andrew Garrett, Inc. (“AGI”), the placement agent for the paymentCompany’s ongoing private placement, pursuant to the terms of certain social benefitsa letter agreement executed by AGI and the useCompany.
The Company entered into letter agreements with each of a company car. The Malka Employment Agreement is terminable by Integrity IsraelMs. Strand, Mr. Seff, Mr. Darivoff and Mr. Malka on 90 days’ prior written notice (the “Malka Notice Period”), without cause, or immediately by Integrity Israel for cause as defined in the Malka Employment Agreement. Integrity Israel may terminate Mr. Malka’s employment without cause prior to the expiration of the Malka Notice Period but will be required to pay Mr. Malka a severance fee equal to his base salary plus the financial value of all other benefits Mr. Malka would have been entitled to receive in respect of the portion of the Malka Notice Period which was forfeited.
On May 4,March 20, 2017, the Board unanimously voted to appoint Angela Strand, a memberJohn Graham as the Chief Executive Officer and Director of the Company commencing on March 20, 2017. On March 26, 2017, the Board voted to appoint Mr. Graham as the Chairman of the Board as the interim Chief Strategy Officer of the Company, effective as of May 1, 2017 through September 30, 2017. On May 5, 2017, the Company entered into a letter agreement with Ms. Angela Strand confirming her appointment as interim Chief Strategy Officer of the Company. Pursuant to the terms of the letter agreement, Ms. Strand received aggregate compensation of $150,000 for her service during the term of employment, paid monthly on the schedule mutually agreed upon by the parties.
On May 23, 2017, the Board appointed Michael Hauck to serve as a director of the Company, effective on that date. The Board further appointed Mr. Hauck to serve as a member of the Nominating and Corporate Governance Committee of the Board as well as on the Compensation Committee of the Board. There are no arrangements or understandings between Mr. Hauck and any other person pursuant to which Mr. Hauck was selected as a director. There are no relationships between Mr. Hauck and the Company that would require disclosure under Item 404(a) of Regulation S-K of the Exchange Act.
On May 23, 2017, the Board established an Audit Committee of the Board and appointed each of Leslie Seff and Revan Schwartz to serve as members of the committee. Mr. Schwartz will serve as chairperson of the Audit Committee. The Board determined that each of the members of the Audit Committee designated above is independent pursuant to the required standards set forth in Rule 10A-3(b) of the
Exchange Act,On October 2, 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.
On January 22, 2019, the Board appointed Dr. Robert Fischell to the audit committee.
Director Resignations
On March 20, 2017, David Malka resigned from his position as a director of the Company. Mr. Malka will continue as the Vice President of Operations and as a director of Integrity Israel. Mr. Malka will also act as an observer to all Board meetings, except as may be prohibited by the attorney-client privilege under applicable law. Mr. Malka resigned as part of the reorganization of management and his resignation is not a result of any disagreement with the Company regarding its operations, policies or practices.
On March 26, 2017, Philip Darivoff resigned as a director of the Company, effective immediately. Mr. Darivoff’s resignation was not a result of any disagreement with the Company regarding its operations, policies or practices.
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.
| 28 |
Leslie Seff, who has decided to not stand for reelection and his resignation was effective on the day of the shareholder’s meeting which was held on December 26, 2018.
As of the date of this report, the Company’s Board is comprised of the following sixfive members: John Graham, Robert Fischell, Angela Strand, Leslie Seff, Revan Schwartz, Michael Hauck and Michael Hauck.
Recent Sales of Unregistered Securities
Offering of Series A Unit
During 2017, 2018 and through the date of this report in 2019, the Company completed the first closing of an offering (the “First Closing”), pursuant to which the Company issued and soldraised funds in an aggregate of 165,057 shares of Common Stock at a price of $7.00 per share to certain accredited investors (the “First Closing Purchasers”). In March 2013, the offering was converted from an offering of Common Stock to an offering of Series A Units (see Note 10 to the Company's financial statements included in this Annual Report on Form 10-K for more details). On March 13, 2013, the Company entered into a series of Securities Purchase Agreements (“Series A Purchase Agreements”) with certain accredited investors (the “Series A Unit Purchasers”) pursuant to which the Company issued to the Series A Unit Purchasers an aggregate of 6,300 Series A Units, at a price of $1,000 per unit, each consisting of (i) one share of Series A 5.0% Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred Stock”), convertible into shares of Common Stock at an initial conversion price of $5.80 per share, and (ii) a warrant to purchase, at an exercise price of $6.96 per share, up to 100% of the shares of Common Stock issuable upon conversion of such share of Series A Preferred Stock. The issuance and sale of the Series A Units constituted the second and final closing of the offering.
On December 21, 2018, the Company’s shareholders approved amendments to its Series A, Series B and Series C Preferred Stock, to permit a forced conversion of those instruments into shares of its common stock at a conversion price equal to the lower of $1.00 and the volume average weighted price of the Company’s common stock on the forty five (45) prior trading days, which, as of the Forced Conversion Date of December 31, 2018, was $.258 (the “Forced Conversion Price”). Furthermore, the purchase price for common stock issued by the Company in a series of private placement transactions since December 1, 2017 (and until April 15, 2019) in an amount of $7,056,920 and the remaining $2,943,080 intended to be sold in connection therewith (known as the “D Round”) will also be reset to reflect the Forced Conversion Price. As a result, for each share of Commonstock sold in the D Round, additional shares of common stock will be issued to the purchaser in an amount equal to the number of shares required so that the average per share price is reduced from $4.50 to the per share Forced Conversion Price, less the one (1) share already issued. For each unit purchased by a shareholder of the Corporation in each of the rounds in which Series A preferred stock was issued (the “A Round”, in which Series B preferred stock was issued (the “B Round”, in which Series C preferred stock was issued (the “C Round”) and in the D Round, the warrants issued with respect to that unit (i.e.: for the A Round, the A Warrants, for the B Round, the B-1 and B-2 Warrants, for the C Round, the C-1 and C-2 Warrants and for the D Round, the D-1, D-2 and D-3 Warrants), shall be cancelled, and instead the investor will receive per unit, three warrants, one with an exercise price of $1.80, one with an exercise price of $3.60 and one with an exercise price of $5.40, which warrants will otherwise contain the same terms and conditions as the warrants issued in the D Round. Lastly, as disclosed in the Company’s Definitive Schedule 14A, filed on November 23, 2018, the warrants issued to Andrew Garrett, Inc. (“AGI Warrants”) by the Company contain full ratchet provisions pursuant to which as a result of the Forced Conversion Price, the exercise price of those warrants were decreased, and the number of warrants increased proportionately.
All shares issued in the Forced Conversion shall be released on a monthly basis on the monthly anniversary of the date of Forced Conversion, commencing on the six (6) month anniversary of the date of Forced Conversion, in amounts (“Release Amount”) equal to the greater of five percent (5%) of all shares issuable upon a Forced Conversion of all then outstanding shares of preferred stock of the Corporation or fifteen percent (15%) of the aggregate volume of sales of the Corporation’s common stock on the OTCQB for the twenty two (22) trading days prior to each date of release under this paragraph (b) (“Lookback Period”). The Release Amount shall be increased proportionately by the amount during the applicable Lookback Period by which the volume weighted average price (“VWAP”) of the Corporation’s common stock during the Lookback Period equals or exceeds two hundred percent (200%) of the conversion price for the preferred stock of the Corporation
The Corporation shall file a registration statement for resale of the shares issued under any and all Forced Conversions for all shares of preferred stock of the Corporation, with any cutbacks pursuant to Rule 415 or otherwise required by the Securities Exchange Commission, to be applied pro rata against all then outstanding Forced Conversion Shares owned by the holders thereof. With respect to any Shares subject to a cutback, further registration statements shall be filed as permitted by the United Securities and Exchange Commission.
The holders of the Preferred Stock (collectively,waive any rights for “most favored nation” status and any anti-dilution protection on any equity issuances issued prior to the “Series D-3 Warrants”,date of this Amendment or subsequent to the date of this Amendment, and togetheralso consent to the issuance of other securities by this Corporation at or below the Forced Conversion Price as well as the reset of the exercise and/or conversion price of other securities previously issued by this Corporation.
The holders agree that the percentage for the Beneficial Ownership Limitation is hereby increased to 9.99% and that the holders may also waive the Beneficial Ownership Limitation in order to comply with the Series D-1 WarrantsForced Conversion; provided, however, that in the event the holder determines to not waive under this subparagraph (e), a Forced Conversion with respect to its shares of Preferred Stock will only be effected up to the Beneficial Ownership Limitation, and Series D‑2 Warrants,any shares of Preferred Stock not initially converted, shall be converted as a Forced Conversion as the “Series D Warrants”).
Subject to the beneficial ownership limitation described below, holders of the Series D Warrants will not be permitted to exercise their Series D Warrants if such exercise would cause such holder to beneficially own more than 4.99% of the outstanding Common Stock (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days prior written notice to the Company).
In connection with the sale of the Series D Units, the Company entered into a series of registration rights agreements with the Series D Unit Purchasers (the “Series D Registration Rights Agreement”) pursuant to which, subject to certain exceptions, the Company has agreed to file with the SEC, no later than 90 days after the final issuance of Series D Units, a registration statement covering the resale of all of (a) the shares of Common Stock, (b) the shares of Common Stock issuable upon exercise of the Series D Warrants in full; (c) any additional shares of Common Stock issuable in connection with any anti-dilution provisions in the Series D Warrants; and (d) any securities issued or then issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing. Subject to certain exceptions and limitations specified in the Series D Registration Rights Agreement, the Company will be required to pay each holder monthly partial liquidated damages in the amount of 2% of the aggregate purchase price paid by such holder pursuant to the Series D Purchase Agreement, if the Company fails to timely file a registration statement; timely file a request for acceleration of a registration statement; timely respond to SEC comments with respect to a registration statement; obtain the effectiveness of a registration statement within 120 days from the filing thereof; or maintain the effectiveness of a registration statement for the periods required under the Series D Registration Rights Agreement.
Pursuant to a placement agent agreement with the placement agent for the Offering (the “Series D Placement Agent”), at the closing of the sale of the Series D Units the Company paid the Series D Placement Agent, as a commission, a cash amount equal to 7% of the aggregate sales price of the Series D Units, plus 3% of the aggregate sales price as a management fee plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Series D Units. In addition, pursuant to the placement agent agreement, the Company is required to issue to the Series D Placement Agent warrants to purchase up to such number of shares of Common Stock equal to 10% of the aggregate shares of Common Stock sold in the offering plus warrants equal to 10% of the total number of the Series D Warrants issued to the Series D Unit Purchasers in the offering (collectively, the “Placement Agent Warrants”). The terms of the Placement Agent Warrants will be substantially similar to the Series D Warrants except that the Placement Agent Warrants will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection.
| 29 |
Issuance of Securities to Advisor
On August 1, 2017 the Company entered into an advisory agreement with AGI, pursuant to which the Company retained AGI on a non-exclusive basis to provide certain advisory services to the Company for a period of 9 months.months which was subsequently extended twice and is now in effect to October 31, 2019. As consideration for the advisory services, the Company agreed to pay AGI $20,000 per month, payable in a cash payment of $10,000, and the balance in shares of the Company’s Common Stock valued at $4.50 per share, (2,223 shares per month)(which were reduced to $.258 retrospectively as part of the force conversion). In addition, in recognition of the advisory services previously provided by AGI prior to the advisory agreement, the Company also agreed to issue to AGI 8,889 shares of Common Stock.
As disclosed in the Company’s Definitive Schedule 14A, filed on November 23, 2018, the warrants issued to Andrew Garrett, Inc. (“AGI Warrants”) by the Company contain full ratchet provisions pursuant to which as a result of the Forced Conversion Price, the exercise price of those warrants will be decreased, and the number of warrants increased proportionately.
Corporate Information
Our principal offices are located at 19 Ha'YahalomimHa’Yahalomim St., Ashdod, Israel 7760049 and our telephone number is 972-8-675-7878. Our website address is http://www.integrity-app.com; the reference to such website address does not constitute incorporation by reference of the information contained on the website and such information should not be considered part of this report. There is no relationship between us and Integrity Applications, Incorporated, the engineering and software services company based in Chantilly, Virginia.
Board and Committees
We have sixfive members on our Board, four of whom are independent. The Board has an Audit Committee, Compensation Committee and a Nominating and Corporate Governance Committee, each consisting solely of independent directors. We are continuing to consider expansion of the Board and the establishment of additional appropriate Board committees to support the Company.
Employees
As of December 31, 2017,2018, we had 2719 full-time employees and 2 part-time employees. None of our employees are represented by a collective bargaining agreement. In addition, as of December 31, 2017,2018, we had four full-timetwo-time consultants.
| 30 |
An investment in our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors. If any of these risks actually occur, our business, financial condition and results of operations could be materially harmed. In addition, risks and uncertainties not presently known to us or that we currently deem immaterial may also materially harm our business, financial condition and results of operations. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.
We will need to secure additional financing in 20182019 in order to continue to finance our operations. If we are unable to secure additional financing on acceptable terms, or at all, we may be forced to curtail or cease our operations.
Our cash on hand was approximately $332,000$152,000 as of March 30, 2018.23, 2019. 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 one month 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.
Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings or strategic collaborations. We do not know whether additional funding will be available on acceptable terms, or at all. If we are unable to secure additional financing in the near term, we may be forced to: curtail or abandon our existing business plans; limit or terminate our applications for the regulatory approvals or clearances, as the case may be, in the countries in which we intend to market the GlucoTrack® model DF-F; reduce our headcount; default on our debt obligations; file for bankruptcy; seek to sell some or all of our assets; and/or cease our operations. If we are forced to take any of these steps, any investment in our securities may be worthless. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution, and debt financing, if available, may involve restrictive covenants. In addition to the dilution normally attendant to an equity offering, holders of our shares of Common Stock may experience additional dilution as a result of the anti-dilution and most favored nation provisions of our Preferred Stock and Warrants.
We have a history of operating losses, and there is no assurance that we will generate material revenues or become profitable in the near future.
We are a medical device company with a limited operating history. We are not profitable and have incurred losses since our inception. To date we have not generated material revenue from the sale of products, and we do not anticipate that we will report operating income in the near future. Our initial product, the GlucoTrack® model DF-F, has not been approved for marketing in the United States and may not be sold or marketed without FDA clearance or approval in the United States. While our GlucoTrack® model DF-F received CE Mark approval in 2013, there is no assurance that we will be able to generate any material revenues from sales of such model in the EU or any other jurisdictions. We continue to incur research and development and selling, marketing and general and administrative expenses related to our operations, development and commercialization of our first product. Our operating losses for the years ended December 31, 20172018 and 20162017 were approximately $10.6$6.5 million and $5.7$10.6 million, respectively, and we had an accumulated deficit of approximately $47.4$87.2 million as of December 31, 2017.2018. We expect to continue to incur losses for the foreseeable future, and these losses will likely increase as we prepare for and begin to commercialize the GlucoTrack® model DF-F. If we are not successful in manufacturing and distributing the GlucoTrack® model DF-F, or if the GlucoTrack® model DF-F does not achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm noted in its report accompanying our financial statements for the fiscal year ended December 31, 20172018 that we had suffered significant accumulated deficit and had negative operating cash flows and that the development and commercialization of our product is expected to require substantial expenditures. We have not yet generated any material revenues from our operations to fund our activities, 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. As a result, our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. If we cannot successfully continue as a going concern, our stockholders may lose their entire investment in our common stock.
| 31 |
33
We have never declared or paid any cash dividends on our Common Stock and do not anticipate paying any dividends on our Common Stock in the foreseeable future. Any cash that might be available for payment of dividends will be used to expand our business. Payments of any cash dividends in the future will depend on our financial condition, results of operation and capital requirements, as well as other factors deemed relevant to our Board of Directors. Furthermore, pursuant to the certificate of designations, preferences and rights governing the Series C Preferred Stock, as long as any shares of Series C Preferred Stock are outstanding, without the written consent of the holders of a majority in stated value of the then outstanding Series C Preferred Stock, we will not be permitted to, among other things, pay dividends on or otherwise make distributions in respect of any shares of our Common Stock or other securities junior to the Series C Preferred Stock.
Economic crises and market instability may materially and adversely affect the demand for our products, as well as our ability to obtain credit or secure funds through sales of our stock, which may materially and adversely affect our business, financial condition and ability to fund our operations.
Economic crises may reduce the demand for new and innovative medical devices, resulting in delayed market acceptance of our products, if and when they are approved. Such a delay could have a material adverse impact on our business, expected cash flows, results of operations and financial condition. Additionally, we have funded our operations to date primarily through private sales of securities, including common stock and other securities convertible into or exercisable for shares of our common stock. Economic turmoil and instability in the world’s equity and credit markets and in the unstable world may materially adversely affect our ability to sell additional securities and/or borrow cash. There can be no assurance that we will be able to raise additional working capital on acceptable terms or at all, and any failure to do so may materially adversely affect our ability to continue operations.
34
We will likely be required to undertake significant clinical trials to demonstrate to the FDA that the GlucoTrack® model DF-F is either safe and effective for its intended use or is substantially equivalent in terms of safety and effectiveness to an existing, lawfully marketed non-Section 515 premarket approval (PMA) device (refer to “Management Discussion and Analysis - Government Regulatory”). We may also be required to undertake clinical trials by non-U.S. regulatory agencies in non-CE Mark jurisdictions. Clinical trials are expensive and uncertain processes that may take years to complete. Failure can occur at any point in the process and early positive results do not ensure that the entire clinical trial will be successful. Product candidates in clinical trials may fail to show desired efficacy and safety traits despite early promising results. A number of companies in the medical device industry have suffered significant setbacks in advanced clinical trials, even after their product candidates demonstrated promising results at earlier points.
Positive results from the limited pre-clinical trials and safety and performance clinical trial that we have conducted should not be relied upon as evidence that later-stage or large-scale clinical trials will succeed. These trials involved limited patient populations and there is no assurance that the experimental protocol or protocols, as the case may be, used in these informal trials will be methodologically similar to ones submitted to the FDA or any other regulatory body for its approval. Because of the sample size, possible variation in methodology, differences in exclusion/inclusion criteria, or differences in endpoints, the results of these pre-clinical trials may not be indicative of future results. We will likely be required to demonstrate through well-controlled clinical trials that the GlucoTrack® model DF-F or future product candidates, if any, are safe and effective for their intended uses. In the event that the FDA deems GlucoTrack® model DF-F to be a Class II device, which we do not believe is likely at this point, then we would be required to demonstrate that it is substantially equivalent in terms of safety and effectiveness to a device lawfully marketed either through a premarket notification or prior to May 28, 1976.
Additionally, although we have received our CE Mark approval for the GlucoTrack® model DF-F non-invasive glucose monitoring device,, EU member countries may request or require additional performance and/or safety data from time to time, on a case-by-case basis. We have also received final approval from South Korea to commence sales of the GlucoTrack® model DF-F in South Korea.
Further, the GlucoTrack® model DF-F or our future product candidates, if any, may not be cleared or approved, as the case may be, even if the clinical data are satisfactory and support, in our view, its or their clearance or approval. The FDA or other non-U.S. regulatory authorities may disagree with our trial design or interpretation of the clinical data. In addition, any of these regulatory authorities may change requirements for the clearance or approval of a product candidate even after reviewing and providing comment on a protocol for a pivotal clinical trial that has the potential to result in FDA approval. In addition, any of these regulatory authorities may also clear or approve a product candidate for fewer or more limited uses than we request or may grant clearance or approval contingent on the performance of costly post-marketing clinical trials. In addition, the FDA or other non-regulatory authorities may not approve the labeling claims necessary or desirable for the successful commercialization of the GlucoTrack® model DF-F or our future product candidates, if any.
We are highly dependent on the success of our initial product candidate, the GlucoTrack® model DF-F, and cannot give any assurance that it will receive regulatory approval or clearance or be successfully commercialized.
We are highly dependent on the success of our initial product candidate, the GlucoTrack® model DF-F. We cannot give any assurance that the FDA will permit us to clinically test the device, nor can we give any assurance that the clinical trials will be successful or that the GlucoTrack® model DF-F will receive regulatory clearance or approval or be successfully commercialized, for a number of reasons, including, without limitation, the potential introduction by our competitors of more clinically-effective or cost-effective alternatives, failure in our sales and marketing efforts, or the failure to obtain positive coverage determinations or reimbursement. Any failure to obtain approval to conduct clinical trials, favorable clinical data, clearance or approval of or to successfully commercialize the GlucoTrack® model DF-F would have a material adverse effect on our business.
If our competitors develop and market products that are more effective, safer or less expensive than GlucoTrack® model DF-F or our future product candidates, if any, our commercial opportunities will be adversely affected.
The life sciences industry is highly competitive and we face significant competition from many medical device companies that are researching and marketing products designed to address the needs of persons suffering from diabetes. We are currently developing medical devices that will compete with other medical devices that currently exist or are being developed. Products that we may develop in the future are also likely to face competition from other medical devices and therapies. Some of our competitors have significantly greater financial, manufacturing, marketing and product development resources than we do. Large medical device companies, in particular, have extensive experience in clinical testing and in obtaining regulatory clearances or approvals for medical devices. These companies also have significantly greater research and marketing capabilities than us. Some of the medical device companies that we expect to compete with include Roche Disetronic, a division of Roche Diagnostics;Roche; LifeScan, Inc., a division of Johnson & Johnson; the MediSense and TheraSense divisions of Abbott Laboratories; Ascensia, a spin off from Bayer Corporation; Echo Therapeutics, Inc.; Grove Instruments; and Medtronic, Inc. In addition, many other universities and private and public research institutions are or may become active in research involving blood glucose measurement devices.
We believe that our ability to successfully compete will depend on, among other things:
| our ability to have partners manufacture and sell commercial quantities of any approved products to the market; |
| acceptance of product candidates by physicians and other health care providers; |
| the results of our clinical trials; |
| our ability to recruit and enroll patients for our clinical trials; |
| the efficacy, safety, performance and reliability of our product candidates; |
| the speed at which we develop product candidates; |
| our ability to obtain prompt and favorable IRB review and approval at each of our clinical sites; |
| our ability to commercialize and market any of our product candidates that may receive regulatory clearance or approval; |
| our ability to design and successfully execute appropriate clinical trials; |
| the timing and scope of regulatory clearances or approvals; |
| appropriate coverage and adequate levels of reimbursement under private and governmental health insurance plans, including Medicare; and |
| our ability to protect intellectual property rights related to our products. |
If our competitors market products that are more effective, safer, easier to use or less expensive than GlucoTrack® model DF-F or our future product candidates, if any, or that reach the market sooner than GlucoTrack® model DF-F or our future product candidates, if any, we may not achieve commercial success. In addition, the medical device industry is characterized by rapid technological change. It may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological advances or products developed by our competitors may render our technologies or product candidates obsolete or less competitive.
Our product development activities could be delayed or stopped.
We do not know whether our future clinical trials will begin on time, or at all, and whether ongoing and/or future clinical trials will be completed on schedule, or at all.
The commencement of future clinical trials could be substantially delayed or prevented by several factors, including:
| the failure to obtain sufficient funding to pay for all necessary clinical trials; |
| limited number of, and competition for, suitable patients that meet the protocol’s inclusion criteria and do not meet any of the exclusion criteria; |
| limited number of, and competition for, suitable sites to conduct the clinical trials, and delay or failure to obtain FDA approval, if necessary, to commence a clinical trial; |
| delay or failure to obtain sufficient supplies of the product candidate for clinical trials; |
| requirements to provide the medical device required in clinical trials at cost, which may require significant expenditures that we are unable or unwilling to make; |
| delay or failure to reach agreement on acceptable clinical trial agreement terms or clinical trial protocols with prospective sites or investigators; and |
| delay or failure to obtain IRB approval or renewal of such approval to conduct a clinical trial at a prospective or accruing site, respectively. |
The completion of clinical trials in connection with our application for FDA approval could also be substantially delayed or prevented by several factors, including:
| slower than expected rates of patient recruitment and enrollment; |
| failure of patients to complete the clinical trial; |
| unforeseen safety issues; |
| lack of efficacy evidenced during clinical trials; |
| termination of clinical trials by one or more clinical trial sites; |
| inability or unwillingness of patients or medical investigators to follow clinical trial protocols; and |
| inability to monitor patients adequately during or after treatment. |
Our clinical trials may be suspended or terminated at any time by the FDA, other regulatory authorities, the IRB for any given site, or us. Any failure or significant delay in completing clinical trials for GlucoTrack® or future product candidates, if any, could materially harm our financial results and the commercial prospects for our product candidates.
The regulatory approval process is expensive, time-consuming and uncertain and may prevent us from obtaining approvals for the commercialization of GlucoTrack® model DF-F or our future product candidates, if any.
The research, testing, manufacturing, labeling, approval, selling, marketing and distribution of medical devices are subject to extensive regulation by the FDA and other non-U.S. regulatory authorities, which regulations differ from country to country. We are not permitted to market our product candidates in the United States until we receive a clearance letter under the 510(k)-premarket notification process or approval of a Section 515 premarket approval, from the FDA, depending on the nature of the device. We have not submitted an application or premarket notification for or received marketing clearance or approval for any of our product candidates. Obtaining approval of any premarket approval can be a lengthy, expensive and uncertain process. While the FDA normally reviews, and clears a premarket notification in three months, there is no guarantee that our products will qualify for this more expeditious regulatory process, which is reserved for Class I and II devices, nor is there any assurance that, even if a device is reviewed under the 510(k)-premarket notification process, the FDA will review it expeditiously or determine that the device is substantially equivalent to a lawfully marketed non-premarket approval device. If the FDA fails to make this finding, then we cannot market the device. In lieu of acting on a premarket notification, the FDA may seek additional information or additional data which would further delay our ability to market the product. In addition, failure to comply with FDA, non-U.S. regulatory authorities or other applicable U.S. and non-U.S. regulatory requirements may, either before or after product clearance or approval, if any, subject us to administrative or judicially imposed sanctions, including:
| restrictions on the products, manufacturers or manufacturing process; |
| adverse inspectional observations (Form 483), warning letters or non-warning letters incorporating inspectional observations, i.e., so-called “untitled letter”; |
| civil and criminal penalties; |
| injunctions; |
| suspension or withdrawal of regulatory clearances or approvals; |
| product seizures, detentions or import bans; |
| voluntary or mandatory product recalls and publicity requirements; |
| total or partial suspension of production; |
| imposition of restrictions on operations, including costly new manufacturing requirements; and |
| refusal to clear or approve pending applications or premarket notifications. |
Regulatory approval of a PMA or PMA supplement or clearance pursuant to a 510(k)-premarket notification is not guaranteed, and the approval or clearance process, as the case may be, is expensive and may, especially in the case of the PMA, take several years. The FDA also has substantial discretion in the medical device clearance or approval processes. Despite the time and expense exerted, failure can occur at any stage and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional pre-clinical studies and clinical trials. The number of pre-clinical studies and clinical trials that will be required for FDA clearance or approval varies depending on the medical device candidate, the disease or condition that the medical device candidate is designed to address, and the regulations applicable to any particular medical device candidate. The FDA can delay, limit or deny clearance or approval of a medical device candidate for many reasons, including:
| a medical device candidate may not be deemed safe or effective, in the case of a PMA; |
| a medical device candidate may not be deemed to be substantially equivalent to a lawfully marketed non-premarket approval device in the case of a 510(k)-premarket notification; |
| FDA officials may not find the data from the clinical trials sufficient; |
| the FDA might not approve our third-party manufacturer’s processes or facilities; or |
| the FDA may change its clearance or approval policies or adopt new regulations. |
Further, while we have received CE Mark approval for the GlucoTrack® model DF-F, the MDD requires only minimum harmonization. In practice, uniform regulation throughout the EU is not ensured. Rather, 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 additional to the MDD’s requirements from time to time, on a case-by-case basis. Therefore, we cannot predict whether we will be able to successfully commercialize the GlucoTrack® model DF-F or our future product candidates, if any, in the EU.
Failure to recruit and enroll patients for clinical trials may cause the development of our product candidates to be delayed.
We may encounter delays if we are unable to recruit and enroll and retain enough patients to complete clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in patient enrollment are not unusual. Any such delays in planned patient enrollment may result in increased costs, which could harm our ability to develop products.
The terms of clearances or approvals and ongoing regulation of our products may limit how we manufacture and market our product candidates, which could materially impair our ability to generate anticipated revenues.
Once regulatory clearance or approval has been granted, the cleared or approved product and its manufacturer are subject to continual review. Any cleared or approved product may only be promoted for its indicated uses. In addition, if the FDA or other non-U.S. regulatory authorities clear or approve GlucoTrack® model DF-F or our future product candidates, if any, the labeling, packaging, adverse event reporting, storage, advertising and promotion for the product will be subject to extensive regulatory requirements. We, and the manufacturers of our products, if other than us, also will be required to comply with the FDA’s Quality System Regulation, which includes requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Moreover, device manufacturers are required to report adverse events by filing Medical Device Reports with the FDA, which are publicly available. Further, regulatory agencies must approve our manufacturing facilities before they can be used to manufacture products, and these facilities are subject to ongoing regulatory inspection. If we fail to comply with the regulatory requirements of the FDA and other non-U.S. regulatory authorities, or if previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions, including:
| restrictions on the products, manufacturers or manufacturing process; |
| adverse inspectional observations (Form 483), warning letters, or non-warning letters incorporating inspectional observations; |
| civil or criminal penalties or fines; |
| injunctions; |
| product seizures, detentions or import bans; |
| voluntary or mandatory product recalls and publicity requirements; |
| suspension or withdrawal of regulatory clearances or approvals; |
| total or partial suspension of production; |
| imposition of restrictions on operations, including costly new manufacturing requirements; and |
| refusal to clear or approve pending applications or premarket notifications. |
In addition, the FDA and other non-U.S. regulatory authorities, including the EU and each of the EU member countries individually, may change their policies and additional regulations may be enacted that could prevent or delay regulatory clearance or approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we will likely not be permitted to market future product candidates and may not achieve or sustain profitability.
Even if we receive regulatory clearance or approval to market the GlucoTrack® model DF-F or our future product candidates, if any, the market may not be receptive to our products.
Even if GlucoTrack® model DF-F or our future product candidates, if any, obtain regulatory clearance or approval, resulting products may not gain market acceptance among physicians, patients, health care payors or the medical community. We believe that the degree of market acceptance will depend on a number of factors, including:
| timing of market introduction of competitive products; |
| safety and efficacy of our product; |
| prevalence and severity of any side effects; |
| potential advantages or disadvantages over alternative treatments; |
| strength of marketing and distribution support; |
| price of our product candidates, both in absolute terms and relative to alternative treatments; and |
| availability of coverage and reimbursement from government and other third-party payors. |
If the GlucoTrack® model DF-F or our future product candidates, if any, fail to achieve market acceptance, we may not be able to generate significant revenue or achieve or sustain profitability.
The coverage and reimbursement status of newly cleared or approved medical devices is uncertain, and failure to obtain adequate coverage and adequate reimbursement could limit our ability to market GlucoTrack® model DF-F or future product candidates, if any, and may inhibit our ability to generate revenue from GlucoTrack® model DF-F or our future product candidates, if any, that may be cleared or approved.
There is significant uncertainty related to the third-party coverage and reimbursement of newly cleared or approved medical devices. The commercial success of GlucoTrack® model DF-F or our future product candidates, if any, in both domestic and international markets will depend in part on the availability of coverage and adequate reimbursement from third-party payors, including government payors, such as the Medicare and Medicaid programs, managed care organizations and other third-party payors. Government and other third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new products and, as a result, they may not cover or provide adequate payment for GlucoTrack® model DF-F or our future product candidates, if any. These payors may conclude that our products are not as safe or effective as existing devices or that the overall cost of using one of our devices exceeds the overall cost of the competing device, and third-party payors may not approve GlucoTrack® model DF-F or our future product candidates, if any, for coverage and adequate reimbursement. Furthermore, deficit reduction and austerity measures in the United States and abroad may put further pressure on governments to limit coverage of, and reimbursement for, our products. The failure to obtain coverage and adequate reimbursement for GlucoTrack® model DF-F or our future product candidates, if any, or health care cost containment initiatives that limit or restrict reimbursement for such products may reduce any future product revenue.
We may not obtain insurance coverage to adequately cover all significant risk exposures.
We will be exposed to liabilities that are unique to the products we provide. We currently maintain premises insurance and there can be no assurance that we will acquire or maintain insurance for certain risks, that the amount of our insurance coverage will be adequate to cover all claims or liabilities, or that we will not be forced to bear substantial costs resulting from risks and uncertainties of business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition and results of operations.
If product liability lawsuits are brought against us, we may incur substantial liabilities.
We face a potential risk of product liability as a result of any of the products that we offer for sale. For example, we may be sued if any product we sell allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
| ● | decreased demand for products that we may offer for sale; | |
| ● | injury to our reputation; | |
| ● | costs to defend the related litigation; | |
| ● | a diversion of | |
| ● | substantial monetary awards to trial participants or patients; | |
| ● | product recalls, withdrawals or labeling, marketing or promotional restrictions; and | |
| ● | a decline in our stock price. |
Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently maintain product liability insurance up to $3,000,000$5,000,000 per claim and in the aggregate. Although we have product liability coverage, we may have to pay amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
If we fail to attract and retain key management and scientific personnel, we may be unable to successfully develop or commercialize the GlucoTrack® model DF-F or our future product candidates, if any.
We will need to expand and effectively manage our managerial, operational, financial, development and other resources in order to successfully pursue our research, development and commercialization efforts for GlucoTrack® model DF-F or our future product candidates, if any. Our success depends on our continued ability to attract, retain and motivate highly qualified management and pre-clinical and clinical personnel. The loss of the services of any of our senior management could delay or prevent the development or commercialization of GlucoTrack® model DF-F or our future product candidates, if any. At present, we do not have key man insurance policies with respect to any of our employees. We will need to hire additional personnel as we continue to expand our research and development activities and build a sales and marketing function. Although we currently have employment agreements with each of Messrs. Graham,, Malka, Sassoun and Podwalski, those agreements provide that they may be terminated by Mr. Graham, Malka, Mr. Sassoun and SassounMr. Podwalski, as applicable, upon 90 days written notice to us, respectively.
We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for qualified personnel among medical device and other businesses. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our research and development objectives, our ability to raise additional capital and our ability to implement our business strategy. In particular, if we lose any members of our senior management team, we may not be able to find suitable replacements in a timely fashion or at all and our business may be harmed as a result.
As we continue to evolve from a company primarily involved in development to a company also involved in commercialization, we may encounter difficulties in managing our growth and expanding our operations successfully.
As the GlucoTrack® model DF-F has received a CE Mark, we have begun to expand our manufacturing, marketing and sales capabilities by contracting with third parties to provide these capabilities. We anticipate that, as our operations expand, we will need to manage additional relationships with such third parties. Maintaining these relationships and managing our future growth will impose significant added responsibilities on members of our management. We must be able to manage our development efforts effectively; manage our clinical trials effectively; hire, train and integrate additional management, development, administrative and sales and marketing personnel; improve managerial, development, operational and finance systems; and expand our facilities, all of which may impose a strain on our administrative and operational infrastructure.
We rely on third parties to manufacture and supply our product.
We do not own or operate manufacturing facilities for clinical or commercial production of the GlucoTrack® model DF-F, other than a prototype lab. We have no experience in medical device manufacturing and lack the resources and the capability to manufacture the GlucoTrack® model DF-F on a commercial scale. We currently manufacture the GlucoTrack® model DF-F with a third-party manufacturer in Israel. In July 2014, we entered into a manufacturing agreement with Wistron. Wistron is in the process of preparing a production line for the GlucoTrack® model DF-F. Wistron has produced a small pilot batch and is in the process of producing a second pilot batch of the GlucoTrack® model DF-F device. Following 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 July 2017, the production line for the GlucoTrack® model DF-F is now operational. We intend to utilize the services of both Wistron and the Israeli third-party manufacturer to produce the GlucoTrack® model DF-F.
If our manufacturing partners are unable to produce our products in the amounts, timing or pricing that we require, we may not be able to establish a contract and obtain a sufficient alternative supply from another supplier on a timely basis and in the quantities or pricing we require. We expect to depend on third-party contract manufacturers for the foreseeable future.
The GlucoTrack® model DF-F does, and our future product candidates, if any, likely will require precise, high quality manufacturing. Any of our contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and other non-U.S. regulatory authorities to ensure strict compliance with quality system regulations, including current good manufacturing practices and other applicable government regulations and corresponding standards. If our contract manufacturers fail to achieve and maintain high manufacturing standards in compliance with quality system regulations, we may experience manufacturing errors resulting in patient injury or death, product recalls or withdrawals, delays or interruptions of production or failures in product testing or delivery, delay or prevention of filing or approval of marketing applications for our products, cost overruns or other problems that could seriously harm our business.
Any performance failure on the part of our contract manufacturers could delay clinical development or regulatory clearance or approval of our product candidates or commercialization of our future product candidates, depriving us of potential product revenue and resulting in additional losses. In addition, our dependence on a third-party for manufacturing may adversely affect our future profit margins. Our ability to replace an existing manufacturer may be difficult because the number of potential manufacturers is limited and the FDA must approve any replacement manufacturer before it can begin manufacturing our product candidates. Such approval would require additional non-clinical testing and compliance inspections. It may be difficult or impossible for us to identify and engage a replacement manufacturer on acceptable terms in a timely manner, or at all.
We are dependent on third-party distributors to market and sell our products.
We have limited internal marketing, sales or distribution capabilities and currently we do not intend to develop extensive internal marketing, sales or distribution capabilities in the future. Rather, we intend to utilize third-party distributors to market our products, and have entered into exclusive distribution agreements with respect to certain territories. There is no assurance that third party distributors will achieve acceptable levels of sales or that, if any of our existing arrangements expire or terminate, we will be able to replace any distributors on terms advantageous to us, or at all. Further, there is no assurance that we will be able to expand our distribution network by adding additional distributors. If third party distributors cease to promote our products, or if we are unable to make acceptable arrangements with distributors or sales personnel in other markets, our business prospects, operating results or financial condition could be materially adversely affected.
Independent clinical investigators and contract research organizations that we engage to conduct our clinical trials may not be diligent, careful or timely.
We will depend on independent clinical investigators to conduct our clinical trials. Contract research organizations may also assist us in the collection and analysis of data. These investigators and contract research organizations will not be our employees and we will not be able to control, other than by contract, the amount of resources, including time that they devote to products that we develop. If independent investigators fail to devote sufficient resources to the clinical trials, or if their performance is substandard, it will delay the approval or clearance and commercialization of any products that we develop. Further, the FDA requires that we comply with standards, commonly referred to as good clinical practice, for conducting, recording and reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial subjects are protected. If our independent clinical investigators and contract research organizations fail to comply with good clinical practice, the results of our clinical trials could be called into question and the clinical development of our product candidates could be delayed. Failure of clinical investigators or contract research organizations to meet their obligations to us or comply with federal regulations could adversely affect the clinical development of our product candidates and harm our business.
If we are unable to obtain and enforce patent protection for our products, our business could be materially harmed.
Our success depends,, among other things, on our ability to protect proprietary methods and technologies that we develop under the patent and other intellectual property laws of the United States and other countries, so that we can prevent others from unlawfully using our inventions and proprietary information. However, we may not hold proprietary rights to some patents required for us to commercialize proposed products. For this and other reasons, we may be unable to secure desired patent rights, thereby losing desired exclusivity. Although we do not believe that we need any licenses for the GlucoTrack® model DF-F, we may need to obtain licenses in the future for other products or in certain circumstances, such as if one of our patents were declared invalid in the future. If such licenses are not available to us on acceptable terms, we will not be able to market the affected products or conduct the desired activities, unless we successfully challenge the validity, enforceability or infringement of the third-party patent or otherwise circumvent the third-party patent.
Our strategy depends on our ability to rapidly identify and seek patent protection for our discoveries. The process of obtaining patent protection is expensive and time-consuming. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary.
The issuance of a patent does not guarantee that it is valid or enforceable. Any patents we have obtained, or which we may obtain in the future, may be challenged, invalidated, unenforceable or circumvented. Moreover, the United States Patent and Trademark Office (the “USPTO”) may commence interference proceedings involving our patents or patent applications. Any challenge to, finding of unenforceability or invalidation or circumvention of our patents or patent applications would be costly, would require significant time and attention of our management and could have a material adverse effect on our business. In addition, court decisions may introduce uncertainty in the enforceability or scope of patents owned by medical device companies.
Our pending patent applications may not result in issued patents. The patent position of medical device companies, including us, is generally uncertain and involves complex legal and factual considerations. The standards that the USPTO and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in medical device patents. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims that will be allowed in any patents issued to us or to others. The legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Therefore, the enforceability or scope of our patents in the United States or in foreign countries cannot be predicted with certainty, and, as a result, any patents that we own may not provide sufficient protection against competitors. We may not be able to obtain or maintain patent protection for our pending patent applications or those we may file in the future.
We cannot assure you that any patents that will issue, that may issue or that may be licensed to us will be enforceable or valid or will not expire prior to the commercialization of our product candidates, thus allowing others to more effectively compete with us. Therefore, any patents that we own may not adequately protect our product candidates or our future products.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
In addition to patent protection, we also rely on other proprietary rights, including protection of trade secrets, know-how and confidential and proprietary information. To maintain the confidentiality of trade secrets and proprietary information, we will seek to enter into confidentiality and non- disclosure agreements with our employees, consultants and collaborators upon the commencement of their relationships with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. Our agreements with employees also generally provide and will generally provide that any inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. However, we may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may not comply with their terms. In the event of unauthorized use or disclosure of our trade secrets or proprietary information, these agreements, even if obtained, may not provide meaningful protection, particularly for trade secrets or other confidential information. To the extent that our employees, consultants or contractors use technology or know-how owned by third parties in their work for us, disputes may arise between us and those third parties as to the rights in related inventions.
Adequate
remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of trade secrets would impair our competitive position and may materially harm our business, financial condition and results of operations.Some jurisdictions may require us to grant licenses to third parties. Such compulsory licenses could be extended to include some of our product candidates, which may limit potential revenue opportunities.
Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, most countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may be limited to monetary relief and may be unable to enjoin infringement, which could materially diminish the value of the patent. Compulsory licensing of life-saving products is also becoming increasingly popular in developing countries, either through direct legislation or international initiatives. Such compulsory licenses could be extended to include some of our product candidates, which may limit our potential revenue opportunities.
Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties.
Other entities may have or obtain patents or proprietary rights that could limit our ability to manufacture, use, sell, offer for sale or import products or impair our competitive position. In addition, to the extent that a third party develops new technology that covers our products, we may be required to obtain licenses to that technology, which licenses may not be available on commercially reasonable terms, if at all. If licenses are not available on acceptable terms, we will not be able to market the affected products or conduct the desired activities unless we successfully challenge the validity, enforceability or infringement of the third-party patent or circumvent the third-party patent, which would be costly and would require significant time and attention of our management. Third parties may have or obtain valid and enforceable patents or proprietary rights that could block us from developing products using our technology. Our failure to obtain a license to any technology that we require may materially harm our business, financial condition and results of operations.
If we become involved in patent litigation or other proceedings related to a determination of rights, we could incur substantial costs and expenses, substantial liability for damages or be required to stop our product development and commercialization efforts.
Third parties may sue us for infringing their patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or licensed to us or to determine the scope and validity of proprietary rights of others. In addition, a third party may claim that we have improperly obtained or used our confidential or proprietary information. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert management’s efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.
If any parties successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may have access to the same technology. If we fail to obtain a required license and are unable to design around a patent, we may be unable to effectively market some of our technology and products, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain operations.
Failure to obtain additional regulatory approvals outside the United States will prevent or limit us from marketing our product candidates abroad.
We intend to market our product candidates in non-U.S. markets. In order to market product candidates in the EU and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals. In December 2012, we submitted our technical file to the Notified Body in connection with our application to obtain CE Mark approval for the GlucoTrack® model DF-F non-invasive glucose monitoring device. On June 4, 2013, we received CE Mark approval for the GlucoTrack® model DF-F non-invasive glucose monitoring device from the Notified Body. Receipt of the CE Mark allows us to market and sell the GlucoTrack® model DF-F glucose monitoring device in EU member countries that have adopted the MDD without being subject to additional national regulations with regard to demonstration of performance and safety. The CE Mark also permits the sale in countries that have an MDD Mutual Recognition Agreement with the EU. However, member countries may apply and enforce the MDD’s terms differently, and certain EU member countries may request or require that we provide performance and/or safety data additional to the MDD’s requirements from time to time, on a case-by-case basis, in order to be cleared to market and sale the GlucoTrack® model DF-F in such countries. Receipt of FDA approval does not ensure approval by regulatory authorities in countries, and approval by one or more non-U.S. regulatory authorities (including receipt of the CE Mark) does not ensure approval by regulatory authorities in other countries or by the FDA. The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA approval or clearance. We may not obtain additional non-U.S. regulatory approvals on a timely basis, if at all. We may not be able to file for additional non-U.S. regulatory approvals and may not receive necessary approvals to commercialize our product candidates in any market.
Non-U.S. governments often impose strict price controls, which may adversely affect our future profitability.
We intend to seek approval to market GlucoTrack® model DF-F and our future product candidates, if any, in both the U.S. and in non-U.S. jurisdictions. If we obtain approval in one or more non-U.S. jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our products. In some countries, particularly countries of the EU, each of which has developed its own rules and regulations, pricing may be subject to governmental control under certain circumstances. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a medical device candidate. Each of the EU member states has its own unique legal system and thus it is difficult to predict the particular requirements to which we may be subject. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available products. If reimbursement of our product candidates is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
Our business may become subject to economic, political, regulatory and other risks associated with international operations, which could harm our business.
Our business is subject to risks associated with conducting business internationally. Accordingly, our future results could be harmed by a variety of factors, including:
| difficulties in compliance with non-U.S. laws and regulations; |
| changes in non-U.S. regulations and customs; |
| changes in non-U.S. currency exchange rates and currency controls; |
| changes in a specific country’s or region’s political or economic environment; |
| trade protection measures, import or export licensing requirements or other restrictive actions by U.S. or non-U.S. governments; |
| negative consequences from changes in tax laws; and |
| difficulties associated with staffing and managing foreign operations, including differing labor relations. |
economic and military conditions in Israel directly affect our operations. Specifically, we could be materially adversely affected by:
Three of our executive officers and one of our directors are non-residents of the United States and a substantial portion of our assets and the assets of these persons will be located outside of the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a United States court judgment, including a judgment based upon the civil liability provisions of the Securities Act, and the Exchange Act of 1934, as amended (the “Exchange Act”), in original actions instituted in an Israeli court against any of these persons. Furthermore, service of process upon these persons may be difficult to obtain within the United States.
We may not be able to enforce covenants not-to-compete under current Israeli law, which might result in added competition for our products.
We have non-competition agreements or provisions with all of our employees and executive officers, all of which are governed by Israeli law. These agreements or provisions prohibit our employees from competing with us or working for our competitors, generally during, and for up to nine months after termination of, their employment with us. However, Israeli courts are reluctant to enforce non-compete undertakings of former employees and tend, if at all, to enforce those provisions for only relatively brief periods of time or in restricted geographical areas. In addition, Israeli courts typically require the presence of additional circumstances, such as a demonstration of an employer’s legitimate interest which was damaged; breach of fiduciary duties, loyalty and acting not in good faith; a payment of a special consideration for employee’s non-compete obligation; material concern for disclosing employer'semployer’s trade secrets; or a demonstration that an employee has unique value to the employer specific to that employer’s business, before enforcing a non-competition undertaking against such employee.
| 43 |
The funding that we received through the Office of the Chief Scientist (the “OCS”) for research and development activities restricts our ability to manufacture products or to transfer technology outside of Israel.
On March 4, 2004, the OCS agreed to provide us with a grant of 420,000 New Israeli Shekels (“NIS”), or approximately $93,300 at an exchange rate of 4.502 NIS/dollar (the exchange rate in effect on such date), for our plan to develop a non-invasive blood glucose monitor (the “development plan”). This grant constituted 60% of our research and development budget for the development plan at that time. Due to our acceptance of this grant, we are subject to the provisions of the Israeli Law for the Encouragement of Industrial Research and Development, 1984 (the “R&D Law”). Among other things, the R&D Law restricts our ability to sell or transfer rights in technology or know-how developed with OCS funding or transfer any Means of Control (as defined in the R&D Law) of us to non-Israeli entities. The Industrial Research and Development Committee at the OCS (the “research committee”) may, under special circumstances, approve the transfer outside of Israel of rights in technology or know-how developed with OCS funding subject to certain conditions, including the condition that certain payments be made to the OCS. Additionally, we may not manufacture products developed with OCS funding outside of Israel without the approval of the research committee. The restrictions regarding the sale or transfer of technology or manufacturing rights out of Israel could have a material adverse effect on our ability to enter into strategic alliances or enter into merger or acquisition transactions in the future that provide for the sale or transfer of our technology or manufacturing rights.
If we are successful in bringing the GlucoTrack® model DF-F to market, we will be required to use a portion of our net sales to repay certain loans and to pay royalties to the OCS, which will have a negative impact on our profitability.
Integrity Israel is required to pay royalties to the OCS on the proceeds from the sale of our systems resulting from research and development projects for which the OCS provided a grant. During the first three years of sales, we will be required to pay royalties of 3% of the sales of such products. In the fourth, fifth and sixth years of sales, we will be required to pay royalties of 4% of such sales and from the seventh year on we will be required to pay royalties of 5% of such sales, in all cases, up to 100% of the amount of grants received by us from the OCS plus interest at the London Interbank Offered Rate (“LIBOR”). We do not have any other future performance obligations related to the OCS grants. As of December 31, 2017,2018, the contingent liabilities with respect to OCS grants subject to repayment under these royalty agreements equaled $36,083,$49,879, not including interest.interest. To the extent that we are required to pay royalties to the OCS, such payments will increase our expenses for the year(s) in which such payment(s) are accrued, and, as a result, will reduce our profits (or increase our losses, as applicable) for such periods. Payments made to the OCS in lieu of royalties and repayment of the loans described above will reduce our free cash-flow and our cash balance for the year(s) in which such payment(s) are made.
Messrs. Avner Gal and Zvi Cohen collectively loaned us NIS 176,000 ($50,76440,010 based on the exchange rate of 3.4673.748 NIS/dollar as of December 31, 2017)2018) in May 2002 pursuant to an oral agreement (the “Gal/Cohen Loan”). Messrs. Nir Tarlovsky, Yitzhak Fisher and Asher Kugler loaned us NIS 336,300 ($97,00089,728 based on the same exchange rate) on March 16, 2004 (the “Tarlovsky/Fisher/Kugler Loan”). These loans are not required to be repaid until the first year in which we realize profits in our statement of operations. At such time, the loans are to be repaid on a quarterly basis in an amount equal to 10% of our total sales after deduction of VAT in the relevant quarter, beginning 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 abovementioned mechanism, we will not be required to repay the loans during any time when such repayment would cause a deficit in our working capital. The Israeli Consumer Price Index was 177.6386, and 178.5793, respectively, as of the dates of the Gal/Cohen Loan and the Tarlovsky/Fisher/Kugler Loan. As of December 31, 2017,2018, the Israeli Consumer Price Index was 221.3468223.9951 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.
We are subject to certain employee severance obligations, which may result in an increase in our expenditures.
Under Israeli law, employers are required to make severance payments to dismissed employees and employees leaving employment in certain other circumstances, on the basis of the latest monthly salary for each year of service. This obligation results in an increase in our expenses, including accrued expenses. Integrity Israel currently makes monthly deposits to insurance policies and severance pay funds in order to provide for this liability.
The Company’s and its Israeli subsidiary’s agreements with all of their Israeli employees are in accordance with Section 14 of the Israeli Severance Pay Law -1963 (“Section 14”). Payments in accordance with Section 14 release the Company from any other future severance payments in respect of those employees. Deposits under Section 14 are not recorded as an asset in the Company’s balance sheet.
There is a limited trading market for our common stock, which may make it difficult for our stockholders to sell their shares.
Although our stock is quoted on the OTCQB, few trades in our stock have taken place, to-date, and an active trading market in our securities may not develop, or if developed, may not be sustained. If no active market is ever developed for our Common Stock, it will be difficult for you to sell any shares you purchase in our Company at the time you wish to sell them or at a price that you consider reasonable or at all. In such a case, you may find that you are unable to achieve any benefit from your investment or liquidate your shares without considerable delay, if at all. In the absence of an active public trading market, an investor may be unable to liquidate an investment in our Common Stock. As a result, investors: (i) may be precluded from transferring their shares of Common Stock; (ii) may have to hold their shares of Common Stock for an indefinite period of time; and (iii) must be able to bear the complete economic risk of losing their investment in us. In the event a market should develop for the Common Stock, there can be no assurance that the market price will equal or exceed the price paid for such share by any of our stockholders.
There may be limitations on the effectiveness of our internal controls, and a failure of our control systems to prevent error or fraud may materially harm our company.
Proper systems of internal controls over financial accounting and disclosure are critical to the operation of a public company. If we are unable to effectively establish such systems, this would leave us without the ability to reliably assimilate and compile financial information about our company and significantly impair our ability to prevent error and detect fraud, all of which would have a negative impact on our company from many perspectives.
Moreover, we do not expect that disclosure controls or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could materially adversely impact us.
The market price of our common stock may fluctuate significantly.
The market price of the common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:
| the announcement of new products or product enhancements by us or our competitors; |
| developments concerning intellectual property rights and regulatory approvals; |
| variations in our and our competitors’ results of operations; |
| changes in earnings estimates or recommendations by securities analysts, if the common stock is covered by analysts; |
| developments in the medical device industry; |
| the results of product liability or intellectual property lawsuits; |
| future issuances of common stock or other securities; |
| the addition or departure of key personnel; |
| announcements by us or our competitors of acquisitions, investments or strategic alliances; and |
| general market conditions and other factors, including factors unrelated to our operating performance. |
Further, in recent years, the stock market in general, and the market for medical device companies in particular, have experienced extreme price and volume fluctuations. Continued or renewed market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of the common stock. Price volatility of our common stock might be significant if the trading volume of the common stock is low, which often occurs with respect to newly traded securities on the OTCQB.
Future sales of common stock could reduce our stock price.
As of March 30, 2018,April 15, 2019, we had 7,257,348146,689,805 shares of common stock outstanding. In addition, the shares of Preferred Stock, Warrantswarrants and employees’ stock options outstanding on such date were convertible into, or exercisable for, an aggregate of 18,378,13676,109,089 shares of common stock. Pursuant to the registration rights agreement we entered into with certain of our stockholders who participated in the private placement of units of the Company consisting of our Series A Preferred Stock and Warrants to purchase shares of Common Stock and the placement agent agreement entered into with Andrew Garrett, Inc., we have filed a registration statement registering for resale an aggregate of 2,824,471 shares of common stock underlying the Series A Preferred Stock and related Warrants and the placement agent Warrants issued in respect thereof. Pursuant to the registration rights agreement entered into in connection with our sale of the Series B Units, on March 31, 2015 we filed a Registration Statement on Form S-1 registering the resale of an aggregate of 4,818,761 shares of Common Stock underlying the Series B Units and related Warrants and the placement agent Warrants issued in respect thereof. Furthermore, pursuant to the registration rights agreement entered into in connection with our sale of the Series C Units, on November 7, 2017 we filed a Registration Statement on Form S-1 registering the resale of an aggregate of
8,736,198 shares of Common Stock underlying the Series C Units and related Warrants and the placement agent Warrants issued in respect thereof In addition, the shares of Common Stock sold by us in a previous private placement consummated in the period from December 16, 2010 through July 29, 2011 may be eligible for resale without registration in accordance with one or more exceptions under the Securities Act. Sales by stockholders of substantial amounts of shares of Common Stock (pursuant to the registration statement described in the preceding sentence or pursuant to an exemption from registration), the issuance of new shares of Common Stock (or securities convertible into or exercisable for shares of our common stock) by us or the perception that these sales may occur in the future, could materially and adversely affect the market price of the Common Stock.
| 46 |
Because our common stock may beis a “penny stock,” it may be more difficult for investors to sell shares of the common stock, and the market price of the common stock may be adversely affected.
Our common stock may be a penny stock if, among other things, the stock price is below $5.00 per share, it is not listed on a national securities exchange or approved for quotation on the Nasdaq Stock Market or any other national securities exchange or it has not met certain net tangible asset or average revenue requirements. Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk- disclosure document prepared by the SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser and obtain the purchaser’s written agreement to the purchase. Broker-dealers must also provide customers that hold penny stock in their accounts with such broker-dealer a monthly statement containing price and market information relating to the penny stock. If a penny stock is sold to an investor in violation of the penny stock rules, the investor may be able to cancel its purchase and get its money back.
If applicable, the penny stock rules may make it difficult for investors to sell their shares of common stock. Because of the rules and restrictions applicable to a penny stock, there is less trading in penny stocks and the market price of the common stock may be adversely affected. Also, many brokers choose not to participate in penny stock transactions. Accordingly, investors may not always be able to resell their shares of common stock publicly at times and prices that they feel are appropriate.
Compliance with changing regulations concerning corporate governance and public disclosure may result in additional expenses.
There have been changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new regulations promulgated by the SEC and rules promulgated by the national securities exchanges. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity,, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Our directors, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified directors and executive officers, which could harm our business. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, we could be subject to liability under applicable laws or our reputation may be harmed.
Because a certain portion of our expenses is incurred in currencies other than the NIS, our results of operations may be harmed by currency fluctuations and inflation.
The functional currency of Integrity Israel is the NIS, and we pay a substantial portion of our expenses in NIS. However, we expect a portion of our future revenues to be denominated in U.S. dollars or in Euros. As a result, we will be exposed to the currency fluctuation risks relating to the recording of our revenues in NIS. For example, if the NIS strengthens against either the U.S. dollar or the Euro, our reported expenses in NIS may be higher than anticipated. The Israeli rate of inflation has not offset or compounded the effects caused by fluctuations between the NIS and the U.S. dollar or the Euro. To date, we have not engaged in hedging transactions. Although the Israeli rate of inflation has not had a material adverse effect on our financial condition to date, we may, in the future, decide to enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of the currencies mentioned above in relation to the NIS. These measures, however, may not adequately protect us from material adverse effects.
The adoption of the “Conflict Minerals” regulations may adversely affect the manufacturing of our current and future products.
Recent regulatory requirements regarding the use of “conflict minerals” could affect the sourcing and availability of the raw materials used by our third-party manufacturers. We may be subject to costs associated with the new regulations, including for the diligence pertaining to the presence of any conflict minerals used in our products and the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. The impact of the regulations may result in a limited pool of suppliers who provide conflict free minerals, and we cannot assure that we will be able to obtain products in sufficient quantities or at competitive prices. We may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins for the metals used in the products we sell. As a result, we may not be able to obtain the materials necessary to manufacture our products, which could force us to cease production or search for alternative supply sources, possibly at a higher cost. Such disruptions may have a material adverse effect on our business, financial condition, results of operations and cash flows.
Not applicable.
Until mid-December 2015, Integrity Israel leased approximately 3,100 square feet of office space in the city of Ashkelon, Israel as its principal offices and prototype laboratory. Pursuant to a verbal agreement with the landlord, Integrity Israel leased this facility on a monthly basis at a cost of approximately $3,298$2,934 (NIS 11,500 based on an exchange rate of $.2868:1 NIS as of March 28, 2018). Currently, Integrity Israel leases approximately 5,500 square feet of office space in the city of Ashdod, Israel for its principal offices. The lease term began on December 1, 2015 for a period of 5 years which can be extended for an additional 5 years at the option of the Company. Monthly lease payments including maintenance are approximately $10,000. The Company estimates that its minimal rent and maintenance payments will be approximately $120,000 per year over each of the next 5 years. In connection with the lease agreement, Integrity Israel provided the landlord a bank guarantee in the amount of approximately $39,338$36,596 (NIS 137,162 based on the same exchange rate)rate of $.2668:1 NIS as of December 31, 2018) that can be exercised by the landlord in the case Integrity Israel fails to pay the monthly rent payments. The guarantee is renewed on an annual basis for a period of 5 years and is secured by funds on deposit with the bank, which generally must be sufficient to cover the principal amount guarantee.
We are not presently a party to any material litigation. We may, however, become involved in litigation from time to time relating to claims arising in the ordinary course of our business. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
Not applicable.
51
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Trading Market
quotedHolders on the OTCQB under the symbol “IGAP.” Although our common stock is traded on the OTCQB, there is no established public trading market for our common stock due to limited and sporadic quotations.
| Quarter Ended | High Bid | Low Bid | ||||||
| December 31, 2017 | $ | 4.75 | $ | 1.80 | ||||
| September 30, 2017 | $ | 6.00 | $ | 1.00 | ||||
| June 30, 2017 | $ | 2.30 | $ | 1.93 | ||||
| March 31, 2017 | $ | 2.60 | $ | 1.83 | ||||
| December 31, 2016 | $ | 3.09 | $ | 2.30 | ||||
| September 30, 2016 | $ | 3.75 | $ | 1.70 | ||||
| June 30, 2016 | $ | 4.50 | $ | 3.25 | ||||
| March 31, 2016 | $ | 4.50 | $ | 2.00 | ||||
As of March 30, 2018,April 15, 2019, there were approximately 365378 holders of record of our Common Stock.
Dividends
We have never declared or paid any cash dividends on our Common Stock and do not anticipate paying any dividends on our Common Stock in the foreseeable future. Any cash that might be available for payment of dividends will be used to expand our business. Payments of any cash dividends in the future will depend on our financial condition, results of operation and capital requirements, as well as other factors deemed relevant to our Board. Furthermore, pursuant to the certificate of designations, preferences and rights governing the Series C Preferred Stock (the “Series C Certificate of Designations”), as long as any shares of Series C Preferred Stock are outstanding, without the written consent
As a result of the holders offorced conversion approved by our shareholders as discussed above, all dividends and interest due as a majority in stated valueresult of the then outstanding Series C Preferred Stock, we will not be permitted to, among other things, pay dividendslate payment were paid if full on or otherwise make distributions in respect of any shares of our Common Stock or other securities junior to the Series C Preferred Stock.
Not required for smaller reporting companies.
Prospective investors should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notesandother financial information included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis..
Overview
We are a medical device company focused on the design, development and commercialization of non-invasive glucose monitoring devices for use by people with diabetes. 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 blood glucose monitor, the GlucoTrack® model DF-F glucose monitoring device, which is designed to help people with diabetes obtain blood 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 blood 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.
On June 4, 2013, we received initial CE Mark approval for the GlucoTrack® model DF-F non-invasive glucose monitoring device from DEKRA Certification B.V., our European notified body (the “Notified Body”). In March 2014, we received CE Mark approval for six months’ calibration validity of the same device. Receipt of the CE Mark allows us to market and sell the GlucoTrack® model DF-F glucose monitoring device in European Union (“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 additional 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.
On August 31, 2015, we received approval from the Notified Body for improvements to the GlucoTrack® model DF-F which 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 persons 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. 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). 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 CE-mark review process of future GlucoTrack® model DF-F enhancements or revisions. 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 improve the time to market for product sales on new, enhanced or modified GlucoTrack® model DF-F devices.
In addition to the improvements to the GlucoTrack® model DF-F described above, we have also continued to work on additional improvements to the device and the development of new devices and, subject to our raising sufficient funds to do so, intend to continue these efforts in 2018.2019. Specifically, we developed wireless communication module (WLM) with embedded Bluetooth Low-Energy (BLE) and Wi-Fi technologies, which we expect will enable transmission of measurement data captured by the GlucoTrack® model DF-F to a cloud-based server. We also started to design the next generation of GlucoTrack®.
Going Concern
We have not yet generated material revenues from our operations and, as of December 31, 2017,2018, the Company has incurred accumulated deficit of $47,368,612, stockholder's deficit of $16,574,933$87,186,783, stockholder’s deficit of $2,873,301 and negative operating cash flows. We currently have no material sources of recurring revenue and therefor 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, our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. 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. As applicable to the consolidated financial statements included elsewhere in this report, the most significant estimates and assumptions relate to (i) the fair value estimate of the Warrants with down-round protection, (ii)until December 31,2017 and the allocationmeasurement of the proceeds and the related issuance costs of the Series C Units, (iii)benefit to warrants with down round protection upon trigger event commencing January 1,2018, (ii) the going concern assumptions, (iv)(iii) measurement of stock based compensation, and (v)(iv) determination of net realizable value of inventory.
Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included elsewhere in this report. Our management believes that, as for the financial statements for the periods included in this report, the going concern assessment is a critical accounting policy. 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 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. As a result, our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Recently Issued Accounting Pronouncements
1. Accounting Standard Update 2014-09, “Revenue from Contracts with Customers”
Commencing January 1, 2018, the FASB issuedCompany adopted Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("(“ASU 2014-09"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”)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.
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 amendments in Part 1 of ASU 2017-11 should be applied in either retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the fiscal year of adoption (‘Modified retrospective approach’), or retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented (‘Full Retrospective approach’) with a cumulative-effect adjustment to the statement of financial position as of the beginning of the earliest fiscal year presented.
The Company elected to early apply ASU 2017-11, using the Modified retrospective approach. Accordingly, the Company recognized, a cumulative-effect adjustment to the statement of financial position as of January 1, 2018. The company reclassified to Additional paid-in capital (APIC) the remaining balance related to outstanding warrants with down round that was presented as a derivative liability at December 31, 2017 (in the amount of $768,249). Further, the company recorded an increase to APIC in an amount of 2,505,723 and a decrease in the same amount to accumulated deficit, in order to reflect the amount that would have been reported if ASU 2017-11 was in effect at the issuance and throughout the term of the financial instruments outstanding, that are subject to the provisions of ASU 2017-11. Such amount reflects the cancelation of the aggregate periodic changes in fair value of the warrants with down-round protection that were previously recognized as financing expense or financing income and recognition of the value of the effect of the round down feature when it was triggered.
Under the application approach applied by the Company, comparative periods were not required to be restated.
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 2017-112018-07 on its financial statements. Although this process has not been completed, managements believes
4. Accounting Standards Update 2016-02, "Leases"
In February 2016, the FASB issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).
Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1. A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and, 2. A right-of-use asset, which is an asset that its provisions might impactrepresents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.
Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year Company). Early application is permitted for all public business entities upon issuance.
Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial instruments issued bystatements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
The Company has completed an initial assessment of the potential impact on its consolidated financial statements. The Company expects that include down-round protection.
Results of Operations
The following discussion of our operating results explains material changes in our results of operations for the years ended December 31, 2017, December 31, 20162018 and December 31, 2015.2017. The discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report.
Year Ended December 31, 20172018 Compared to Year Ended December 31, 2016
During the year ended December 31, 2017,2018, we had revenues of $589,462$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 $611,689$589,462 for the prior-year period. The decrease in revenues is not material.
Research and development expenses
Research and development expenses were $3,207,466$3,032,863 for the year ended December 31, 2017,2018, as compared to $2,881,817$3,207,466 for the prior-year period. The increasedecrease is mainly attributable primarily to an allowance recorded for slow moving inventory in the amountcompletion of $756,134 during 2017 and offset by our efforts to obtain regulatory approvalclinical trials for the GlucoTrack® model DF-F in China which occurred during 2016.
Research and development expenses consist primarily of salaries and other personnel-related expenses, including stock-based compensation expenses, materials, (including provision for slow inventory), 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 in 20182019 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 $1,525,168$1,092,462 for the year ended December 31, 2017,2018, as compared to $1,127,915$1,525,168 for the prior-year period. The increasedecrease is primarily attributable to the hiring of our Chief Commercialization Officer during June 2017 and the related signing bonus and stock-based compensation associated with his employment. In addition, we incurred higher travel costs for ourCompany’s decision to reduce its business development team during 2017.
Selling and marketing expenses consist primarily of professional services, 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 in 20182019 and beyond as we continue our focus on marketing and sales of the GlucoTrack® model DF-F.
General and administrative expenses
General and administrative expenses were $6,432,679$2,456,763 for the year ended December 31, 2017,2018, as compared to $2,257,799$6,432,679 for the prior-year period. The increasedecrease is attributable to severance paid tothe departure of our former Chairman and CEO during 2018 which resulted in a reversal of approximately $162,000 as well as stock-basedstock based compensation in the amount of $262,000.approximately $1.1 Million, In addition, the increasedecrease is attributable to a one time signing bonus of $412,500 including employer payroll taxes and stock-based compensation in the amount of approximately $1,591,000 paid to our newformer Chairman and CEO, recruiting fees of $195,000 and the related professional fees associated with the changes in management.management which occurred during 2017. The Company also incurred approximately $327,000 related to stock-based compensation and fees paid to our Board members and $193,000 to key executives.executives paid in 2017. We also incurred higher legal fees related to the filing of an S-1 in November of 2017 to register the Series C units and additional fees related to the AGI agreement described above.
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.
57
Financing income,expense, net was $247,045$176,820 for the year ended December 31, 2017,2018, as compared to financing income, net of $246,105$247,045 for the prior-year period. For the year ended December 31, 2018 the Company incurred a penalty related due to late payment of dividends in the amount of 127,057. The change was not material.income during the year ended December 31, 2017 mainly relates to the decrease in the value of the Placement Agent Warrants. In accordance with U.S. GAAP, we mark the Series A Warrants andmarked the Placement Agent Warrants to market on a quarterly basis based on the fair value estimate derived by using a binomial pricingBlack and Scholes model, with the changes in fair value recognized as finance expense or income, as applicable, in our consolidated statement of operations.
As a result of the early adoption of ASU 2017-11 the company reclassified all the warrants with down round protection (warrants held by the placement agent) from long term liabilities to stockholder’s deficit and as a result we stopped measuring the Placement Agent Warrants to fair value through earnings since January 1, 2018
Net Income (Loss)
Net loss was $(10,328,806)$6,715,420 for the year ended December 31, 2017,2018, as compared to a net loss of $(5,409,737) for the prior-year period. The increase in net loss is attributable primarily to the increase in our research and development, selling and marketing and general and administrative expenses , as described above.
Liquidity and Capital Resources
As of December 31, 2017,2018, and March 30, 2018,December 31, 2017, cash on hand was approximately $54,000$97,079 and $332,000,$53,782, respectively. During the first quarter of 2018 and 2017, we received aggregate net proceeds of approximately $1.690$5.0 million and $377 thousand (net of related cash expenses) from the issuance and sale of Series D Units. During 2017, we received aggregate net proceeds of approximately $5.4 million (net of related cash expenses) from the first quarterissuance and sale of Series C Units. During 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 one month 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 us NIS 176,000 ($50,76446,958 based on the exchange rate of 3.4673.748 NIS/dollar as of December 31, 2017)2018) in May 2002 pursuant to an oral agreement. Messrs. Nir Tarlovsky, Yitzhak Fisher and Asher Kugler loaned us NIS 336,300 ($97,00089,728 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 statement of operations. At such time, the loans are to be repaid on a quarterly basis in an amount equal to 10% of our total sales after deduction of VAT in the relevant quarter, beginning 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 abovementioned mechanism, we will not be required to repay the loans during any time when such repayment would cause a deficit in our working capital. The Israeli Consumer Price Index was 177.6386, and 178.5793, respectively, as of the dates of the Gal/Cohen Loan and the Tarlovsky/Fisher/Kugler Loan. As of December 31, 2017,2018, the Israeli Consumer Price Index, was 221.3468.223.9951. Our Board 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.
We are required to pay royalties to the Office of the Chief Scientist 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 December 31, 2017,2018, the contingent liability with respect to royalty payment on future sales equals to approximately $36,083,$49,879, excluding interest.
Year Ended December 31, 20172018 Compared to Year Ended December 31, 20162017
Net Cash Used in Operating Activities for the Years Ended December 31, 20172018 and December 31, 2016
Net cash used in operating activities was $5,895,119$4,892,277 and $5,311,830$5,895,014 for the years ended December 31, 20172018 and 2016,2017, respectively. Net cash used in operating activities primarily reflects the net loss for those periods of $6,715,420 and $10,328,806, and $5,409,737, respectively. Net cash used in operating activities was partially offset byIn addition, the one-time chargescompany incurred a reduction in the amountstock based compensation of $211,077 representing the incremental fair market value adjustments in respect of modified warrants issued to AGI during the year ended December 31, 2016 and partially offset by the decrease of $2,672,174 related to stock-based compensation as described above in general and administrative expenses. Net increase in operating assets and liabilities during the year ended December 31, 2017 increased our net cash used in operating activitiesapproximately $2.0 for the year ended December 31, 2017 by $1,958,043,2018 of which resulted primarily from deferralapproximately $1.1M was related to the departure of payments to suppliers in the amount of $620,978 and the write down of inventory in the amount of 756,134 for slow moving items.
Net Cash Used in Investing Activities for the Years Ended December 31, 20172018 and December 31, 2016
Net cash used in investing activities was $19,467$5,371 and $76,455$19,467 for the years ended December 31, 20172018 and 2016,2017, respectively. During the years ended December 31, 20172018 and 2016,2017, cash used in investment activities consisted of equipment purchases (such as computers, research and development and office equipment) in the amount of $5,371 and $19,467, and $76,455, respectively.
Net Cash Provided by Financing Activities for the Years Ended December 31, 20172018 and December 31, 2016
Net cash provided by financing activities was $5,750,736$4,961,862 and $4,936,556$5,750,736 for the years ended December 31, 2018 and 2017, and 2016, respectively. Cash provided by financing activities for the year ended December 31, 2018 reflected net capital raised from the issuance of Series D Units. Cash provided by financing activities for the year ended December 31, 2017 reflected net capital raised from the issuance of Series C Units and Series D Units in the amounts of $5,379,217 and $377,250, respectively. Cash provided by financing activities for the year ended December 31, 2016 reflected net capital raised from the issuance of Series C Units in the amounts of $4,950,085,respectively, offset partially by dividends paid to the holders of our Preferred Stock in the amounts of $13,529.
Off-Balance Sheet Arrangements
As of December 31, 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.
The financial statements required by this Item 8 are filed herewith commencing on page F-1 hereto and are incorporated herein by reference.
None.
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 December 31, 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 SEC’s rules and forms. 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 December 31, 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.
61
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — the 2013 Integrated Framework. Management has concluded that, as of December 31, 2017,2018, its internal control over financial reporting was effective based on these criteria.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errorerrors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of ourthe Company’s independent registered public accounting firm because we are a smaller reporting company.
None.
62
OUR DIRECTORS
The table below sets forth (1) the names and ages of our Directors as of December 31, 2017,the date of this Registration Statement, (2) all positions with the Company presently held by each such person and (3) the positions held by, and principal areas of responsibility of, each such person during the last five years.
Name | Age | Position | ||
| Dr. Robert Fischell | Director, Member of the Audit Committee and Compensation, | |||
| 66 | Director,President and Chief Operating Officer | |||
| Angela Strand | 51 | Vice Chairperson, Chair of the Compensation, | ||
Revan Schwartz | Director, Chair of the Audit Committee | |||
Michael Hauck | Director, Member of the Compensation, |
Dr. Robert Fischellhas served as one of Integrity’s directors since 2010. He also serves on Integrity’s Compenation, Nominating and Corporate Governance Committee and Compensationa member of the Audit Committee. Dr. Fischell is an inventor and serial entrepreneur with over 160 issued U.S. patents. Starting in 1959, Dr. Fischell spent over 30 years with the Johns Hopkins University Applied Physics Laboratory, which resulted in 53 patents in both aerospace and biomedical technology. His interests at Johns Hopkins then turned to the invention of new medical devices such as pacemakers and implantable heart defibrillators. Starting in 1969, Dr. Fischell began the formation of 14 private companies that licensed his patents on medical devices. These companies include Pacesetter Systems, Inc. (purchased by Siemens and now part of St. Jude Medical, Inc.), IsoStent, Inc. (merged with Cordis Company, a Johnson and Johnson Company), NeuroPace, Inc., Neuralieve, Inc., Angel Medical Systems, Inc., and Svelte Medical Systems, Inc. As it relates to diabetes management devices, he was the inventor of the first implantable insulin pump (which became Minimed, which was sold to Medtronic). Dr. Fischell’s honors include Inventor of the Year for the USA in 1984, election to the National Academy of Engineering in 1989, the Distinguished Physics Alumnus Award of the University of Maryland, and several medals for distinguished accomplishments in science, engineering and innovation. In 2004, Discover magazine gave Dr. Fischell their annual Technology for Humanity award. In 2008, Dr. Fischell received the honorary degree of Doctor of Humane Letters from the Johns Hopkins University in recognition of his many lifesaving inventions. From June 2009 until March 2011, Dr. Fischell was a director of InspireMD, Inc. (OTCBB: NSPR), a medical device company focusing on the development and commercialization of its proprietary stent system, MGuard. Dr. Fischell received his BSME degree from Duke University and MS and Sc.D. degrees from the University of Maryland.
Sami Sassoun joined Integrity in February 2017 as its Chief Financial Officer. Prior to joining Integrity, Mr. Sassoun served as the Founder of Bedrock Enterprises Ltd., a boutique consulting firm. Previously Mr. Sassoun held the position of chief financial officer for multiple public and private companies in several industries. Mr. Sassoun served as the CFO of EZTD Inc. from 2014 until 2015. Prior to that Mr. Sassoun served as a Managing Director of YesCFO from 2010 to 2014. Mr. Sassoun began his career as an accountant with Cohn Reznick, an accounting, tax and advisory firm, followed by serving as the Vice President of finance and operations with Brean Murray & Co, an investment banking firm based in New York City. Mr. Sassoun obtained his Certified Public Accountant certificate in 1992, and holds a B.S. in accounting from Rutgers University.
Angela Strand has served as one of Integrity’s directors since March 2016 and was appointed Vice Chairperson of the Board in March of 2017. Ms. Strand also serves as Integrity’s Chairperson of the Compensation, Nominating and Corporate Governance Committee and a member of the Audit Committee. Ms. Strand previously served as a founder and senior executive of Nohm, a joint venture between Smith Electric Vehicles and FDG Electric Vehicles Ltd. (HK: 729HK), and the founder of Strand Strategy, a healthcare management and consulting firm. Ms. Strand is also a named inventor with seven issued patents. From 2011 to 2015, Ms. Strand served as the chief marketing officer and head of business development and government affairs for Smith Electric Vehicles. Ms. Strand has also served as vice president of market development for Proteus Digital Health, and in various executive roles at Aerogen (acquired by Nektar Therapeutics, NASDAQ:NKTR), Novacept (acquired by Cytyc, NASDAQ: CYTC, now NASDAQ: HOLX) and FemRx (acquired by Johnson & Johnson, NYSE: JNJ). Ms. Strand holds a B.Sc. in Communications and an MBA in Marketing from the University of Tennessee.
Revan Schwartz, JDhas served as one of Integrity’s directors since November 2016. He is also Chair of Integrity’s Audit Committee. Mr. Schwartz was appointed to the Board of Directors by Andrew Garrett, Inc. (“AGI”), pursuant to the terms of a placement agent agreement executed by AGI and the Company. Mr. Schwartz is an attorney and currently maintains a private law practice. Mr. Schwartz has acted as a sole practitioner lawyer for the last five years. Mr. Schwartz has more than 30 years of experience in corporate and securities law. He held the position of General Counsel for AAA Computer, Hafco International Trading Corporation, Bermil Industries, Viking Credit Corp and The Pride Group. Most recently, Mr. Schwartz was Executive Vice President and General Counsel for Andrew Garrett, Inc., a boutique securities and investment banking firm. While with Andrew Garrett, Mr. Schwartz possessed NASD/FINRA Series 4, 7, 24, 27, 53 and 55 licenses. Mr. Schwartz began his career with the East New York Savings Bank (ENYSB) where he held several administrative and management positions, including a position overseeing a life insurance subsidiary. Mr. Schwartz received a BS, with a major in accounting and a minor in economics, summa cum laude, from New York Institute of Technology, and a JD, cum laude, from St. John’s University. Mr. Schwartz is currently a member of the New York Bar.
Michael Hauck has served on our board since May 2017. Mr. Hauck also serves on Integrity’s Compensation, Nominating and Corporate Governance Committee. He is the Executive Director of The Getz Group, a $1 billion privately owned pan-Asian trading company focused on healthcare, industrial products, consumer distribution and retailing. Mr. Hauck has previously held executive and director level positions at companies including, ERM, Interpharma Investments Ltd., Zuellig Pharma Group, Invida Holdings, Target Worldwide Express, 3i plc, Springboard, and Business Health Group Ltd. Additionally, he has served as CEO of Walsh International for eight years, where he led the company’s IPO and eventual sale to IMS Health. Through his extensive leadership experience, Mr. Hauck has developed expertise across a wide range of industries and functions, including healthcare distribution services, product launch, and commercialization; pharma, medical device, consumer health, and wellness; data aggregation and data solutions; business development, mergers and acquisitions; and personnel and finance. Mr. Hauck received an MA in politics, philosophy, and economics from St. Catherine’s College, Oxford University, as well as an MBA in marketing and finance from Cranfield School of Management, one of the oldest and most reputable business schools in the United Kingdom.
OUR EXECUTIVE OFFICERS
The table below sets forth the names and ages of our executive officers as of April 15, 2019 and all positions with the Company presently held by each such person. Immediately following the table is biographical information for each of our executive officers, including the positions held by, and principal areas of responsibility of, each such person during the last five years. Biographical information for Mr. Podwalski is included above under the caption “Our Directors.”
| Name | Age | Position | ||
| David Podwalski | 66 | Chief Operating Officer and President | ||
| David Malka | 53 | Vice President of Operations | ||
| Sami Sassoun | 51 | Chief Financial Officer | ||
| Eugene Naidis | 51 | Vice President of Research and Development |
David Malkahas served as Integrity’s Vice President of Operations since March 2012. From 2003 to 2012, Mr. Malka was a director and Integrity’s Vice President of Operations. Prior to joining us, Mr. Malka served as a vice president of operations for Solid Systems from 2000 to 2003. From 1994 to 2000, Mr. Malka served as a manager of production and purchasing at Kollmorgen-Servotronix, an Israeli company specializing in the design, development and manufacture of digital servo control systems. From 1991 to 1993, Mr. Malka was a production design and inspection worker at TFL Time & Frequency Systems Ltd. Mr. Malka has a degree in practical engineering - industrial management from the Institute of Work & Production Productivity, Tel-Aviv and a Bachelor of Arts degree in management from the Open University in Israel.
Sami Sassounjoined Integrity in February 2017 as its Chief Financial Officer. Prior to joining Integrity, Mr. Sassoun served as the Founder of Bedrock Enterprises Ltd., a boutique consulting firm. Previously Mr. Sassoun held the position of chief financial officer for multiple public and private companies in several industries. Mr. Sassoun served as the CFO of EZTD Inc. from 2014 until 2015. Prior to that Mr. Sassoun served as a Managing Director of YesCFO from 2010 to 2014. Mr. Sassoun began his career as an accountant with Cohn Reznick, an accounting, tax and advisory firm, followed by serving as the Vice President of finance and operations with Brean Murray & Co, an investment banking firm based in New York City. Mr. Sassoun obtained his Certified Public Accountant certificate in 1992, and holds a B.S. in accounting from Rutgers University.
Eugene Naidis has served as Integrity’s Vice President of Research and Development since 2010 and has an extensive experience in software development and management of R&D projects. Over the past 15 years, he has lead complex projects in the field of industrial and medical measurement devices and applications. Mr. Naidis was involved (software development and management) in the invention of a symbiotic approach, revolutionary vibration-based percussion technology to determine the presence of content inside pipes; electromagnetic based, high-precision thickness measurement system; a system for non-contact, continuous measurement of liquid and solid levels in storage containers, based on ultrasonic technology. Mr. Naidis holds BSc. in Metallurgy Engineering and Masters of Science in Metallurgy and Computer Engineering.
CORPORATE GOVERNANCE
requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes of ownership with the SEC. Our officers, directors and 10% shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms so filed.
Integrity has adopted a code of ethics that applies to its Chief Executive Officer and its senior financial officers (currently consisting only of the Chief Financial Officer). This code of ethics is available on Integrity’s website atwww.integrity-app.com. If Integrity makes any substantive amendments to the code or grants any waiver, including any implicit waiver, from a provision of the code to its principal executive, financial or accounting officer, it will disclose the nature of the amendment or waiver on its website or in a report on a Current Report on Form 8-K filed in accordance with the rules and regulations of the SEC. The Company will provide to any person without charge, upon five days’ written request, a copy of the code of ethics.
Compensation,Nominating and Corporate Governance Committee
The members of the Compensation, Nominating and Corporate Governance Committee of the Board are Ms. Angela Strand (Chairperson), Mr. Robert Fischell and Mr. Michael Hauck. Our Board has determined that these directors are “independent” as defined by the rules of the SEC. The purposes and powers of the Compensation, Nominating and Corporate Governance Committee include (i) reviewing compensation and other benefits for our executive officers (ii) identifying potential qualified nominees for director and recommend to the Board for nomination candidates for the Board, (ii)(iii) developing the Company'sCompany’s corporate governance guidelines and additional corporate governance policies, and (iii)(iv) exercising such other powers and authority as shall from time to time be assigned thereto by resolution of the Board. The Compensation, Nominating and Corporate Governance Committee adopted the Compensation, Nominating and Corporate Governance Committee charter on July 5, 2016, which sets forth the duties and responsibilities of the Nominating and Corporate Governance Committee.
Audit Committee and Audit Committee Financial Expert
The members of the Audit Committee of the Board are Mr. Revan Schwartz (Chairman), Mr. Leslie Seff and Ms. Angela Strand.Strand and Mr. Robert Fischell, replacing Mr. Les Seff. Our Board has determined that allthese three of these directors are “independent” as defined by the rules of the SEC. The primary role of the Committee is to oversee the financial reporting and disclosure process. To fulfill this obligation, the Committee relies on: management for the preparation and accuracy of the Company’s financial statements; both management and the Company’s internal audit department/management for establishing effective internal controls and procedures to ensure the Company'sCompany’s compliance with accounting standards, financial reporting procedures and applicable laws and regulations; and the Company’s independent auditors for an unbiased, diligent audit or review, as applicable, of the functions of the audit committee are performed by the full Board. Each member of the Committee shall be independent in accordance with the requirements of Rule 10A-3 of the Exchange Act and the NASDAQ Listing Rules. No member of the Committee can have participated in the preparation of the Company'sCompany’s or any of its subsidiaries'subsidiaries’ financial statements at any time during the past three years.
The Board has determined that Mr. Schwartz is an “Audit Committee Financial Expert” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K.
| 61 |
66
Summary Compensation Table
The following table summarizes compensation of our named executive officers, as of December 31, 20172018 and 2016.
| Name and Principal Position | Year | Salary | Signing Bonus | Option Awards | All other Compensation | Total Compensation | ||||||||||||||||
| John Graham | 2017 | $ | 266,449 | $ | 375,000 | $ | 1,590,635 | - | $ | 2,232,084 | ||||||||||||
| Chief Financial Officer | 2016 | - | - | - | - | - | ||||||||||||||||
| David Podwalski | 2017 | $ | 94,545 | $ | 130,814 | - | $ | 225,359 | ||||||||||||||
| Chief Commercialization Officer | 2016 | - | - | - | - | - | ||||||||||||||||
| Sami Sassoun | 2017 (1) | $ | 109,276 | $ | - | $ | 82,432 | $ | 64,013 | (2 | ) | $ | 255,721 | |||||||||
| Chief Financial Officer | 2016 (5) | - | - | - | - | - | ||||||||||||||||
| David Malka | 2017 (1) | $ | 105,000 | $ | 110,904 | $ | 67,385 | (3 | ) | $ | 283,289 | |||||||||||
| Vice President of Operations | 2016 (5) | $ | 63,114 | $ | - | $ | - | $ | 48,046 | (6 | ) | $ | 111,160 | |||||||||
| Eugene Naidis | 2017 (1) | $ | 96,418 | $ | - | $ | 82,432 | $ | 49,326 | (4 | ) | $ | 228,176 | |||||||||
| Vice President of R&D | 2016 (5) | $ | 79,656 | $ | - | $ | 40,776 | (7 | ) | $ | 120,432 | |||||||||||
| Name and Principal Position | Year | Salary | Bonus | Option Awards | All other Compensation | Total Compensation | |||||||||||||||||
| David Podwalski | 2018 | $ | 245,833 | $ | 25,000 | (11) | $ | 100,960 | $ | 20,300 | (1) | $ | 392,093 | ||||||||||
| President | 2017 | $ | 94,545 | - | $ | 130,814 | $ | 7,298 | (6) | $ | 232,657 | ||||||||||||
| John Graham, Former CEO | 2018 | $ | 417,000 | $ | 225,000 | (14) | $ | 592,766 | $ | $ | 1,234,766 | ||||||||||||
| 2017 | $ | 266,449 | $ | 375,000 | (14) | $ | 1,590,635 | $ | $ | 2,232,084 | |||||||||||||
| Sami Sassoun | 2018 | (2) | $ | 144,262 | $ | 37,389 | (12) | $ | 131,297 | $ | 63,469 | (3) | $ | 376,417 | |||||||||
| Chief Financial Officer | 2017 | (7) | $ | 109,276 | $ | - | $ | 82,432 | $ | 64,013 | (8) | $ | 255,720 | ||||||||||
| David Malka | 2018 | (2) | $ | 134,103 | $ | 69,922 | (13) | $ | 130,111 | $ | 68,132 | (4) | $ | 402,268 | |||||||||
| Vice President of Operations | 2017 | (7) | $ | 105,000 | $ | - | $ | 110,904 | $ | 67,385 | (9) | $ | 283,288 | ||||||||||
| Eugene Naidis | 2018 | (2) | $ | 109,959 | $ | - | $ | 131,297 | $ | 50,197 | (5) | $ | 291,453 | ||||||||||
| Vice President of R&D | 2017 | (7) | $ | 96,418 | $ | - | $ | 82,432 | $ | 49,326 | (10) | $ | 228,176 | ||||||||||
| (1) | |
| (2) | Calculated based on the average exchange rate for the year of New Israeli Shekels to U.S. Dollars of NIS 3.604 = U.S. $1.00 |
| (3) | Includes $18,336 in automobile expenses paid by Integrity, including leasing costs, insurance premiums, gasoline and/or repairs incurred in connection with the executive’s automobile, $333 in cellular communications expenses paid by Integrity, representing the estimated costs of our cellular communications expenses attributable to the executive, $17,527 in tax gross-up payments, and contributions to the (a) Severance Pay- Fund, (b) retirement plan feature of Managers’ Insurance (Kupat Gemel), (c) disability insurance (Ovdan Kosher Avoda) and (d) and statutory national insurance (Bituach Leumi) in the aggregate total amount of $27,817. |
| (4) | Includes $22,501 in automobile expenses paid by Integrity, including leasing costs, insurance premiums, gasoline and/or repairs incurred in connection with the executive’s automobile, $333 in cellular communications expenses paid by Integrity, representing the estimated costs of our cellular communications expenses attributable to the executive, $17,770 in tax gross-up payments, and contributions to the (a) Severance Pay- Fund, (b) retirement plan feature of Managers’ Insurance (Kupat Gemel), (c) disability insurance (Ovdan Kosher Avoda) and (d) statutory national insurance (Bituach Leumi) in the aggregate total amount of $27,528. |
| (5) | Includes $12,749 in automobile expenses paid by Integrity, including leasing costs, insurance premiums, gasoline and/or repairs incurred in connection with the executive’s automobile, $333 in cellular communications expenses paid by Integrity, representing the estimated costs of our cellular communications expenses attributable to the executive, $14,357 in tax gross-up payments, and contributions to the (a) Severance Pay- Fund, (b) retirement plan feature of Managers’ Insurance (Kupat Gemel), (c) disability insurance (Ovdan Kosher Avoda) and (d) statutory national insurance (Bituach Leumi) in the aggregate total amount of $22,758. |
| (6) | Includes $6,557 in health benefits and $741 cellular telephone expenses. |
| (7) | Calculated based on the average exchange rate for the year of New Israeli Shekels to U.S. Dollars of NIS 3.576 = U.S. $1.00 |
| (8) | Includes $16,107 in automobile expenses paid by Integrity, including leasing costs, insurance premiums, gasoline and/or repairs incurred in connection with the executive’s automobile, $336 in cellular communications expenses paid by Integrity, representing the estimated costs of our cellular communications expenses attributable to the executive, $14,060 in tax gross-up payments, and contributions to the (a) Severance Pay- Fund, (b) retirement plan feature of Managers’ Insurance (Kupat Gemel), (c) disability insurance (Ovdan Kosher Avoda) and (d) and statutory national insurance (Bituach Leumi) in the aggregate total amount of $33,510. |
| (9) | Includes $21,745 in automobile expenses paid by Integrity, including leasing costs, insurance premiums, gasoline and/or repairs incurred in connection with the executive’s automobile, $336 in cellular communications expenses paid by Integrity, representing the estimated costs of our cellular communications expenses attributable to the executive, $14,060 in tax gross-up payments, and contributions to the (a) Severance Pay- Fund, (b) retirement plan feature of Managers’ Insurance (Kupat Gemel), (c) disability insurance (Ovdan Kosher Avoda) and (d) statutory national insurance (Bituach Leumi) in the aggregate total amount of $31,244. |
| (10) | Includes $15,101 in automobile expenses paid by Integrity, including leasing costs, insurance premiums, gasoline and/or repairs incurred in connection with the executive’s automobile, $336 in cellular communications expenses paid by Integrity, representing the estimated costs of our cellular communications expenses attributable to the executive, $10,705 in tax gross-up payments, and contributions to the (a) Severance Pay- Fund, (b) retirement plan feature of Managers’ Insurance (Kupat Gemel), (c) disability insurance (Ovdan Kosher Avoda) and (d) statutory national insurance (Bituach Leumi) in the aggregate total amount of $23,184. |
| (11) | |
| (12) | Represents a performance bonus received by Mr. Sassoun as part of the |
| (13) | Represents a retention bonus received by Mr. Malka as part of |
| (14) | Represents a signing bonus in 2017 and a guaranteed bonus in 2018 received by Mr. Graham as part of the terms in his April 7, 2017 employment agreement. |
Employment Agreements
Set forth below are summaries of the material terms of the employment agreements if each of Integrity’s named executive officers
559,414 options at an exercise price of $5.41 per share vest on the two (2) year anniversary of the Graham Effective Date
, and (5) 844,130 options at an exercise price of $7.75 per share vest on the two (2) year anniversary of the Graham Effective Date. According to the agreement between the Company and Graham, Mr. Graham is also eligible to earn an annual performance bonus between 35-72% of his base salary (of which $225,000 is guaranteed as performance bonus for his first year), subject to certain performance criteria approved and adopted in September 2017 by the Compensation Committee and the Board of Directors and, provided that Mr. Graham continues to be an employee through and on March 15, 2018.
On June 26, 2017, the Company entered into an employment agreement (the “CCO Employment Agreement”) with with Mr. Podwalski to serve as Chief Commercial Officer of the Company. Under the CCO Employment Agreement, Mr. Podwalski (1) receives a base salary of $240,000 per year; (2) receives a sign-on bonus of $25,000, payable on the six month anniversary of the Podwalski Effective Date, subject to his continued employment through and on such payment date; (3) is eligible to receive an annual performance bonus, having a minimum bonus opportunity equal to 20% of his current base salary based upon 80% achievement of performance criteria (the “Minimum Performance Goal”), a target bonus opportunity equal to 25% of his current base salary based upon 100% achievement of performance criteria, and a maximum bonus opportunity equal to 37.5% of his current base salary based upon 150% achievement of performance criteria (the “Maximum Performance Goal”), provided, however, that such performance bonus will be determined using straight-line interpolation of the level of achievement between the Minimum Performance Goal and the Maximum Performance Goal; and (4) receive an initial stock option grant to purchase shares of Common Stock equal to 1% of the total fully diluted shares of Common Stock as of the Podwalski Effective Date, with an exercise price of $4.50 per share or the fair market value of a share of Common Stock on the grant date, whichever is greater, vesting monthly over a three year period commencing on the Podwalski Effective Date, subject to his continued employment through and on each such vesting date (the total fair value of the grant as of the Podwalski Effective Date is approximately $270,000).The CCO Employment Agreement is terminable by the Company on 90 days written notice and by Mr. Podwalski on 30 days written notice. The CCO Employment Agreement is immediately terminable by the Company for cause, as defined in the CCO Employment Agreement, without the payment of severance. The CCO Employment Agreement contains non-compete obligations applicable during the term of the agreement and for one year thereafter and confidentiality obligations that survive the termination of the agreement indefinitely
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.
As a result, 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 were 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
68
David Malka entered into an employment agreement with Integrity Israel in July 2010 pursuant to which Mr. Malka agreed to continue to serve as the Vice President of Operations of Integrity Israel. Mr. Malka’s employment agreement providesprovided for an annual salary of NIS 240,000, or approximately $68,985$64,034 based on the exchange rate of 3.4793.748 NIS / $1.00 USD in effect on March 21,December 31, 2018, and an annual bonus to be determined by the Board of Directors and an additional sum provided that Mr. Malka reaches certain milestones approved by the Board of Directors, as well as the payment of certain social and insurance benefits and the use of a company car. The agreement also provides that Mr. Malka’s annual salary shall be subject to increase from time to time at the discretion of the Board of Directors. We expect that Mr. Malka’s bonus formula, as previously determined by the Board of Directors, will be renegotiated once Integrity Israel has begun commercialization of its products. The agreement is terminable by either party on 90 days’ notice, immediately by Integrity Israel with the payment of an amount equal to 90 days of annual salary, or immediately by Integrity Israel for cause (as defined in the agreement) without the payment of severance. Mr. Malka’s employment agreement contains non-compete and confidentiality provisions effective during the term of the agreement and for one year thereafter.
Pursuant to his employment agreement, in March 2012, Mr. Malka was granted options to purchase 79,434 shares of Common Stock at an exercise price per share $6.25 per share. Mr. Malka’s options vested (or in the case of clause (iii) below, will vest) in one-third increments upon (i) submission of clinical trials’ results to the Notified Body; (ii) the receipt of CE mark approval; and (iii) the receipt of FDA approval, subject to immediate vesting in the event of a change of control.
Effective April 7, 2017, Integrity Israel entered into an amended and restated personal employment agreement (the “Malka Employment Agreement”) with David Malka for his continued service as Vice President of Operations of the Company and Integrity Israel, effective as of March 20, 2017 (the “Malka Effective Date”). Pursuant to the terms of the Malka Employment Agreement, Mr. Malka (a) receives a monthly base salary of NIS 20,000 (approximately $5,749 based on an exchange rate of 3. 479 NIS / 1 USD in effect on March 21, 2018), which may increase to NIS 35,000 per month (approximately $10,060 using the same exchange rate) in the event certain performance milestones are met; (b) is eligible to earn an annual performance bonus between 420-864% of his base salary, subject to certain performance criteria to be established by the Board of Directors within the first ninety (90) days of each fiscal year; (c) is eligible to earn a retention bonus equal to 60% of his aggregate base salary earned through the one-year anniversary of the Malka Effective Date, payable thirty days following the one-year anniversary of the Malka Effective Date and provided that Mr. Malka remains employed with Integrity Israel through and on the one-year anniversary of the Malka Effective Date; (d) received a modification to the terms of his options to purchase 79,434 shares of Common Stock at an exercise price per share equal to $6.25 whereby the unvested portion of such options will accelerate and will be immediately exercisable, effective as of the Malka Effective Date (since the original performance conditions were not expected to be satisfied as of the date of the modification of the terms, the fair value of such grant was measured based on the fair value of the modified award at the modification date); and (e) received options to purchase361,875 shares ofCommon Stock, granted under the Plan, withan exercise price $4.50 per share, which shall vest over a three-year period. In addition, the Malka Employment Agreement provides for the payment of certain social benefits and the use of a company car. The Malka Employment Agreement is terminable by Integrity Israel and Mr. Malka on 90 days’ prior written notice, without cause, or immediately by Integrity Israel for cause as defined in the Malka Employment Agreement. Integrity Israel may terminate Mr. Malka’s employment without cause prior to the expiration of the 90-day notice period, but will be required to pay Mr. Malka a severance fee equal to his base salary plus the financial value of all other benefits Mr. Malka would have been entitled to receive in respect of the portion of the notice period which was forfeited.
69
Mr. Sassoun’s appointment as Chief Financial Officer was made pursuant to an employment agreement (the “Sassoun Employment Agreement”) with Integrity Israel, dated February 1, 2017. The Sassoun Employment Agreement provides for a monthly base gross salary of NIS 30,000 (approximately $8,623$8,004 based on the exchange rate of NIS 3.4793.748 /$1.00 USD in effect on March 21,December 31, 2018), as well as the payment of certain social benefits and the use of a company car. The Sassoun Employment Agreement is terminable by either party on 90 days’ notice or immediately by Integrity Israel for cause (as defined in the Employment Agreement) without the payment of severance. The Employment Agreement contains non-compete obligations applicable during the term of the agreement and for one year thereafter and confidentiality obligations that survive the termination of the agreement indefinitely.
In September 2017, the Compensation Committee and the Board of Directors approved an increase of Mr. Sassoun’s base salary to NIS 47,250 per month (approximately US$161,513157,500 annually), which shall only start to take effect after the Company has completed the next round of financing and has sufficient funds to finance operations. The Compensation Committee and the Board of Directors also approved certain on-target performance bonus at 35% of Mr. Sassoun annual base salary and grant of stock options (pursuant to the Company’s 2010 Incentive Compensation Plan, as amended) equating to 1% of the fully diluted number of shares of the Company after the closing of the offering of Series C Units, with a strike price of US$4.50, with three-year monthlyquarterly vesting commencing on the first monthquarterly after the effective date.
Eugene Naidis
Eugene Naidis entered into an employment agreement with Integrity Israel in July 2010 pursuant to which Mr. Naidis agreed to continue to serve as the Vice President of Research and Development of Integrity Israel. Mr. Naidis’s employment agreement providesprovided for an annual salary of NIS 276,000, or approximately $79,333$73,639 based on the exchange rate of 3.4793.748 NIS / $1.00 USD in effect on March 21,December 31, 2018, as well as the payment of certain social and insurance benefits and the use of a company car. The agreement also provides that Mr. Naidis’s annual salary shall be subject to increase from time to time at the discretion of the Board of Directors. We expect that Mr. Naidis’s bonus formula, as previously determined by the Board of Directors, will be renegotiated once Integrity Israel has begun commercialization of its products. The agreement is terminable by either party on 90 days’ notice, immediately by Integrity Israel with the payment of an amount equal to 90 days of annual salary, or immediately by Integrity Israel for cause (as defined in the agreement) without the payment of severance. Mr. Naidis’s employment agreement contains non-compete and confidentiality provisions effective during the term of the agreement and for one year thereafter.
In September 2017, the Compensation Committee and the Board of Directors approved an increase of Mr. Naidis’s base salary to NIS 43,200 (US$147,660144,000 annually), which shall only start to take effect after the Company has completed the next round of financing and has sufficient funds to finance operations. The Compensation Committee and the Board of Directors also approved certain on-target performance bonus at 35% Mr. Naidis’s annual base salary and grant of stock options (pursuant to the Company’s 2010 Incentive Compensation Plan, as amended) equating to 1% of the fully diluted number of shares of the Company after the closing of the offering of Series C Units, with a strike price of US$4.50, with three-year monthly vesting commencing on the first month after the effective date.
| 65 |
Outstanding Equity Awards as of December 31, 2017
The following table sets forth for each of Integrity’s named executive officers certain information regarding unexercised options as of December 31, 2017:
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | ||||||||||
| David Podwalski, President | 146,752 | 143,833 | $ | 4.50 | (1) | June 22, 2027 | ||||||||
| Sami Sassoun, Chief Financial Officer | 125,195 | 167,729 | $ | 4.50 | (2) | September 15, 2027 | ||||||||
| David Malka, Vice president of Operations | 288,627 | 152,682 | $ | 4.5-$6.25 | (3) | April 3, 2027 | ||||||||
| Eugene Naidis, Vice President of Research and Development | 125,195 | 167,729 | $ | 4.50 | (4) | September 15, 2027 | ||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price($) | Option Expiration Date | |||||||||
| John Graham, Chief Executive Officer | 1,231,016 | 1,846,524 | $ | 4.5-$7.75 | (1) | March 16, 2027 | |||||||
| David Podwalski, Chief Commercialization Officer | 56,503 | 234,082 | $ | 4.50 | (2) | June 22, 2027 | |||||||
| Sami Sassoun, Chief Financial Officer | 24,410 | 268,514 | $ | 4.50 | (3) | September 15, 2017 | |||||||
| David Malka, Vice president of Operations | 167,891 | 755,673 | $ | 4.5-$6.25 | (4) | April 3, 2027 | |||||||
| Eugene Naidis, Vice President of Research and Development | 24,410 | 268,514 | $ | 4.50 | (5) | September 15, 2017 | |||||||
| (1) |
| Mr. Podwalski’s options vested or will vest in 12 equal quarterly installments beginning June 22, 2017. |
| Mr. Sassoun’s options vested or will vest in 12 equal quarterly installments beginning September 15, 2017. |
| Mr. Malka’s options to purchase 79,434 shares of Common Stock at an exercise price per share equal to $6.25 all vested as of April 3, 2017, pursuant to an amendment to his employment agreement. 361,875 of Mr. Malka’s options vested or will vest in 12 equal quarterly installments beginning April 7, 2017. |
| Mr. Naidis’s options vested or will vest in 12 equal quarterly installments beginning September 15, 2017. |
DIRECTOR COMPENSATION
The following table sets forth information with respect to the compensation of our directors (other than Mr. Gal and Mr. Malka,Podwalski, whom did not receive separate compensation for their service as directors) as of December 31, 2017:
| Name | Fees earned or paid in cash | Payment for services in Common Shares (2) | Other Compensation (3) | Options Awards Vested (1) | Total | |||||||||||||||
| Angela Strand | $ | 38,868 | $ | 15,000 | $ | 60,000 | $ | 21,724 | $ | 135,592 | ||||||||||
| Robert Fischell | $ | 24,150 | $ | 21,724 | $ | 45,874 | ||||||||||||||
| Leslie Seff | $ | 40,200 | $ | 15,000 | $ | 21,724 | $ | 76,924 | ||||||||||||
| Revan Schwartz | $ | 28,333 | $ | 35,249 | $ | 63,582 | ||||||||||||||
| Michael Hauck | $ | 22,900 | $ | 16,821 | $ | 39,721 | ||||||||||||||
| $ | 154,451 | $ | 30,000 | $ | 60,000 | $ | 117,244 | $ | 361,695 | |||||||||||
| Name | Fees earned (2) | Payment for services in Restricted Stock Units (2) | Other Compensation (3) | Options Awards Vested (1) | Total | |||||||||||||||
| Angela Strand | $ | 52,500 | $ | 38,750 | $ | 17,000 | $ | 4,000 | $ | 112,250 | ||||||||||
| Robert Fischell | $ | 45,000 | $ | 18,750 | $ | 4,000 | $ | 67,750 | ||||||||||||
| Revan Schwartz | $ | 47,500 | $ | 18,750 | $ | 7,824 | $ | 74,074 | ||||||||||||
| Michael Hauck | $ | 45,000 | $ | 18,750 | $ | 3,995 | $ | 67,745 | ||||||||||||
| $ | 190,000 | $ | 95,000 | $ | 17,000 | $ | 19,819 | $ | 321,819 | |||||||||||
The dollar value recognized for the stock option awards was determined in accordance with FASB ASC Topic 718. For information on the determination of the fair value of each option granted as of the grant date, and of assumptions made with respect to the value of the option awards, see Note 10 to our Consolidated Financial Statements for the year ended December 31, 2018 and calculated based on 34,227 options outstanding as of December 31, 2018 to all Board members, with the exception of Mr. Hauck whom had 18,005 options outstanding as of December 31, 2018. | ||
| (2) | On May 23, 2017, the Board approved the following compensation for all non-employee directors and interim officers serving on the Board: |
| ● | an annual cash payment to each non-employee director and interim officer of the Company in the amount of $35,000, payable in four equal quarterly installments of $8,750 each on the last day of each calendar quarter commencing with the fourth quarter of 2017, subject to their continued service as of each such date; |
| ● | an additional annual cash payment to each member of a Board |
| ● | an additional annual cash payment to the chairperson of a Board committee in the amount of $12,500, payable in four equal quarterly installments of $3,125 each on the last day of each calendar quarter commencing with the second quarter of 2017, subject to their continued service as of each such date; |
| ● | the grant to each non-employee director and each interim officer of the Company of a one-time award of options to purchase up to an aggregate of 14,894 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), at an exercise price of $4.50, under and pursuant to the Company’s 2010 Incentive Compensation Plan, as amended (the “Plan”), which options vest in 12 equal monthly increments commencing as of June 1, 2017 (subject to their continued service as of each such date) and have a term of 10 | |
| ● | the grant to each non-employee director and each interim officer of the Company of an award of Restricted Stock Units (“RSUs”), to be granted on June 1, 2017 and vesting on June 1, 2018, with a cash value of $45,000 based on the 30-day volume weighted average price of the Company’s Common Stock on June 1, 2017, subject to their continued service on and through such date, and settled on such date as they elect or upon termination of their service with the Company; and | |
| ● | an additional annual cash payment to the vice chairperson of the Board in the amount of $20,000, payable in RSUs under the same vesting terms. On January 22, 2019, the Board approved to combine the Compensation Committee and Nominating and Governance committee into one committee and as a result to increase theannual cash payment to the chairperson of a Board committee to $15,000, payable in four equal quarterly installments of $3,750 and to increase theannual cash payment to each member of a Board committee to $6,500,payable in four equal quarterly installments of $1,625. These fees are payable on the last day of each calendar quarter commencing with the first quarter of 2019, subject to the continued service as of each such date. | |
| (3) | On May 4, 2017, the Board of Directors unanimously voted to appoint Angela Strand, a member of the Board of Directors, as the interim Chief Strategy Officer of the Company, effective as of May 1, 2017 through September 30, 2017. On May 5, 2017, the Company entered into a letter agreement with Ms. Angela Strand confirming her appointment as interim Chief Strategy Officer of the Company. Pursuant to the terms of the letter agreement, Ms. Strand receives aggregate compensation of $150,000 for her service during the term of employment, paid monthly on the schedule mutually agreed upon by the parties. For the year ended December 31, 2017 and 2018, Ms. Strand received $60,000 and $17,000 of this fee and the balance was deferred and scheduled for payment in 2019. |
72
The following table sets forth information as of December 31, 2017,2018 with respect to securities authorized for issuance under the Plan, which has been approved by Integrity’s stockholders, as well as securities authorized for issuance under certain compensation arrangements that were not subject to approval by Integrity’s stockholders.
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted- average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders | 5,236,967 | $ | 5.28 | 388,033 | (1) | |||||||
| Equity compensation plans not approved by security holders | 2,023,751 | (2) | $ | 5.37 | - | |||||||
| Total | 7,260,718 | $ | 5.31 | 388,033 | ||||||||
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted- average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders | 3,992,610 | $ | 4.70 | 3,007,390 | (1) | |||||||
| Equity compensation plans not approved by security holders | 51,001,332 | (2) | $ | 0.258 | - | |||||||
| Total | 54,993,942 | $ | 0.356 | 3,007,390 | ||||||||
| (1) | On April 7, 2017, the Board approved an amendment to the 2010 Incentive Compensation Plan of the Company (the “Plan”) to increase the number of shares of the Company’s Common Stock reserved for issuance under the Plan from 1,000,000 shares to 5,625,000 shares.On February 15, 2018, the Board approved another amendment to the Plan to further increase the number of shares of common stock reserved for issuance under the Plan to 7,000,000 shares. On March 23, 2018, stockholders of the Company approved the two amendments to the Plan adopted by the Board as of April 7, 2017 and February 15, 2018. |
| (2) | Consists of: (i) warrants to purchase 129,556 As a result of future issuances, the exercise price per share and the number of shares of Common Stock issuable upon exercise of each such warrant were adjustedseveraltimes and as of December 31,2018 the number of warrants was 3,138,471 shares of Common Stock issuable to Andrew Garrett, Inc., as partial consideration for its services as the placement agent for Integrity’s private placement of 1,295,545 shares of Common Stock completed in July 2011, (ii) warrants to purchase 256,769 As a result of future issuances, the exercise price per share and the number of shares of Common Stock issuable upon exercise of each such warrant were adjustedseveraltimesand as of December 31,2018 the number of warrants was 6,350,076 shares of Common Stock issued or issuable to Andrew Garrett, Inc., as partial consideration for its services as placement agent for Integrity’s private placement of the Series A Units; (iii) warrants to purchase 439,674 As a result of future issuances, the exercise price per share and the number of shares of Common Stock issuable upon exercise of each such warrant were adjustedseveraltimes and as of December 31,2018 the number of warrants was 12,269,988 shares of Common Stock issued or issuable to Andrew Garrett, Inc., as partial consideration for its services as placement agent for Integrity’s private placement of the Series B Units; (iv) warrants to purchase |
As disclosed in the Company’s Definitive Schedule 14A, filed on November 23, 2018, the warrants issued to Andrew Garrett, Inc. (“AGI Warrants”) by the Company contain full ratchet provisions pursuant to which as a result of the Forced Conversion Price, the exercise price of those warrants will be decreased, and the number of warrants increased proportionately and as such all of the above warrants were exchanged to reflect the above balance.
| 68 |
73
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information known to us regarding the beneficial ownership of shares of our Common Stock and Preferred Stock aswithin 60 days of March 30, 2018April 15, 2019 by: (i) each person known by
| ● | each person known to us to be the beneficial owner of more than 5% of our outstanding shares of common stock; |
| ● | each of our named executive officers and our current directors; and |
| ● | all of our executive officers and directors as a group. |
Except as otherwise indicated below, the address of each beneficial owner of more than 5% oflisted in the outstanding shares of Common Stock and/or Preferred Stock; (ii) each of our executive officer and director; and (iii) all executive officers and directors as a group. Intable is c/o Integrity Application Inc., 19 Ha’Yahlomim Street, Ashdod Israel
We have determined beneficial ownership in accordance with the rules and regulations of the SEC, in computingSEC. Except as indicated by the number of shares of Common Stock or Preferred Stock (as applicable) beneficially owned by a person and the percentage ownership of that person, shares issuable through the exercise of any option, warrant or right, through conversion of any security held by that person that are currently exercisable or that are exercisable within 60 days are included. These shares are not, however, deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated,footnotes below, we believe, based on the information furnished to us, that allthe persons and entities named in the table below have sole voting and investment power with respect to all securitiesshares of common stock that they beneficially own, (withinsubject to applicable community property laws.
Applicable percentage ownership is based on 146,689,805 shares of common stock outstanding on April 15, 2019. In computing the meaning of Rule 13d-3 of the Exchange Act). Holdersnumber of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed as outstanding shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of April 15, 2019. We did not deem these exercisable shares outstanding, however, for the purpose of computing the percentage ownership of any other person. The applicable footnotes are an integral part of the table and should be carefully read in order to understand the actual ownership of our Preferred Stock are entitled to vote such shares on an as converted to Common Stock basis;securities, particularly by the Preferred Stock does not entitle5% stockholders listed in the holders thereof to separate voting rights.
| Name of Beneficial Owner | Class of Security | Number of Shares Beneficially owned | Percent of Class (1) | |||||||
| John Graham (2) | Common Stock | 1,231,016 | 8.5 | % | ||||||
| Dr. Robert Fischell (3) | Common Stock | 77,216 | 0.6 | % | ||||||
| Angela Strand (4) | Common Stock | 51,892 | 0.4 | % | ||||||
| Leslie Seff (5) | Common Stock | 37,447 | 0.3 | % | ||||||
| Revan Schwartz (6) | Common Stock | 28,002 | 0.2 | % | ||||||
| 7Michael Hauck (7) | Common Stock | 7,447 | 0.1 | % | ||||||
| David Malka (8) | Common Stock | 343,858 | 2.5 | % | ||||||
| Sami Sassoun (9) | Common Stock | 69,163 | 0.5 | % | ||||||
| Eugene Naidis (10) | Common Stock | 94,030 | 0.7 | % | ||||||
| David Podwalski (11) | Common Stock | 88,790 | 0.7 | % | ||||||
| All Executive Officers and Directors as a group (10 persons) | Common Stock | 2,028,861 | 14.4 | % | ||||||
| Principal Stockholders | ||||||||||
| Y.H Dimri Holdings (12) | Common Stock | 1,160,650 | 8.7 | % | ||||||
Vayikra Capital LLC (13) | Common Shares, Series B Preferred Stock and Series C Preferred Stock | 868,026 | 6.5 | % | ||||||
| Name of Beneficial Owner | Number of Shares Beneficially Held | Number of Options and Warrants Exercisable within 60 days | Total Shares Beneficially Owned (1) | |||||||||||||
| Number | Percent | |||||||||||||||
| Dr. Robert Fischell | 222,677 | 41,560 | 264,237 | (2) | 0.18 | % | ||||||||||
| Angela Strand | 223,599 | 41,560 | 265,159 | (3) | 0.18 | % | ||||||||||
| Revan Schwartz | 148,082 | 41,560 | 189,642 | (4) | 0.13 | % | ||||||||||
| Michael Hauck | 143,937 | 15,180 | 159,117 | (5) | 0.11 | % | ||||||||||
| David Malka | 239,975 | 305,119 | 545,094 | (6) | 0.37 | % | ||||||||||
| Sami Sassoun | 116,280 | 169,334 | 285,614 | (7) | 0.19 | % | ||||||||||
| Eugene Naidis | 63,627 | 169,334 | 232,961 | (8) | 0.16 | % | ||||||||||
| David Podwalski | 193,799 | 202,106 | 395,904 | (9) | 0.27 | % | ||||||||||
| All Executive Officers and Directors as a group (8 persons) | 1,351,976 | 985,753 | 2,337,728 | 1.60 | % | |||||||||||
| Principal Stockholders | ||||||||||||||||
| John A Ballantyne Rev Trust 08/01/2017 | 19,557,223 | 19,557,223 | (10) | 13.33 | % | |||||||||||
| Vayikra Capital LLC | 8,094,041 | 8,094,041 | (11) | 5.52 | % | |||||||||||
(1)
Subject to a(2) All the options to purchase an aggregate of 41,560 shares of Common Stock granted to Mr.Dr. Fischell under the Incentive Plan, 14,894 of which are subject to the approval and ratification by shareholders of the increase of the total number of shares authorized for issuance under the Plan approved by the Board on April 7, 2017 and February 15, 2018, 34,113 options will be deemed vested within 60 days from March 30, 2018.of April 15, 2019. In addition to vested options, this number also includes 43,103222,677 shares of Common Stock owned by Mr.Dr. Fischell.
(3) All the options to purchase an aggregate of 41,560 shares of Common Stock granted to Ms. Strand under the Incentive Plan, 14,894 of which are subject to the approval and ratification by shareholders of the increase of the total number of shares authorized for issuance under the Plan approved by the Board on April 7, 2017 and February 15, 2018, of which 34,113 options will be deemed vested within 60 days from March 30, 2018.of April 15, 2019. In addition to vested options, this number also includes 17,779223,599 shares of Common Stock owned by Ms. Strand.
(4) All the options to purchase an aggregate of 41,560 shares of Common Stock granted to Mr. Schwartz under the Incentive Plan, 14,894 of which are subject to the approval and ratification by shareholders of the increase of the total number of shares authorized for issuance under the Plan approved by the Board on April 7, 2017 and February 15, 2018, of which 28,002 options will be deemed vested within 60 days from March 30, 2018.
(5) All the options to purchase an aggregate of 14,89415,180 shares of Common Stock granted to Mr. Hauck under the Incentive Plan, 14,894 of which are subject to the approval and ratification by shareholders of the increase of the total number of shares authorized for issuance under the Plan approved by the Board on April 7, 2017 and February 15, 2018, of which 7,447 options will be deemed vested within 60 days from March 30, 2018.
(6) Of the options to purchase an aggregate of 441,309 shares of Common Stock granted to Mr. Malka under the Incentive Plan, 388,353 of which are subject to the approval and ratification by shareholders of the increase of the total number of shares authorized for issuance under the Plan approved by the Board on April 7, 2017 and February 15, 2018, of which 220,163305,119 options will be deemed vested within 60 days from March 30, 2018.of April 15, 2019. In addition to vested options, this number also includes 123,695239,975 shares of Common Stock owned by Mr. Malka.
(7) Of the options to purchase an aggregate of 292,924 shares of Common Stock granted to Mr. Sassoun under the Incentive Plan, which are subject to the approval and ratification by shareholders of the increase of the total number of shares authorized for issuance under the Plan approved by the Board on April 7, 2017 and February 15, 2018, of which 69,163169,334 options will be deemed vested within 60 days from March 30, 2018.
(8) Of the options to purchase an aggregate of 292,924 shares of Common Stock granted to Mr. Naidis under the Incentive Plan, which are subject to the approval and ratification by shareholders of the increase of the total number of shares authorized for issuance under the Plan approved by the Board on April 7, 2017 and February 15, 2018, of which 69,163169,334 options will be deemed vested within 60 days from March 30, 2018.of April 15, 2019. In addition to vested options, this number also includes 24,86763,627 shares of Common Stock owned by Mr. Naidis.
(9) Of the options to purchase an aggregate of 290,585365,585 shares of Common Stock granted to Mr. Podwalski under the Incentive Plan, which are subject to the approval and ratification by shareholders of the increase of the total number of shares authorized for issuance under the Plan approved by the Board on April 7, 2017 and February 15, 2018, of which 88,790202,106 options will be deemed vested within 60 days of April 15, 2019. In addition to vested options, this number also includes 193,798 shares of Common Stock owned by Mr. Podwalski.
(10) In addition, the John A. Ballantyne Revocable Trust 08/01/2017 owns additional shares of common stock acquirable within 60 days, each of which is subject to a Blocker Limitation. However, the percentage ownership by the John A. Ballantyne Revocable Trust 08/01/2017 is currently in excess of such Blocker Limitations, and as a result, such Blocker Securities have been excluded from March 30, 2018.
(11) In addition, Vayikra Capital LLC beneficially owns additional shares of Common Stock; (ii) 138,889common stock acquirable within 60 days, each of which is subject to a Blocker Limitation. However, the percentage ownership by Vayikra is currently in excess of such Blocker Limitations, and as a result, such Blocker Securities have been excluded from the table. These Blocker Securities consist of the 1,283,334 shares of Common Stockcommon stock issuable upon the conversion of shares of Series B Preferred Stock; and (iii) 288,889 shares of Common Stock issuable upon the conversion of shares of Series C Preferred Stock. The percentage of ownership is calculated based on the number of shares of Common Stock as converted. This number does not include Series B-1 and Series B-2 Warrants owned by Vayikra Capital, LLC, the conversion of which is limited by a beneficial ownership limitation that Vayikra Capital, LLC will not be permitted to exercise such warrants if such conversion would cause such holder to beneficially own more than 9.99% of the outstanding number of shares of our Common Stock outstanding after giving effect to such conversion.
Changes in Control
There are no arrangements known to the Company the operation of which may at a subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons
On May 4, 2017, the Board unanimously voted to appoint Angela Strand, a member of the Board of Directors, as the interim Chief Strategy Officer of the Company, effective as of May 1, 2017 through September 30, 2017. On May 5, 2017, the Company entered into a letter agreement with Ms. Angela Strand confirming her appointment as interim Chief Strategy Officer of the Company. Pursuant to the terms of the letter agreement, Ms. Strand receives aggregate compensation of $150,000 for her service during the term of employment, paid monthly on the schedule mutually agreed upon by the parties.
76General
Integrity’s bylaws provide that the size of the Board of Directors shall be determined from time to time by resolution of the Board of Directors but shall not consist of less than one director nor more than fifteen. The Board of Directors currently has five members.
Director Independence
Integrity is not currently listed on any national securities exchange. As a result, Integrity is not subject to the requirements of any securities exchange providing that a majority of the Board of Directors must be comprised of independent directors. Nevertheless, the Board hasfor purposes of this proxy statement, Integrity applied the independence rules of the NYSE American (formerly NYSE MKT)MKT to determine the independence of its directors. The independence rules of the NYSE AmericanMKT include a series of objective tests, including that an “independent” person will not be employed by Integrity and will not be engaged in various types of business dealings with Integrity. Applying these rules and based on representations from the directors with respect to their independence thereunder, the Board of Directors has determined that, other than John Graham,David Podwalski, each of the current members of Integrity’s Board of Directors is independent and, therefore,independent.
Director Compensation
Directors of Integrity receive compensation from the Company which compensation is described below under Director Compensation.
Board Leadership Structure
The Board of Directors of Integrity has not adopted a majorityformal policy regarding the need to separate or combine the offices of the membersChairman of the Board and Chief Executive Officer and instead the Board remains free to make this determination from time to time in a manner that it determines to be most appropriate for Integrity. The Board of Directors believes that the independent directors work well together in the current board structure, and has designated the Vice-Chairman as lead independent director to add significant benefit to the Board of Directors’ oversight role.
Committees of the Board of Directors
The Board of Directors of Integrity currently has two committees, an Audit Committee, and a Compensation, Nominating and Corporate Governance Committee. The Board of Directors has determined that its Audit Committee Chair, Revan Schwartz, qualifies as an “Audit Committee Financial Expert”.
Board Meeting Attendance
During 2018, the Board of Directors met 7 times and acted by unanimous written consent 15 times. Each member of the Board of Directors attended the meetings of the Board of Directors held in the 2018 fiscal year during the period for which he was a director.
Integrity does not have a formal policy regarding director attendance at annual meetings of stockholders. However, all directors are independent directors.
Director Qualifications and Nominating Process
Director nominees are considered by the full Board of Directors. The Board of Directors does not maintain any specific minimum qualifications for director candidates. However, the Board of Directors believes that directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of Integrity’s stockholders and must also be able to dedicate the time and resources sufficient to ensure the diligent performance of their duties. While the Board of Directors does not have a formal policy with regard to the consideration of diversity in identifying director nominees, the Board of Directors seeks to include a range of talents, experience, skills, diversity and expertise (particularly in the areas of accounting and finance, management, domestic and international markets, leadership and corporate governance, and the medical device and related industries) sufficient to provide sound and prudent guidance with respect to the operations of Integrity and the interests of Integrity and its stockholders.All of the nominees for election as directors at the Annual Meeting were nominated by the Board of Directors. Integrity did not receive any stockholder nominations for directors to be elected at the Annual Meeting.
Candidates for director may come from a number of sources including, among others, recommendations from current directors, recommendations from management, and recommendations from stockholders. Director candidates are evaluated to determine whether they have the qualities and skills set forth above. Such evaluation may be by personal interview, background investigation and other appropriate means. The Board of Directors has not engaged any third-party search firms to identify director candidates.
The Board of Directors considers individuals for nomination for election to the Board of Directors from any source, including stockholder recommendations. The Board of Directors does not evaluate candidates differently based on who has made the recommendation. Consideration of nominee candidates typically involves a series of internal discussions and a review of information concerning a candidate’s qualifications and perceived contributions.
Processes for the Consideration and Determination of Executive and Director Compensation
The Board of Directors is responsible for, among other things, establishing Integrity’s general compensation philosophy and overseeing the development and implementation of Integrity’s compensation and benefits program. The Board of Directors is also responsible for reviewing the performance of Integrity’s Chief Executive Officer and other executive officers and setting the compensation of the Chief Executive Officer and such other executive officers. The Board of Directors also sets and approves its own compensation. In considering and determining the compensation to be paid to Integrity’s executive officers, the Board of Directors receives information and recommendations from the Chief Executive Officer as to such compensation, including recommendations as to the amount and form of such compensation. Neither Integrity nor the Board of Directors has retained the services of any compensation consultant to assist in determining or recommending the amount or form of executive and director compensation.
Communications with the Board of Directors
Integrity does not have a formal procedure for stockholder communication with its Board of Directors. Stockholders who wish to contact the Board of Directors or an individual director should send their correspondence to Integrity Applications, Inc., 19 Ha’Yahalomim St., P.O. Box 12163,Ashdod, Israel L3 7760049, Attention: Chief Financial Officer. Any such communication should specify the applicable addressee or addressees to be contacted, as well as the general topic of the communication. Integrity will initially receive and process a communication before forwarding it to the addressee or addressees. Integrity generally will not forward a stockholder communication to its directors if it determines that such communication is primarily commercial in nature or is abusive, threatening or otherwise inappropriate.
Role of the Board of Directors in Risk Oversight
Integrity’s management has responsibility for managing day-to-day risk and for bringing the most material risks facing Integrity to the Board of Directors’ attention. To facilitate the Board of Directors’ risk oversight responsibility, management provides the Board of Directors with information about its identification, assessment and management of critical risks and its risk mitigation strategies. These matters are further discussed by the Board of Directors with or without the presence of management.
Code of Ethics
Integrity has adopted a code of ethics that applies to its Chief Executive Officer and its senior financial officers (currently consisting only of the Chief Financial Officer). This code of ethics is available on Integrity’s website atwww.integrity-app.com. If Integrity makes any substantive amendments to the code or grants any waiver, including any implicit waiver, from a provision of the code to its principal executive, financial or accounting officer, it will disclose the nature of the amendment or waiver on its website or in a report on a Current Report on Form 8-K filed in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Fees for services rendered by Fahn Kanne & Co. (“Fahn Kanne”) for professional services rendered for the 20172018 and 20162017 audit of our annual financial statements, review of financial statements included in quarterly reports on Form 10-Q in 20172018 and 2016,2017, review of the Registration Statement on Form S-1 filed in November 2017 and out of pocket expenses, totaled approximately $58,070 and $48,261 for 2018 and $28,703 for 2017, and 2016, respectively.
Audit-Related Fees
Integrity did not pay Fahn Kanne any fees in 20172018 or 20162017 for assurance and related services reasonably related to the performance of the audit or review of the Integrity’s financial statements.
Tax Fees
Fees for services rendered by Fahn KanneBDO in 20172018 and 20162017 for tax compliance, tax advice, and tax planning services totaled approximately $3,095 and $2,992, and $3,914 for 2017 and 2016, respectively.
All Other Fees
Integrity did not pay any other fees to Fahn Kanne in 20172018 or 2016.
Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The Board is solely responsible for the pre-approval of all audit and non-audit services to be provided by the independent accountants. The Board approved all of the fees paid to Fahn Kanne for the years ended December 31, 20172018 and 2016.
77
| (a) | Document List |
| (1) | Financial Statements: |
The financial statements of the Company filed herewith are set forth in Part II, Item 8 of this report.
| (2) | Financial Statement Schedules: |
None.
| (3) | Exhibits: |
| (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. |
| (2) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on March 18, 2013. |
| (3) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on September 5, 2014. |
| (4) | Previously filed as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-1, as filed with the SEC on October 7, 2011. |
| (5) | Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2017, as filed with the SEC on August 18, 2017. |
| (6) | Previously filed as an exhibit to Amendment No. 3 to the Company’s Registration Statement on Form S-1, as filed with the SEC on November 10, 2011. |
| (7) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC on March 27, 2014. |
| (8) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April |
| (9) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the SEC on March 31, 2017. |
| (10) | Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, as filed with the SEC on November 7, 2017. |
| (11) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April |
| (12) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on March 7, 2018. |
| (13) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on March 23, 2016. |
| * | Compensation Plan or Arrangement or Management Contract. |
| ** | Filed herewith. |
| 77 |
79
Pursuant to the requirements of Section 13 or 15(d) 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 as of this 30th1st day of March, 2018.
INTEGRITY APPLICATIONS, INC. | ||
| By: | ||
| Name: | David Podwalski | |
| Title: | President | |
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of the registrant, do hereby constitute and appoint John GrahamDavid Podwalski and Sami Sassoun, and each of them, as his or her true and lawful attorney-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
/s/ David Podwalski | ||||
| (Principal Executive Officer) | ||||
| /s/ Sami Sassoun | Chief Financial Officer | |||
| Sami Sassoun | (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Robert Fischell | Director | |||
| Dr. Robert Fischell | ||||
| /s/ Angela Strand | Vice Chairperson | |||
| Angela Strand | ||||
/s/ Revan Schwartz | Director | |||
| Revan Schwartz | ||||
| /s/ Michael Hauck | Director | |||
| Michael Hauck |
INTEGRITY APPLICATIONS, INC.
Consolidated Financial Statements
as of December 31,
Table of Contents
| Page | |
| F-2 | |
| Consolidated Financial Statements | |
| F-3 | |
| F-4 | |
| F-5 – | |
 |
 | Fahn Kanne & Co. |
| Head Office | |
| 32 Hamasger Street | |
| Tel-Aviv6721118, ISRAEL | |
| PO Box 36172, 6136101 | |
| T +972 3 7106666 | |
| F +972 3 7106660 | |
| www.gtfk.co.il |
Board of Directors and the Stockholders of
INTEGRITY APPLICATIONS, INC.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Integrity Applications, Inc. (the “Company”) as of December 31, 20172018 and 2016,2017, the related consolidated statements of operations and comprehensive loss,, changes in stockholders’ deficit and cash flows for each of the threetwo years in the period ended December 31, 2017,2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172018 and 2016,2017, and the results of its operations and its cash flows for each of the threetwo years in the period ended December 31, 2017,2018, in conformity with accounting principles generally accepted in the United States of America.
Going concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1,1B, the Company has not yet generated material revenues from its operations to fund its activities and is therefore dependent upon external sources for financing its operations. As of December 31, 2017,2018, the Company has incurred accumulated deficit of $47,368,612, stockholder's$87,186,783, stockholder’s deficit of $16,574,933$2,873,301 and negative operating cash flows. These factors among others, as discussed in Note 11B to the consolidated financial statements raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are described in Note 1B. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/FAHN KANNE & CO. GRANT THORNTON ISRAEL
Certified Public Accountants (Isr.)
We have served as the Company’s auditor since 2010.
Tel-Aviv, Israel
April 15, 2019
| F-2 |
F - 2
| US dollars (except share data) | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| A S S E T S | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | 53,782 | 148,836 | ||||||
| Accounts receivable, net | 121,782 | 92,061 | ||||||
| Inventories (Note 3) | 957,349 | 1,419,604 | ||||||
| Other current assets (Note 4) | 94,137 | 356,994 | ||||||
| Total current assets | 1,227,050 | 2,017,495 | ||||||
| Property and Equipment, Net (Note 5) | 216,746 | 240,452 | ||||||
| Long-Term Restricted Cash | 39,562 | 35,673 | ||||||
| Funds in Respect of Employee Rights Upon Retirement | 185,570 | 167,326 | ||||||
| Total assets | 1,668,928 | 2,460,946 | ||||||
| LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | 2,419,988 | 1,634,642 | ||||||
| Other current liabilities (Note 6) | 1,265,954 | 713,549 | ||||||
| Total current liabilities | 3,685,942 | 2,348,191 | ||||||
| Long-Term Liabilities | ||||||||
| Long-Term Loans from Stockholders (Note 8) | 182,767 | 162,034 | ||||||
| Liability for Employee Rights Upon Retirement (Note 2J) | 185,570 | 176,719 | ||||||
| Warrants with Down-Round Protection (Note 10D) | 768,249 | 681,970 | ||||||
| Total long-term liabilities | 1,136,586 | 1,020,723 | ||||||
| Total liabilities | 4,822,528 | 3,368,914 | ||||||
| Commitments and Contingent Liabilities (Note 9) | ||||||||
| Temporary Equity (Note 10.A) | ||||||||
| Convertible Preferred Stock of $ 0.001 par value ("Preferred Stock"): | ||||||||
| 10,000,000 shares of Preferred Stock authorized as of December 31, 2017, and as of December 31, 2016 | ||||||||
| Preferred Stock Series A issued and outstanding 376 shares as of December 31, 2017, and 376 shares as of December 31, 2016 | 221,152 | 221,152 | ||||||
| Preferred Stock Series B issued and outstanding 15,031 shares as of December 31, 2017, and 15,031 shares as of December 31, 2016 | 6,715,844 | 6,715,844 | ||||||
Preferred Stock Series C issued and outstanding 12,004 shares as of December 31, 2017, and 5,829 shares as of December 31, 2016 | 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 December 31, 2017, and December 31, 2016; issued and outstanding 6,821,792 shares and 6,026,527 shares as of December 31, 2017, and December 31, 2016, respectively | 6,824 | 6,028 | ||||||
| Additional paid in capital | 30,676,180 | 24,586,142 | ||||||
| Accumulated other comprehensive income | 110,675 | 62,576 | ||||||
| Accumulated deficit | (47,368,612 | ) | (35,604,176 | ) | ||||
Total stockholders' deficit | (16,574,933 | ) | (10,949,430 | ) | ||||
| Total liabilities, temporary equity and stockholders’ deficit | 1,668,928 | 2,460,946 | ||||||
| US dollars (except share data) | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenues | 589,462 | 611,689 | 143,167 | |||||||||
| Research and development expenses (Note 11) | 3,207,466 | 2,881,817 | 2,268,345 | |||||||||
| Selling and Marketing (Note 12) | 1,525,168 | 1,127,915 | 1,127,434 | |||||||||
| General and administrative expenses (Note 13) | 6,432,679 | 2,257,799 | 1,402,741 | |||||||||
| Total operating expenses | 11,165,313 | 6,267,531 | 4,798,520 | |||||||||
| Operating loss | 10,575,851 | 5,655,842 | 4,655,353 | |||||||||
| Financing (income) expenses, net (Note 14) | (247,045 | ) | (246,105 | ) | 1,186,819 | |||||||
| Loss for the period | (10,328,806 | ) | (5,409,737 | ) | (5,842,172 | ) | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Foreign currency translation adjustment | 48,099 | (27,592 | ) | 23,498 | ||||||||
| Comprehensive (loss) for the period | (10,280,707 | ) | (5,437,329 | ) | (5,818,674 | ) | ||||||
| Loss per share (Basic) (Note 16) | (1.87 | ) | (1.08 | ) | (1.15 | ) | ||||||
| Loss per share (Diluted) (Note 16) | (1.87 | ) | (1.08 | ) | (1.15 | ) | ||||||
| Common shares used in computing Basic Loss per share (Note 16) | 6,285,324 | 5,788,842 | 5,476,870 | |||||||||
| Common shares used in computing Diluted Loss per share (Note 16) | 6,285,324 | 5,788,842 | 5,476,870 | |||||||||
| US dollars (except share data) | ||||||||
| December 31, 2018 | December 31, 2017 | |||||||
| Current Assets | ||||||||
| Cash and cash equivalents | 97,079 | 53,782 | ||||||
| Accounts receivable, net | 22,779 | 121,782 | ||||||
| Inventories (Note 3) | 170,999 | 957,349 | ||||||
| Other current assets (Note 4) | 23,288 | 94,137 | ||||||
| Total current assets | 314,145 | 1,227,050 | ||||||
| Property and Equipment, Net (Note 5) | 149,779 | 216,746 | ||||||
| Long-Term Restricted Cash | 52,605 | 39,562 | ||||||
| Funds in Respect of Employee Rights Upon Retirement | 171,657 | 185,570 | ||||||
| Total assets | 688,186 | 1,668,928 | ||||||
| LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | 2,064,259 | 2,419,988 | ||||||
| Other current liabilities (Note 6) | 1,157,350 | 1,265,954 | ||||||
| Total current liabilities | 3,221,609 | 3,685,942 | ||||||
| Long-Term Liabilities | ||||||||
| Long-Term Loans from Stockholders (Note 8) | 168,221 | 182,767 | ||||||
| Liability for Employee Rights Upon Retirement (Note 2J) | 171,657 | 185,570 | ||||||
| Warrants with Down-Round Protection (Note 10C) | - | 768,249 | ||||||
| Total long-term liabilities | 339,878 | 1,136,586 | ||||||
| Total liabilities | 3,561,487 | 4,822,528 | ||||||
| Commitments and Contingent Liabilities (Note 9) | ||||||||
| Temporary Equity (Note 10.A) | ||||||||
| Convertible Preferred Stock of $0.001 par value (“Preferred Stock”): | ||||||||
| 10,000,000 shares of Preferred Stock authorized as of December 31, 2017, and as of December 31, 2016 | ||||||||
| Preferred Stock Series A issued and outstanding 0 and 376 shares as of December 31, 2018 and of December 31, 2017, respectively | - | 221,152 | ||||||
| Preferred Stock Series B issued and outstanding 0 and 15,031 shares as of December 31, 2018, and as of December 31, 2017, respectively | - | 6,715,844 | ||||||
| Preferred Stock Series C issued and outstanding 0 and 12,004 shares as of December 31, 2018 and December 31, 2017, respectively | - | 6,484,337 | ||||||
| Total Temporary Equity | - | 13,421,333 | ||||||
| Stockholders’ Deficit | ||||||||
| Common Stock of $0.001 par value (“Common Stock”): | ||||||||
| 200,000,000 and 40,000,000 shares authorized as of December 31, 2018, and December 31, 2017; issued and outstanding shares 141,634,700 and 6,821,792 shares as of December 31, 2017, and December 31, 2016, respectively | 141,638 | 6,824 | ||||||
| Additional paid in capital | 84,007,612 | 30,676,180 | ||||||
| Accumulated other comprehensive income | 164,232 | 110,675 | ||||||
| Accumulated deficit | (87,186,783 | ) | (47,368,612 | ) | ||||
| Total stockholders’ deficit | (2,873,301 | ) | (16,574,933 | ) | ||||
| Total liabilities, temporary equity and stockholders’ deficit | 688,186 | 1,668,928 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-3 |
F - 4
| US Dollars (except share data) | ||||||||||||||||||||||||
| Common Stock | Accumulated other | Total | ||||||||||||||||||||||
Number of shares | Amount | Additional paid in capital | comprehensive income | Accumulated deficit | stockholders’ deficit | |||||||||||||||||||
| Balance as of January 1, 2015 | 5,323,058 | 5,324 | 18,182,866 | 66,670 | (23,087,063 | ) | (4,832,203 | ) | ||||||||||||||||
| Loss for the year | - | - | - | - | (5,842,172 | ) | (5,842,172 | ) | ||||||||||||||||
| Other comprehensive income | - | - | - | 23,498 | - | 23,498 | ||||||||||||||||||
| Issuance of Series B-1 and Series B-2 Warrants | - | - | 3,445,337 | - | - | 3,445,337 | ||||||||||||||||||
| Conversion of Series A and Series B Preferred Stock into Common Stock | 86,208 | 86 | 237,451 | - | - | 237,537 | ||||||||||||||||||
| Stock dividend to certain Common Stock holders | 92,136 | 92 | (92 | ) | - | - | - | |||||||||||||||||
| Stock dividend on Series B Preferred Stock | 168,926 | 169 | 390,050 | - | (390,219 | ) | - | |||||||||||||||||
| Cash dividend on Series A Preferred Stock | - | - | - | - | (57,061 | ) | (57,061 | ) | ||||||||||||||||
| Exercise of employees’ stock options | 19,769 | 20 | 36,117 | - | - | 36,137 | ||||||||||||||||||
| Stock-based compensation | - | - | 18,013 | - | - | 18,013 | ||||||||||||||||||
| Balance as of December 31, 2015 | 5,690,097 | 5,691 | 22,309,742 | 90,168 | (29,376,515 | ) | (6,970,914 | ) | ||||||||||||||||
F - 5
| US Dollars (except share data) | ||||||||||||||||||||||||
| Common Stock | Accumulated other | Total | ||||||||||||||||||||||
Number of shares | Amount | Additional paid in capital | comprehensive income | Accumulated deficit | stockholders’ deficit | |||||||||||||||||||
| Balance as of January 1, 2016 | 5,690,097 | 5,691 | 22,309,742 | 90,168 | (29,376,515 | ) | (6,970,914 | ) | ||||||||||||||||
| Loss for the year | - | - | - | - | (5,409,737 | ) | (5,409,737 | ) | ||||||||||||||||
| Other comprehensive loss | - | - | - | (27,592 | ) | - | (27,592 | ) | ||||||||||||||||
| Amounts allocated to Series C-1 and Series C-2 Warrants, net | - | - | 1,537,380 | - | - | 1,537,380 | ||||||||||||||||||
| Amount classified out of stockholders’ deficit and presented as Warrants with Down-Round Protection within long-term liabilities | - | - | (341,662 | ) | - | - | (341,662 | ) | ||||||||||||||||
| Incremental fair market value adjustments of modified warrants issued to placement agent | - | - | 211,077 | - | - | 211,077 | ||||||||||||||||||
| Stock dividend on Series C Preferred Stock | 64,148 | 65 | 152,415 | - | (152,480 | ) | - | |||||||||||||||||
| Stock dividend on Series B Preferred Stock | 272,282 | 272 | 646,943 | - | (647,215 | ) | - | |||||||||||||||||
| Cash dividend on Series A Preferred Stock | - | - | - | - | (18,229 | ) | (18,229 | ) | ||||||||||||||||
| Stock-based compensation | - | - | 70,247 | - | 70,247 | |||||||||||||||||||
| Balance as of December 31, 2016, | 6,026,527 | 6,028 | 24,586,142 | 62,576 | (35,604,176 | ) | (10,949,430 | ) | ||||||||||||||||
| US Dollars (except share data) | ||||||||||||||||||||||||
| Common Stock | Accumulated other | Total | ||||||||||||||||||||||
Number of shares | Amount | Additional paid in capital | comprehensive income | Accumulated deficit | 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 year | - | - | - | - | (10,328,806 | ) | (10,328,806 | ) | ||||||||||||||||
| Other comprehensive income | - | - | - | 48,099 | - | 48,099 | ||||||||||||||||||
| Amounts allocated to Series C-1 and Series C-2 Warrants, net | - | - | 1,672,766 | - | - | 1,672,766 | ||||||||||||||||||
| Amounts allocated to Series D-1, Series D-2 and Series D-3 Warrants, net | - | - | 148,044 | - | - | 148,044 | ||||||||||||||||||
| Stock dividend on Series C Preferred Stock | 237,169 | 238 | 565,795 | - | (566,033 | ) | - | |||||||||||||||||
| Stock dividend on Series B Preferred Stock | 359,505 | 359 | 854,288 | - | (854,647 | ) | - | |||||||||||||||||
| Cash dividend on Series A Preferred Stock | - | - | - | - | (14,950 | ) | (14,950 | ) | ||||||||||||||||
| Amounts allocated to issuance of Common Stock from Series D offering | 94,444 | 94 | 176,971 | - | 177,065 | |||||||||||||||||||
| Stock-based compensation | 104,147 | 105 | 2,672,174 | - | 2,672,279 | |||||||||||||||||||
| Balance as of December 31, 2017 | 6,821,792 | 6,824 | 30,676,180 | 110,675 | (47,368,612 | ) | (16,574,933 | ) | ||||||||||||||||
| US dollars | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Loss for the year | (10,328,806 | ) | (5,409,737 | ) | (5,842,172 | ) | ||||||
| Adjustments to reconcile Loss for the year to net cash used in operating activities: | ||||||||||||
| Depreciation | 67,878 | 59,584 | 44,891 | |||||||||
| Stock-based compensation | 2,672,174 | 70,247 | 18,013 | |||||||||
| Stock based compensation to financial advisor - warrants with Down-Round Protection | 32,880 | - | - | |||||||||
| Incremental fair market value adjustments of modified warrants issued to placement agent | - | 211,077 | - | |||||||||
| Change in the fair value of warrants issued with down-round protection | (300,322 | ) | (289,626 | ) | (149,092 | ) | ||||||
| Linkage difference on principal of loans from stockholders | 3,034 | (629 | ) | (2,521 | ) | |||||||
| Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants | - | - | 1,284,354 | |||||||||
| Changes in assets and liabilities: | ||||||||||||
| Decrease (increase) in accounts receivable | (19,274 | ) | (73,440 | ) | 4,131 | |||||||
| Decrease (increase) in inventory | 608,212 | (590,616 | ) | (737,554 | ) | |||||||
| Decrease (increase) in other current assets | 286,834 | (85,415 | ) | (156,302 | ) | |||||||
| Increase in accounts payable | 620,798 | 526,560 | 982,215 | |||||||||
| Increase (decrease) in other current liabilities | 471,334 | 270,165 | (11,187 | ) | ||||||||
| Increase in funds in respect of employee rights upon retirement | (9,861 | ) | - | - | ||||||||
| Net cash used in operating activities | (5,895,119 | ) | (5,311,830 | ) | (4,565,224 | ) | ||||||
| Cash flows from investment activities: | ||||||||||||
| Increase in funds in respect of employee rights upon retirement | - | - | (24,279 | ) | ||||||||
| Purchase of property and equipment | (19,467 | ) | (76,455 | ) | (143,736 | ) | ||||||
| Increase in long-term restricted cash | - | - | (35,152 | ) | ||||||||
| Net cash used in investment activities | (19,467 | ) | (76,455 | ) | (203,167 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Cash dividend on Series A Preferred Stock | (5,731 | ) | `(13,529 | ) | (57,061 | ) | ||||||
| Proceeds allocated to Series C Preferred Stock, net of cash issuance expenses | 3,598,254 | 3,310,617 | - | |||||||||
| Proceeds allocated to Series C Warrants, net of cash issuance expenses | 1,780,963 | 1,639,468 | - | |||||||||
| Proceeds allocated to Series D Warrants, net of cash issuance expenses | 171,837 | - | - | |||||||||
| Proceeds allocated to Common Stock from Series D offering, net of cash issuance expenses | 205,413 | - | - | |||||||||
| Proceeds from exercise of employees’ stock options | - | - | 36,137 | |||||||||
| Repayment of loan from stockholders | - | - | (439,939 | ) | ||||||||
| Net cash provided by (used in) financing activities | 5,750,736 | 4,936,556 | (460,863 | ) | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | 68,796 | (8,136 | ) | 10,395 | ||||||||
| Decrease in cash and cash equivalents | (95,054 | ) | (459,865 | ) | (5,218,859 | ) | ||||||
| Cash and cash equivalents at beginning of the year | 148,836 | 608,701 | 5,827,560 | |||||||||
| Cash and cash equivalents at end of the year | 53,782 | 148,836 | 608,701 | |||||||||
| 2018 | 2017 | |||||||
| Revenues | 43,488 | 589,462 | ||||||
| Research and development expenses (Note 11) | 3,032,863 | 3,207,466 | ||||||
| Selling and Marketing (Note 12) | 1,092,462 | 1,525,168 | ||||||
| General and administrative expenses (Note 13) | 2,456,763 | 6,432,679 | ||||||
| Total operating expenses | 6,582,088 | 11,165,313 | ||||||
| Operating loss | 6,538,600 | 10,575,851 | ||||||
| Financing income (expense), net (Note 14) | (176,820 | ) | 247,045 | |||||
| Loss for the period | 6,715,420 | 10,328,806 | ||||||
| Other comprehensive income: | ||||||||
| Foreign currency translation adjustment | 53,557 | 48,099 | ||||||
| Comprehensive Loss for the period | 6,661,863 | 10,280,707 | ||||||
| Loss per share (Basic) (Note 16) | (4.74 | ) | (1.87 | ) | ||||
| Loss per share (Diluted) (Note 16) | (4.74 | ) | (1.87 | ) | ||||
| Common shares used in computing Basic Loss per share (Note 16) | 8,396,847 | 6,285,324 | ||||||
| Common shares used in computing Diluted Loss per share (Note 16) | 8,396,847 | 6,285,324 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-4 |
F - 8
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (cont.)
| US Dollars (except share data) | ||||||||||||||||||||||||
| Common Stock | Additional | Accumulated other | Total | |||||||||||||||||||||
| Number | paid in | comprehensive | Accumulated | stockholders’ | ||||||||||||||||||||
| of shares | Amount | capital | income | deficit | 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 year | - | - | - | - | (10,328,806 | ) | (10,328,806 | ) | ||||||||||||||||
| Other comprehensive income | - | - | - | 48,099 | - | 48,099 | ||||||||||||||||||
| Amounts allocated to Series C-1 and Series C-2 Warrants, net | - | - | 1,672,766 | - | - | 1,672,766 | ||||||||||||||||||
| Amounts allocated to Series D-1, Series D-2 and Series D-3 Warrants, net | - | - | 148,044 | - | - | 148,044 | ||||||||||||||||||
| Stock dividend on Series C Preferred Stock | 237,169 | 238 | 565,795 | - | (566,033 | ) | - | |||||||||||||||||
| Stock dividend on Series B Preferred Stock | 359,505 | 359 | 854,288 | - | (854,647 | ) | - | |||||||||||||||||
| Cash dividend on Series A Preferred Stock | - | - | - | - | (14,950 | ) | (14,950 | ) | ||||||||||||||||
| Amounts allocated to issuance of Common Stock from Series D offering | 94,444 | 94 | 176,971 | - | 177,065 | |||||||||||||||||||
| Stock-based compensation | 104,147 | 105 | 2,672,174 | - | 2,672,279 | |||||||||||||||||||
| Balance as of December 31, 2017 | 6,821,792 | 6,824 | 30,676,180 | 110,675 | (47,368,612 | ) | (16,574,933 | ) | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-5 |
INTEGRITY APPLICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (cont.)
| Common Stock | Additional | Accumulated other | Total | |||||||||||||||||||||
| Number of shares | Amount | paid in | 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 | - | - | - | - | (6,715,420 | ) | (6,715,420 | ) | ||||||||||||||||
| Other comprehensive income | - | - | - | 53,557 | - | 53,557 | ||||||||||||||||||
| Conversion of preferred Shares into common | 106,243,915 | 106,244 | 27,304,685 | - | (13,989,596 | ) | 13,421,333 | |||||||||||||||||
| Conversion of Dividends into Common | 109,302 | 109 | 28,092 | - | - | 28,201 | ||||||||||||||||||
| Conversion of late dividend fee into Common | 492,422 | 492 | 126,565 | - | - | 127,057 | ||||||||||||||||||
| Additional Shares issued to Series D holders on Conversion | 22,485,158 | 22,486 | 5,778,686 | - | (5,801,172 | ) | - | |||||||||||||||||
| Conversion of warrants | - | - | 182,093 | - | (182,093 | ) | - | |||||||||||||||||
| Stock dividend on Series C Preferred Stock | 863,374 | 863 | 2,114,766 | - | (2,115,629 | ) | - | |||||||||||||||||
| Stock dividend on Series B Preferred Stock | 1,081,115 | 1,082 | 2,648,106 | - | (2,649,188 | ) | - | |||||||||||||||||
| Cash dividend on Series A Preferred Stock | - | - | - | - | (18,454 | ) | (18,454 | ) | ||||||||||||||||
| Issuance of Common Stock from Series D offering | 1,273,112 | 1,273 | 2,502,112 | - | - | 2,503,385 | ||||||||||||||||||
| Stock-based compensation | 830,401 | 831 | 704,417 | - | - | 705,248 | ||||||||||||||||||
| Amounts allocated to Series D-1, D-2 and Series D-3 Warrants, net | - | - | 2,091,362 | - | - | 2,091,362 | ||||||||||||||||||
| Early adoption of ASU 2017-11 (*) | - | - | 3,273,971 | - | (2,505,723 | ) | 768,248 | |||||||||||||||||
| Warrants issued as consideration for placement agent services | - | - | 367,115 | - | - | 367,115 | ||||||||||||||||||
Effect of down round protection of warrants upon occurrence of trigger event | - | - | 5,840,896 | - | (5,840,896 | ) | - | |||||||||||||||||
| Issuance of shares as settlement of financial liabilities | 1,434,109 | 1,434 | 368,566 | - | - | 370,000 | ||||||||||||||||||
| Balance as of Dec 31, 2018 | 141,634,700 | 141,638 | 84,007,612 | 164,232 | (87,186,783 | ) | (2,873,301 | ) | ||||||||||||||||
(*) See Note 2U and 2W
The accompanying notes are an integral part of the consolidated financial statements.
| F-6 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2018 | 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Income (loss) for the year | (6,715,420 | ) | (10,328,806 | ) | ||||
| Adjustments to reconcile income (loss) for the year to net cash used in operating activities: | ||||||||
| Depreciation | 58,789 | 67,878 | ||||||
| Stock-based compensation | 705,248 | 2,672,279 | ||||||
| Stock based compensation to financial advisor - warrants with Down-Round Protection | - | 32,880 | ||||||
| Change in the fair value of warrants issued with down-round protection | - | (300,322 | ) | |||||
| Linkage difference on principal of loans from stockholders | (927 | ) | 3,034 | |||||
| Changes in assets and liabilities: | ||||||||
| Decrease (increase) in accounts receivable | 89,307 | (19,274 | ) | |||||
| Decreasein inventory | 720,378 | 608,212 | ||||||
| Increase in other current assets | 64,172 | 286,834 | ||||||
| Increase in accounts payable | (261,915 | ) | 620,798 | |||||
| Increase (decrease) in other current liabilities | 448,091 | 471,334 | ||||||
| Increase in funds in respect of employee rights upon retirement | - | (9,861 | ) | |||||
| Net cash used in operating activities | (4,892,277 | ) | (5,895,014 | ) | ||||
| Cash flows from investment activities: | ||||||||
| Purchase of property and equipment | (5,371 | ) | (19,467 | ) | ||||
| Net cash used in investment activities | (5,371 | ) | (19,467 | ) | ||||
| Cash flows from financing activities | ||||||||
| Cash dividend on Series A Preferred Stock | - | (5,731 | ) | |||||
| 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 Series D Warrants, net of cash issuance expenses | 2,258,607 | 171,837 | ||||||
| Proceeds allocated to Common Stock from Series D offering, net of cash issuance expenses | 2,703,255 | 205,413 | ||||||
| Net cash provided by (used in) financing activities | 4,961,862 | 5,750,736 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (7,874 | ) | 72,580 | |||||
Increase (decrease) in cash, cash equivalents, and restricted cash | 56,340 | (91,165 | ) | |||||
cash, cash equivalents, and restricted cash at beginning of the year | 93,344 | 184,509 | ||||||
cash, cash equivalents, and restricted cash at end of the year | 149,684 | 93,344 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-7 |
INTEGRITY APPLICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
Supplementary information on financing activities not involving cash flows:
During the year ended December 31, 2018, $2,649,188 and $2,115,629 representing the fair value of the shares of Common Stock issued to owners of Series B Preferred Stock and owners of Series C Preferred Stock, respectively, were accounted for as stock dividends in the statement of changes in stockholders’ deficit and were charged to accumulated deficit against additional paid in capital and Common Stock therein.
During the year ended December 31, 2018, the Company accrued a cash dividend in the amount of $18,454, in the aggregate, to be paid to holders of its Series A Preferred Stock.
During the year ended December 31, 2018, $367,115 representing the fair value of warrants issued as consideration for placement agent services, this amount was accounted for as Warrants with down-round protection. upon issuance, the fair value was recognized as an increase of additional paid in capital. Of these direct issuance expenses, $167,245 was allocated to the Series D-1, D-2 and Series D-3 Warrants and was recorded as a reduction of additional paid in capital, and $199,870 was allocated to the Series D common stock and was recorded as a reduction of additional paid in capital.
During the year ended December 31, 2017, $854,647 and $566,033, representing the fair value of the shares of Common Stock issued to owners of Series B Preferred Stock and owners of Series C Preferred Stock, respectively, were accounted for as stock dividends in the statement of changes in stockholders’ deficit and waswere charged to accumulated deficit against additional paid in capital and Common Stock therein.
During the year ended December 31, 2017, the Company accrued a cash dividend in the amount of $9,400, in the aggregate, to be paid to holders of its Series A Preferred Stock and a stock dividend in the amount of $1,420,680, in the aggregate, representing the fair value of the shares of Common Stock to be issued to owners of Series B Preferred Stock and of Series C Preferred Stock, in lieu of cash dividends. 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 year ended December 31, 2017, $353,721 representing the fair value of warrants issued as consideration for placement agent services, this amount was accounted for as Warrants with down-round protection within long-term liabilities.liabilities (see Note 2U regarding the change in the accounting treatment of warrants with round down protection). Of these direct issuance expenses, $108,197 was allocated to the Series C-1 and Series C-2 Warrants and was recorded as a reduction of additional paid in capital, $218,383 was allocated to the Series C Preferred Stock and recorded as a reduction of temporary equity, $12,405 was allocated to the Series D-1, D-2 and Series D-3 Warrants and was recorded as a reduction of additional paid in capital, and $14,736 was allocated to the Series D common stock and was recorded as a reduction of additional paid in capital.
The accompanying notes are an integral part of the consolidated financial statements.
| F-8 |
F - 9
| NOTE 1 – | GENERAL |
| A. | Integrity Applications, Inc. (the |
| B. | Going concern uncertainty and management plans | |
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 December 31, 2018, the Group has incurred accumulated deficit of $87,186,783, stockholder’s deficit of $2,873,301, 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 years ended December 31, 2016 and December 31, 2017, the Company raised funds in an aggregate amount of approximately $10.33 million (net of related cash expenses) through the issuance of 12,003.8 units (the “Series C Units”), each consisting of (a) one share of the Company’s newly designated Series C 5.5% Convertible Preferred Stock, par value $0.001 per share (the “Series C Preferred Stock”), convertible into Common Stock at an initial conversion price of $4.50 per share, (b) a five year warrant to purchase, at an exercise price of $4.50 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-1 Warrant”) and (c) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-2 Warrant” and, together with the Series C-1 Warrants, collectively, the “Series C Warrants”). During the years ended December 31, 2017 and December 31, 2018, the Company raised funds in an aggregate amount of approximately $5.3 million (net of related cash expenses) through the issuance of 1,367,556 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, up to such number of shares of Common Stock issued c) a five year warrant to purchase, at an exercise price of $5.75 per share, up to such number of shares of Common Stock issued d) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of Common Stock issued. | ||
| On December 21, 2018, the Company’s shareholders approved amendments to its Series A, Series B and Series C Preferred Stock, to permit a forced conversion of those instruments into shares of its common stock at a conversion price equal to the lower of $1.00 and the volume average weighted price of the Company’s common stock on the forty five (45) prior trading days, which, as of the Forced Conversion Date of December 31, 2018, was $.258 (the “Forced Conversion Price”). Furthermore, the purchase price for common stock issued by the Company in a series of private placement transactions since December 1, 2017 in an amount of $6,154,000 and the remaining $3,846,000 intended to be sold in connection therewith (known as the “D Round”) will also be reset to reflect the Forced Conversion Price. As a result, for each share of stock sold previously in the D Round, additional shares of common stock will be issued to the purchaser in an amount equal to the number of shares required so that the average per share price is reduced from $4.50 to the per share Forced Conversion Price, less the one (1) share already issued. For each unit purchased by a shareholder of the Corporation in each of the rounds in which Series A preferred stock was issued (the “A Round”), in which Series B preferred stock was issued (the “B Round”), in which Series C preferred stock was issued (the “C Round”) and in the D Round, the warrants issued with respect to that unit (i.e.: for the A Round, the A Warrants, for the B Round, the B-1 and B-2 Warrants, for the C Round, the C-1 and C-2 Warrants and for the D Round, the D-1, D-2 and D-3 Warrants), shall be cancelled, and instead the investor will receive per unit, three warrants, one with an exercise price of $1.80, one with an exercise price of $3.60 and one with an exercise price of $5.40, which warrants will otherwise contain the same terms and conditions as the warrants issued in the D Round (See Note 10B). Lastly, as disclosed in the Company’s Definitive Schedule 14A, filed on November 23, 2018, the warrants issued to Andrew Garrett, Inc. (“AGI Warrants”) by the Company contain full ratchet provisions pursuant to which as a result of the Forced Conversion Price, the exercise price of those warrants will be decreased, and the number of warrants increased proportionately. | ||
| 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. |
| F-9 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 – | GENERAL (cont.) |
| 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. |
| NOTE 2 | – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). | ||
| A. | 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 the consolidated financial statements, the most significant estimates and assumptions relate to (i) the fair value estimate of the Warrants with down-round protection until December 31,2017 and the measurement of the benefit to warrants with down round protection upon trigger event commencing January 1,2018 , (ii) the going concern assumptions, (iii) measurement of stock-based compensation, and, (iv) determination of net realizable value of inventory. | ||
| B. | Functional currency | |
| The functional currency of the Company is the US dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, “Foreign Currency Matters” (ASC 830), balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions are carried as financing income or expenses. The functional currency of Integrity Israel is the New Israeli Shekel (“NIS”) and its financial statements are included in consolidation, based on translation into US dollars. Accordingly, assets and liabilities were translated from NIS to US dollars using year-end exchange rates, and income and expense items were translated at average exchange rates during the year. Gains or losses resulting from translation adjustments are reflected in stockholders’ deficit, under “accumulated other comprehensive income (loss)”. |
| 2018 | 2017 | |||||||
| Official exchange rate of NIS 1 to US dollar | 0.267 | 0.288 | ||||||
| Increase (decrease) of the Official exchange rate of NIS 1 to US dollar during the year: | ||||||||
| 2018 | (7.50 | %) | ||||||
| 2017 | 10.90 | % | ||||||
| F-10 |
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Official exchange rate of NIS 1 to US dollar | 0.288 | 0.260 | 0.256 | |||||||||
| Increase (decrease) of the Official exchange rate of NIS 1 to US dollar during the year: | ||||||||||||
| 2017 | 10.90 | % | ||||||||||
| 2016 | 1.48 | % | ||||||||||
| 2015 | (0.33 | ) | ||||||||||
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 2 – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| C. | Principles of consolidation |
| The consolidated financial statements include the accounts of the Company and its subsidiary. All intercompany balances and transactions have been eliminated in consolidation. | ||
| D. | Cash and cash equivalents |
| The Group considers all short-term investments, which are highly liquid investments with original maturities of three months or less at the date of purchase, to be cash equivalents. | ||
| E. | Inventories |
| Inventories are stated at the lower of cost or net realizable value. | ||
| Cost is determined as follows: | ||
| With respect to raw materials, the Group calculates cost using the average cost method. | ||
| With respect to work in process and finished products, the Group calculates the cost on the basis of the average direct manufacturing costs, including materials, labor, subcontracting costs and other direct manufacturing costs. | ||
Management evaluates whether inventory reserve for slow-moving or obsolete items is required. To date, the Group has recorded reserves with respect to its inventory in the amount of approximately US$ 1,457 thousand. (of which an amount of US$ 700 thousand was recognized in the fourth quarter of 2018) | ||
| F. | Property and equipment, net |
| 1. | Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. When an asset is retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition is reflected in the statements of operations. |
| 2. | Rates of depreciation: |
| % | ||||
| Computers | 33 | |||
| Furniture and office equipment | 7-15 | |||
| Leasehold improvements | Shorter of lease term and 10 years | |||
| G. | Impairment of long-lived assets | |
| The Group’s long-lived assets are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. To date the Group did not incur any material impairment losses. |
| F-11 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 2 – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| H. | Long-term restricted cash | |
Restricted cash is invested in certificates of deposit, which are used to secure Integrity Israel’s obligations in respect of its headquarters (See Note 9B) lease and credit card. For presentation of statement of cash flows purposes, restrict cash balances are included with cash and cash equivalents, when reconciling the reported period total amounts. |
| December 31 | December 31 | |||||||
| 2018 | 2017 | |||||||
| Cash and cash equivalents | $ | 97,079 | $ | 53,782 | ||||
| Restricted cash | 52,605 | 39,562 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 149,684 | $ | 93,344 | ||||
| I. | Income tax |
| The Group accounts for income taxes in accordance with ASC 740, “Income Taxes”. Accordingly, deferred income taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and the tax bases of assets and liabilities under the applicable tax law. Deferred tax balances are computed using the enacted tax rates expected to be in effect when these differences reverse. Valuation allowances in respect of deferred tax assets are provided for, if necessary, to reduce deferred tax assets to amounts more likely than not to be realized. | ||
| The Group accounts for uncertain tax positions in accordance with ASC Topic 740-10, which prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. According to ASC Topic 740-10, tax positions must meet a more- likely-than-not recognition threshold. The Group’s accounting policy is to classify interest and penalties relating to uncertain tax positions under income taxes, however the Group did not recognize such items in its fiscal 2018, 2017 financial statements and did not recognize any liability with respect to unrecognized tax position in its balance sheet. | ||
| J. | Liability for employee rights upon retirement |
| Integrity Israel’s liability for employee rights upon retirement with respect to its Israeli employees is calculated pursuant to the Israeli Severance Pay Law, based on the most recent salary of each employee multiplied by the number of years of employment of each such employee as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment, or ratable portion thereof for periods less than one year. Integrity Israel makes monthly deposits to insurance policies and severance pay funds. | ||
| The deposited funds may be withdrawn upon the fulfillment of Integrity Israel’s severance obligations pursuant to Israeli severance pay laws or labor agreements with its employees. The value of the deposited funds is based on the cash surrender value of these policies, and includes immaterial profits or losses. | ||
| Commencing in 2011, Integrity Israel’s agreements with its Israeli employees are in accordance with Section 14 of the Severance Pay Law. Payments in accordance with Section 14 release the employer from any future severance payments in respect of those employees. Related obligations and liabilities under Section 14 are not recorded as an asset or as a liability in the Company’s balance sheet. | ||
| Severance expenses for the year ended December 31, 2018, and 2017 amounted to $120,753, $145,979, respectively. | ||
| K. | Revenue recognition | |
| The Company derives most of its revenues from sales of its GlucoTrack® model DF-F glucose monitoring device to distributors. The Company’s products sold through agreements with distributors are generally non-exchangeable, non-refundable and non-returnable and, to date, the Company has not granted to any of its distributors any rights of price protection or stock rotation. Accordingly, the Company considers its distributors as end-users for revenue recognition purposes. | ||
| Until December 31, 2017, revenues were recognized in accordance with ASC 605, “Revenue Recognition” and SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, when delivery has occurred, persuasive evidence of an agreement exists, the fee was fixed and determinable, collectability was reasonably assured and no further obligations existed. Provisions were made at the time of revenue recognition for any applicable warranty cost expected to be incurred. | ||
Revenue recognition accounting policy applied from January 1, 2018 (following the adoption of ASC Topic 606); On January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). In accordance with ASC 606, The Company determines revenue recognition through the following five steps: ● Identification of the contract, or contracts, with a customer; ● Identification of the performance obligations in the contract; ● Determination of the transaction price; ● Allocation of the transaction price to the performance obligations in the contract; and ● Recognition of revenue when, or as, the Company satisfies a performance obligation. A contract with a customer exists when all of the following criteria are met: the parties to the contract have approved it (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations, the Company can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”), the Company can determine the transaction price for the goods or services to be transferred, the contract has commercial substance and it is probable that the Company will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. Revenues are recognized when, or as, control of services or products is transferred to the customers at a point in time or over time, as applicable to each performance obligation. Revenues are recorded in the amount of consideration to which the Company expects to be entitled in exchange for performance obligations upon transfer of control to the customer, excluding amounts collected on behalf of other third parties and sales taxes. Revenues from sales of GlucoTrack devices are recognized when the control of the product passed to the customer (usually upon delivery). |
| F-12 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 2 – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| L. | Research and development expenses | |
| Research and development expenses are charged to operations as incurred. |
| M. | Royalty-bearing grants |
| Royalty-bearing grants from the OCS to fund approved research and development projects are recognized at the time Integrity Israel is entitled to such grants, on the basis of the costs incurred and reduce research and development costs. The cumulative research and development grants received by Integrity Israel from inception through December 2004 amounted to $93,300. Integrity Israel has not received any research and development grants since December 2004. | ||
| N. | Warranty | |
The Group provides a 24-month warranty for its products at no cost. The Group estimates the costs that may be incurred during the warranty period and records a liability for the amounts of such costs at the time revenues are recognized. For the year ended December 31, 2018 and 2017 warranty expenses were clearly insignificant. ($1,173 and, $8,540, respectively) | ||
| O. | Basic and diluted income (loss) per share |
| Basic income (loss) per share is computed by dividing the income (loss) for the period applicable for Common Stockholders by the weighted average number of shares of Common Stock outstanding during the period. Securities that may participate in dividends with the Common Stock (such as the convertible Preferred Stock) are considered in the computation of basic income per share using the two-class method. However, in periods of net loss, such participating securities are not included since the holders of such securities do not have a contractual obligation to share the losses of the Company. | ||
| In computing, diluted income per share, basic earnings per share are adjusted to reflect the potential dilution that could occur upon the exercise of options or warrants issued or granted using the “treasury stock method” and upon the conversion of Preferred Stock using the “if-converted method”, if the effect of each of such financial instruments is dilutive. | ||
| P. | Stock-based compensation | |
| The Group measures and recognizes the compensation expense for all equity-based payments to employees based on their estimated fair values in accordance with ASC 718, “Compensation-Stock Compensation”. Share-based payments including grants of stock options are recognized in the statement of operations as an operating expense based on the fair value of the award at the date of grant. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model. The Group has expensed compensation costs, net of estimated forfeitures, applying the accelerated vesting method, over the requisite service period or over the implicit service period when a performance condition affects the vesting, and it is considered probable that the performance condition will be achieved. | ||
| Share-based payments awarded to consultants (non-employees) are accounted for in accordance with ASC Topic 505-50, “Equity-Based Payments to Non-Employees”. |
| F-13 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 2 – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| Q. | Fair value of financial instruments |
ASC Topic 825-10, “Financial Instruments” defines financial instruments and requires disclosure of the fair value of financial instruments held by the Group. The Group considers the carrying amount of cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable and other current liabilities balances, to approximate their fair values due to the short-term maturities of such financial instruments. The Warrants with down-round protection represented a derivative liability and therefore were measured and presented on the balance sheet at fair value (see Note 2U regarding the change in the accounting treatment of warrants with round down protection). ASC Topic 825-10, establishes the following fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: | ||
| Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. | ||
| Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. | ||
| Level 3 - Unobservable inputs are used when little or no market data is available. Level 3 inputs are considered as the lowest priority under the fair value hierarchy. | ||
| The fair value measurement of the warrants was (until the early adoption on ASU 2017-11, see note 2U) classified as level 3. The Group did not estimate the fair value of the long-term loans from stockholders since their repayment schedule has not yet been determined. | ||
| R. | Concentrations of credit risk |
Financial instruments that potentially subject the Group to concentrations of credit risk consist primarily of cash and cash equivalentsand restricted cash. Cash and cash equivalents and restricted cash are deposited with major banks in Israel and the United States of America. Management believes that such financial institutions are financially sound, accordingly, minimal credit risk exists with respect to these financial instruments. The Group does not have any significant off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements. | ||
| As of December 31, 2018, the Group has recorded reserves with respect to its accounts receivable in the amount of approximately US$91,719 relating to the risk of the potential collectability from one customer. As of December 31, 2018 the balances of accounts receivable was not material and accordingly such balances do not represent substantial concentration of credit risk. | ||
| S. | Contingencies | |
| The Group records accruals for loss contingencies arising from claims, litigation and other sources when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. Legal costs incurred in connection with loss contingencies are expensed as incurred. | ||
| T. | Preferred Stock |
| 1. | Temporary Equity Classification | |
As more fully described in Note 10, the Company issued Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, which provide a liquidation preference and certain redemption rights for the benefit of the holders of such Preferred Stock upon the occurrence of certain contingent events, some of which are not solely within the Company’s control. Accordingly, the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock were presented as temporary equity (until the amendment describe in note 1B). |
| F-14 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 2 – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| Preferred Stock (cont.) |
| 2. | Initial Measurement |
Upon initial recognition, the Series A Preferred Stock issued together with detachable Series A Warrants (which originally were classified as a derivative liability) were measured based on the “residual approach” and were presented net of the direct issuance expenses that were allocated to them. Upon initial recognition, the Series B Preferred Stock issued together with the detachable Series B Warrants (classified as equity) were measured based on the relative fair value basis and were presented net of the direct issuance expenses that were allocated to them. Upon initial recognition, the Series C Preferred Stock issued together with detachable Series C Warrants (classified as equity) were measured based on the relative fair value basis and were presented net of the direct issuance expenses that were allocated to them. | ||
| 3. | Subsequent Measurement |
On each balance sheet date, the Company’s management was required to assess the probability of redemption of the Preferred Stock Series A, B or C. In the event that management determines such redemption to be probable as of an applicable balance sheet date, the Company should have reclassify the outstanding balance of the Preferred Stock as of that date as a liability and the difference between such amount and the aggregate redemption price of the Preferred Stock was required to be accreted against accumulated deficit over the period beginning on the date that it becomes probable that the Preferred Stock will become redeemable and ending on the earliest redemption date. | ||
Commencing initial recognition and until the forced conversion of such preferred stock into common shares, the redemption of the preferred stock series was not considered probable. | ||
| 4. | Conversion Feature Analysis |
| The Company has determined that due to the economic characteristics and risks of the Preferred Stock, based on their stated or implied substantive terms and features, Series A, Series B and Series C Preferred Stock, were considered as more akin to equity than debt. Accordingly, it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those of the Preferred Stock themselves (the ‘host contract’) are clearly and closely related. As a result, the embedded conversion feature was not required to be bifurcated. Also, since at the respective issuance dates of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock, the effective exercise price of the conversion feature (based on the effective conversion rate of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock into Common Stock) was higher than the estimated fair value of the Company’s Common Stock, it was determined that the conversion feature was not beneficial. | ||
| 5. | Modifications or Exchanges | |
| Modifications to, or exchanges of, the Preferred Stock are accounted for as a modification or an extinguishment. Such an assessment is done by management either qualitatively or quantitatively based on the facts and circumstances of each transaction. A qualitative assessment is generally appropriate when the changes to a Preferred Stock instrument are either so inconsequential or is very significant, otherwise, a quantitative test is also applied. Since the periodic contractual cash flows of the Preferred Stock are not defined, the quantitative test is generally applied using the fair value model. Under the fair value model, the Company compares the fair value of the Preferred Stock immediately before and after the modification or exchange. If the fair values before and after the modification or exchange are substantially different, the modification or exchange is accounted for as an extinguishment, otherwise it is accounted for as a modification. During 2018 and 2017 there were no modifications of preferred stock. However, upon the amendment describe in note 1B and the forced conversion, the entire preferred stocks were converted into common shares. | ||
| Upon consummation of the forced conversion and the extinguishment of the Series A, Series B and Series C Preferred Stock, the difference between the consideration paid (i.e., the fair value of the common shares issued) and the carrying value of the original preferred shares extinguished prior to such date, was recognized as a reduction of, or increase to, retained earnings (accumulated deficit) as a deemed dividend. In addition, the amount of the deemed dividend was also recognized as an adjustment to earnings available to common shareholders for purposes of calculating earnings per share. |
| F-15 |
F - 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 2 – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| U. | Warrants with Down-Round Protection | |
Until December 31, 2017, the Company considered the provisions of ASC 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity”, with respect to the detachable Warrants that were issued to the Series A Unit Purchasers and to the placement agent, as described in Note 10D, and determined that as a result of the “down-round” protection that would adjust the number of Warrants and the exercise price of the Warrants based on the price at which the Company subsequently issues shares or other equity-linked financial instruments, if that price is less than the original exercise price of the Warrants, such Warrants cannot be considered as indexed to the Company's own stock. Accordingly, the Warrants were recognized as derivative liability at their fair value on initial recognition. In subsequent periods (and throughout December 31, 2017), the Warrants were marked to market with the changes in fair value recognized as financing expense or income in the consolidated statement of operations. The direct issuance expenses that were allocated to the detachable Warrants, were expensed as incurred. Commencing January 1, 2018 and following the early adoption of Accounting Standard Update (ASU) No. 2017-11, “Earnings Per Share” (ASU 2017-11), the Company disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Based on its updated evaluation, management has determined that such warrants with Down-Round Protection are eligible for equity classification. In accordance with the provisions of ASU 2017-11, upon the occurrence of an event that triggers a down round protection (i.e., when the exercise price of the warrants is adjusted downward because of the down round feature), the effect is accounted for as a deemed dividend and as a reduction of income available to common shareholders for purposes of basicearnings per share (EPS) calculation | ||
| V. | Modification of equity-classified contracts | |
| The modification or exchange of equity-classified contracts, such as warrants that were classified as equity before the modification or exchange and remained eligible for equity classification after the modification, was accounted for in a similar manner to a modification of stock-based compensation. Accordingly, the incremental fair value from the modification or exchange (the change in the fair value of the instrument before and after the modification or exchange) was recognized as a reduction of, retained earnings (accumulated deficit) as a deemed dividend. Modifications or exchanges that result in a decrease in the fair value of an equity-classified share-based payment award are not recognized. In addition, the amount of the deemed dividend was also recognized as an adjustment to earnings available to common shareholders for purposes of calculating earnings per share. | ||
| W. | Recently Issued Accounting Pronouncements |
1. Accounting Standard Update 2014-09, “Revenue from Contracts with Customers”
| Commencing January 1, 2018, the Company adopted Accounting Standard Update 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 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 2K) |
| F-16 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 2 – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| Recently Issued Accounting Pronouncements (cont.) |
2. Accounting Standard Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015- 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 impactamendments in Part 1 of ASU 2017-11 on itsshould be applied in either retrospectively to outstanding financial statements. Although this process has notinstruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the fiscal year of adoption (‘Modified retrospective approach’), or retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented (‘Full Retrospective approach’) with a cumulative-effect adjustment to the statement of financial position as of the beginning of the earliest fiscal year presented.
The Company elected to early apply ASU 2017-11, using the Modified retrospective approach. Accordingly, the Company recognized, a cumulative-effect adjustment to the statement of financial position as of January 1, 2018. The company reclassified to Additional paid-in capital (APIC) the remaining balance related to outstanding warrants with down round that was presented as a derivative liability at December 31, 2017 (in the amount of $768,249). Further, the company recorded an increase to APIC in an amount of 2,505,723 and a decrease in the same amount to accumulated deficit, in order to reflect the amount that would have been completed, managements believes that its provisions might impactreported if ASU 2017-11 was in effect at the accountingissuance and throughout the term of the financial instruments issuedoutstanding, that are subject to the provisions of ASU 2017-11. Such amount reflects the cancelation of the aggregate periodic changes in fair value of the warrants with down-round protection that were previously recognized as financing expense or financing income and recognition of the value of the effect of the round down feature when it was triggered.
Under the application approach applied by the Company, that include down-round protection.
| 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, 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. |
| 4. | Accounting Standards Update 2016-02, "Leases" |
In February 2016, the FASB issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1. A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and, 2. A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year Company). Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. | |
| The Company has completed an initial assessment of the potential impact on its consolidated financial statements. The Company expects that Following adoption of the new standard to recognize additional operating liabilities in an estimated amount of $250 thousand, with corresponding right-of-use assets of approximately the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. |
| X. | Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications did not have significant effect on the reported results of operations, shareholder’s deficit or cash flows. |
| F-17 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 3– | INVENTORIES |
| US dollars | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Raw materials | 12,734 | 735,201 | ||||||
| Work in process | 1,556,256 | 633,132 | ||||||
| Finished products | 144,493 | 51,271 | ||||||
| 1,713,483 | 1,419,604 | |||||||
| Less – provision for slow moving inventory | (756,134 | ) | - | |||||
| 957,349 | 1,419,604 | |||||||
| US dollars | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Raw materials | 13,522 | 12,734 | ||||||
| Work in process | 1,546,764 | 1,556,256 | ||||||
| Finished products | 67,310 | 144,493 | ||||||
| 1,627,596 | 1,713,483 | |||||||
| Less – provision for slow moving inventory (*) | (1,456,597 | ) | (756,134 | ) | ||||
| 170,999 | 957,349 | |||||||
| (*) | Management evaluates whether inventory reserve for slow-moving or obsolete items is required. To date, as a result of low volume of revenues generated from the sales of the GlucoTrack® model DF-F glucose monitoring device the Group has recorded reserves with respect to its inventory in the amount of approximately US$ 1,457 thousand. (of which an amount of US$ 700 thousand was recognized in the fourth quarter of 2018) |
| NOTE 4 | – | OTHER CURRENT ASSETS |
| US dollars | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Prepaid expenses | 30,319 | 90,563 | ||||||
| Government Institution (*) | 63,818 | 266,431 | ||||||
| 94,137 | 356,994 | |||||||
| US dollars | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Prepaid expenses | 13,591 | 30,319 | ||||||
| Government Institution | 9,697 | 63,818 | ||||||
| 23,288 | 94,137 | |||||||
| NOTE 5 | – | PROPERTY AND EQUIPMENT, NET |
| US dollars | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Computers | 324,690 | 274,693 | ||||||
| Furniture and office equipment | 263,106 | 237,240 | ||||||
| Leasehold improvements | 49,558 | 44,686 | ||||||
| 637,354 | 556,619 | |||||||
| Less – accumulated depreciation | (420,608 | ) | (316,167 | ) | ||||
| 216,746 | 240,452 | |||||||
| US dollars | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Computers | 315,486 | 324,690 | ||||||
| Furniture and office equipment | 233,439 | 263,106 | ||||||
| Leasehold improvements | 45,842 | 49,558 | ||||||
| 594,767 | 637,354 | |||||||
| Less – accumulated depreciation | (444,988 | ) | (420,608 | ) | ||||
| 149,779 | 216,746 | |||||||
| During the years ended December 31, 2018 and 2017, depreciation expenses amounted to $58,789, and $67,878, respectively, and new equipment purchases amounted to $5,371 and $19,467, respectively. |
| NOTE 6 | – | OTHER CURRENT LIABILITIES |
| US dollars | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Employees and related institutions | 239,964 | 336,783 | ||||||
| Accrued expenses and other | 917,386 | 929,171 | ||||||
| 1,157,350 | 1,265,954 | |||||||
| F-18 |
| US dollars | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Employees and related institutions | 336,783 | 363,738 | ||||||
| Accrued expenses and other | 929,171 | 349,811 | ||||||
| 1,265,954 | 713,549 | |||||||
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 7– | LINE OF CREDIT |
| As of December 31, 2018, the Group did not have a credit line with any institution. |
| NOTE 8 | – | LONG-TERM LOANS FROM STOCKHOLDERS |
| During the years 2003-2004, Integrity Israel received loans from stockholders (four separate lenders). The loans are indexed to the Israeli Consumer Price Index from their origination date and bear no interest. | |
| The Group will be required to pay the loans, in quarterly installments, commencing on the first quarter following the first fiscal year in which the Group reports net profit in its annual report. At such time, the Group will be required to make quarterly payments equal to 10% of its total sales for each quarter until the loans have been repaid in full. Notwithstanding the repayment mechanism, the Group will not be required to repay the loans during any period in which such payment would cause a deficit in the Group’s working capital. | |
| From June of 2011 Integrity Israel, Avner Gal, David Malka, Zvi Cohen, Ilana Freger and Alexander Raykhman, on the one hand, and Dimri, on the other hand, which was a shareholder of Integrity Israel prior to the reorganization and merger (See Note 1A above), were involved in arbitration proceedings resulting from certain claims asserted by Dimri following such reorganization. Pursuant to the terms of the Arbitration Decision, (1) Avner Gal, David Malka, Zvi Cohen, Ilana Freger and Alexander Raykhman transferred to Dimri, on March 18, 2015, an aggregate of 440,652 shares of the Company’s outstanding Common Stock held collectively by such shareholders, (2) Integrity Israel (A) paid to Dimri on March 23, 2015, NIS 1,767,674 or $439,939 (based on the exchange rate of 4.018 NIS:$1 as of March 23, 2015), as repayment in full of the outstanding principal amount under Dimri’s investment agreement with Integrity Israel and the founders (the “Investment Agreement”), as adjusted for changes in the Israeli consumer price index since the date on which the loan was made, and (B) paid to Dimri on April 30, 2015, NIS 316,100 or $81,870 (based on the exchange rate of 3.861 NIS:$1 as of April 30, 2015), as partial reimbursement of Dimri’s attorney’s fees in the arbitration. The Company accrued for the fee reimbursement obligation as part of professional fees within selling, marketing and general and administrative expenses included in its results of operations for the fiscal year ended December 31, 2014. During March 2015, such amount was fully paid. | |
| As of December 31, 2018, the Group does not expect to make any additional material repayments during the following 12-month period, if any, and accordingly the entire remaining balance of the loans from stockholders have been presented as long-term liabilities. |
| F-19 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 9 – | COMMITMENTS AND CONTINGENT LIABILITIES |
| A. | On March 4, 2004, the OCS provided Integrity Israel with a grant of approximately $93,300 (NIS 420,000), for its plan to develop a non-invasiveblood glucose monitor |
| As of December 31, 2018, and 2017, the Group accrued royalties to the OCS in the amounts of $4,418 and $13,907, respectively. | ||
| B. | Until mid of December 2015, Integrity Israel leased approximately 3,100 sq. ft. of office space in the city of Ashkelon, Israel as its principal offices and prototype laboratory. Pursuant to a verbal agreement with the landlord, Integrity Israel leased this facility on a monthly basis at a cost of approximately $2,934 (NIS 11,500). Currently, Integrity Israel leases approximately 5,500 sq. ft. of office space in the city of Ashdod, Israel for its principal offices. The lease term began on December 1, 2015 for a period of 5 years which can be extended for an additional 5 years at the option of the Company. Monthly lease payments including maintenance approximate $10,000. TheCompany estimates that its minimal rent and maintenance payments will approximate $120,000 per year over each of the next 5 years. In connection with the lease agreement, Integrity Israel provided the landlord a bank guarantee in the amount of approximately |
| C. | On August 1, 2017 the Company entered into an Advisory Agreement with AGI, pursuant to which the Company retained AGI on a non-exclusive basis to providecertainadvisory services to the As a result of the | |
| The Company |
| F-20 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10– | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION |
| A. | 1. | Description of the rights attached to the Common Stock |
| Each share of Common Stock entitles the holder to one vote, either in person or by proxy, on each matter submitted to the approval of the Company’sstockholders. The holders of Common Stock are not permitted to vote their shares cumulatively. As described below, holders of Preferred Stock are entitled to vote together withtheholders of Common Stock on an as-converted basis. Accordingly, the holders of the Company’s Common Stock together with the holders of the Preferred Stockwho hold, in the aggregate, more than fifty percent of the total voting rights can elect all of the directors and, in such event, the holders of the remaining shares will notbe able to elect any of such directors. The vote of the holders of amajority of the issued and outstanding shares of Common Stock, voting together with the holdersofthe Preferred Stock on an as converted basis, are entitled to vote thereon is sufficient to authorize, affirm, ratify or consent to any act or action submitted to the voteof the Company’sstockholders, except as otherwise provided bylaw. | |||
| 2. | Description of the rights attached to the SeriesAPreferred Stock | ||
| Holders of Series A Preferred Stock | |||
| The Company was obligated to redeem the Series A Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series A Preferred Stock, the occurrence of a change in control ofthe Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for tradingon one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holderofSeries A Preferred Stock had the option to require the Company to redeem such holder’s shares of Series A Preferred Stock for a redemption price payablein shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series A PreferredStock. As a result of the Forced Conversion which occurred on December 31, 2018, the Company issued 6,148 shares of Common Stock to the holders of the Series A Preferred Stock, in lieu of the interest due for late payment. | |||
| Subject to certain conditions, the Company had the option to force the conversion of the Series A Preferred Stock (in whole or in part) if the volumeweighted average price for the Common Stock on its principal trading market exceeded $11.60 for each of any 20 trading days during any 30 consecutive Trading Day periodandthe average daily dollar trading value for the Common Stock during such 30 day period exceeded $100,000. |
| F-21 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10– | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| A. | 2. | Description of the rights attached to the SeriesAPreferred Stock (cont.) | |
| If the Company failed to timely deliver certificates for shares of Common Stock issuable upon conversion of the Series A Preferred Stock (the“Series AConversion Shares”)and, as a result, the holder was required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder ofthe Series A Conversion Shares (a “Buy-In”), the Company was required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by whichsuchholder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate numberofSeries A Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation wasexecuted (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Series A Preferred Stock equal to thenumberof shares of Series A Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the numberofshares of Common Stock that would have been issued if the Company had timely complied with its deliveryrequirements. | |||
| In addition, the Company was required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series A Preferred Stock’ whichhave been converted by a holder and in respect of which the Company failed to deliver Series A Conversion Shares by the eighth trading day following theapplicable conversiondate. | |||
| The conversion price of the shares of Series A Preferred Stock that were included in the Series A Units was subject to adjustment for certain issuances of CommonStock or other securities of the Company at an effective price per share that is lower than the conversion price then in effect ( $4.50 per share at December 31, 2017), as well as for stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions tocommonstockholders. | |||
As a result of the Forced Conversion which occurred on December 31, 2018, the Series A units were exchanged and the Company issued (i) 1,457,364 shares of Common Stock to the holders of the Series A Preferred Stock,par value $0.001 per share, (ii) a five year warrant to purchase, at an exercise price of $1.80per share, 83,556 of shares of our common stock (iii) a five year warrant to purchase, at an exercise price of $3.60per share, 83,556 of shares of our common stock and (iv) a five year warrant to purchase, at an exercise price of $5.40per share, 83,556 of shares of our common stock. The forced conversion and the extinguishment of the Series A preferred stocks was accounted for as a deemed dividend (See Note 2T 5). |
| F-22 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 – | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| A. | 3. | Description of the rights attached to the Series B Preferred Stock | |
Holders of Series B Preferred Stock were entitled to receive cumulative dividends at a rate of 5.5% per annum, based on the stated value per share of Series BPreferredStock. Dividends on the Series B Preferred Stock were payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on September 30, 2014, and on each conversion date (with respect to the shares of Series B Preferred Stock being converted). For so long as required under the terms of the CertificateofDesignations for the Company’s outstanding Series A Preferred Stock, dividends on Series B Preferred Stock have been payable only in shares of CommonStock.Thereafter, dividends on the Series B Preferred Stock have been payable, at the option of the Company, in cash and/or, if certain conditions are satisfied, sharesofCommon Stock or a combination of both. Shares of Common Stock issued as payment of dividends have been valued at the lower of (a) the then current conversionpriceof the Series B Preferred Stock or (b) the average of the volume weighted average price for the Common Stock on the principal trading market therefor for the 10 trading days immediately prior to the applicable dividend payment date. The Company incurred a late fee of 9% per annum, payable in cash, on dividends that are notpaidwithin three trading days of the applicable dividend payment date. During the years ended December 31, 2018 and 2017 the Company was required to issue a total of1,081,115 and 359,505shares of Common Stock, respectively at an estimated fair value of $2,649,188, and $854,647, respectively as in-kind dividends to holders of SeriesBPreferred Stock. As a result of the Forced Conversion which occurred on December 31, 2018, the Company issued 1,233,776 and 270,364 shares of Common Stock to the holders of the Series B Preferred Stock, in lieu of the accrued dividends (for the six month ended December 31,2017 and for the year ended December 31, 2018) and accrued interest fees, respectively. The forced conversion and the extinguishment of the Series B preferred stocks was accounted for as a deemed dividend (See Note 2T 5). | |||
The Series Bunits,each consisted of (i) one share of our newly designated Series B 5.5% Convertible Preferred Stock, par value $0.001 per share are convertibleintosharesofourcommon stock, par value $0.001 per share, at an initial conversion price of $4.50 per share, (ii) a five year warrant to purchase, at an exercise price of $4.50per share, up to such number of shares of our common stockissuable upon conversion of such share of Series BPreferred Stock (each a“Series B-1Warrant”)and (iii) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of our common stockissuable upon conversionofsuch shareofSeries B Preferred Stock (each a“Series B-2Warrant” and, together with the Series B-1 Warrants, collectively, the“SeriesB Warrants”). As a result of the Forced Conversion which occurred on December 31, 2018, the Series B units were exchanged and the Company issued (i) 58,260,194 shares of Common Stock to the holders of the Series C Preferred Stock, par value $0.001 per share, (ii) a five year warrant to purchase, at an exercise price of $1.80per share, 3,340,251 of shares of our common stock (iii) a five year warrant to purchase, at an exercise price of $3.60per share, 3,340,251 of shares of our common stock and (iv) a five year warrant to purchase, at an exercise price of $5.40per share, 3,340,251 of shares of our common stock. | |||
| Subject to certain ownership limitations described below, the Series B Preferred Stock were convertible at the option of the holder at any time and from time to timeinto shares of Common Stock at a conversion price of $4.5 per share (the original conversion price was $5.8 per share, during 2016 the conversion price was decreaseto$4.5 per share as a result of the issuance of series C) (calculated by dividing the stated value per share of Series B Preferred Stock, which is initially $1,000, bythe conversion price per share). The conversion price of the Series B Preferred Stock was subject to adjustment for certain issuances of Common Stock or other securitiesof the Company at an effective price per share that is lower than the conversion price then in effect, as well as for stock splits, stock dividends, combinations ofshares,similar recapitalization transactions and certain pro-rata distributions to common stockholders. In addition, the holders of Series B Preferred Stock were entitledto receive any securities or rights to acquire securities or property granted or issued by the Company pro rata to the holders of Common Stock to the same extent asif such holders of Series B Preferred Stock had converted all of their shares of Series B Preferred Stock prior to such distribution. In the event of afundamentaltransaction, such as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations of the Company, the holders of Series B Preferred Stock were entitled to receive, upon conversion of their shares of Series B Preferred Stock, any securities or other consideration received by the holdersofthe Common Stock pursuant to the fundamentaltransaction. | |||
| Subject to certain conditions contained in the Certificate of Designations, Preferences and Rights relating to the Series B Preferred Stock, the Company hadthe option to force the conversion of the Series B Preferred Stock (in whole or in part) if (a) the volume weighted average price for the Common Stock on its principal trading market exceeds $10.00 for each of any 20 trading days during any 30 consecutive Trading Day period and the average daily dollar trading value forthe Common Stock during such 30 day period exceeds $50,000 or (b) the Company receives approval to list the Common Stock on a national securities exchange. |
| F-23 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 – | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| A. | 3. | Description of the rights attached to the Series B Preferred Stock (cont.) | |
| If the Company failed to timely deliver certificates for shares of Common Stock issuable upon conversion of the Series B Preferred Stock (the “Series B Conversion Shares”) which results in a Buy-In, the Company was required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by which such holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate number of Series B Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Series B Preferred Stock equal to the number of shares of Series B Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements. | |||
| In addition, the Company was required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series B Preferred Stock which have been converted by a holder and in respect of which the Company failed to deliver Series B Conversion Shares by the eighth trading day following the applicable conversion date. | |||
| Subject to any limitations under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock, the Company may become was obligated to redeem the Series B Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series B Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series B Preferred Stock will had the option to require the Company to redeem such holder’s shares of Series B Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series B Preferred Stock. | |||
| Subject to any limitations under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock, the Company may become obligated to redeem the Series B Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series B Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series B Preferred Stock will have the option to require the Company to redeem such holder’s shares of Series B Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series B Preferred Stock. | |||
| Subject to the Beneficial Ownership Limitation, holders of Series B Preferred Stock will could vote together with the holders of Common Stock and Series A Preferred Stock on an as-converted basis. Holders will not be permitted to convert their Series B Preferred Stock if such conversion would cause such holder to beneficially own shares of outstanding Common Stock in excess of the Beneficial Ownership Limitation. | |||
| Subject to the Beneficial Ownership Limitation, holders of Series B Preferred Stock could vote together with the holders of Common Stock and Series A Preferred Stock on an as-converted basis. Holders will not be permitted to convert their Series B Preferred Stock if such conversion would cause such holder to beneficially own shares of outstanding Common Stock in excess of the Beneficial Ownership Limitation. | |||
| Subject to certain limitations, so long as any Purchaser holds any shares of Series B Preferred Stock, if (a) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (b) a Purchaser then holding Series B Preferred Stock, Series B Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such Purchaser, then the Purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such Purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such Purchaser). | |||
| Subject to certain limitations, so long as any Purchaser holds any shares of Series B Preferred Stock, if (a) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (b) a Purchaser then holding Series B Preferred Stock, Series B Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such Purchaser, then the Purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such Purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such Purchaser). |
| F-24 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 – | COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| 4. | Description of the rights attached to the SeriesCPreferred Stock | |||
Holders of Series C Preferred Stock were entitled to receive cumulative dividends at a rate of 5.5% per annum, based on the stated value per share of Series CPreferredStock. Dividends on the Series C Preferred Stock were payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on June 30, 2016,and on each conversion date (with respect to the shares of Preferred Stock being converted). For so long as required under the terms of the Certificate ofDesignationsfor the Company’s outstanding Series A Preferred Stock | ||||
| The Series Cunits, each consisted of (i) one share of our newly designated Series C 5.5% Convertible Preferred Stock, par value $0.001 per share are convertibleintosharesofourcommon stock, par value $0.001 per share, at an initial conversion price of $4.50 per share, (ii) a five year warrant to purchase, at an exercise price of $4.50per share, up to such number of shares of our common stockissuable upon conversion of such share of Series CPreferred Stock (each a“Series C-1Warrant”)and (iii) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of our common stockissuable upon conversionofsuch shareofSeries C Preferred Stock (each a“Series C-2Warrant” and, together with the Series C-1 Warrants, collectively, the“SeriesC Warrants”).As a result of the Forced Conversion which occurred on December 31, 2018, the Series C units were exchanged and the Company issued (i) 46,526,357 shares of Common Stock to the holders of the Series C Preferred Stock, par value $0.001 per share, (ii) a five year warrant to purchase, at an exercise price of $1.80per share,2,667,539of shares of our common stock (iii) a five year warrant to purchase, at an exercise price of $3.60per share,2,667,539of shares of our common stock and (iv) a five year warrant to purchase, at an exercise price of $5.40per share,2,667,539of shares of our common stock. | ||||
Subject to any limitations under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock or Series B Preferred Stock,theCompany was obligated to redeem the Series C Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, amaterialbreach by the Company of certain contractual obligations to the holders of the Series C Preferred Stock, the occurrence of a change in control of the Company,theoccurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one ormorespecified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series C Preferred Stock had the option to require the Company to redeem such holder’s shares of Preferred Stock for a redemption price payable in shares ofCommonStock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series C PreferredStock. | ||||
Subject to certain conditions contained in the Certificate of Designations, Preferences and Rights relating to the Series C Preferred Stock (the“Certificate ofDesignations”),the Company had the option to force the conversion of the Series C Preferred Stock (in whole or in part) if (a) the volume weighted averagepricefor the Common Stock on its principal trading market exceeds $7.00 for each of any 20 trading days during any 30 consecutive trading day period and the averagedailydollar trading value for the Common Stock during such 30 day period exceeds $50,000 or (b) the Company receives approval to list the Common Stock on a national securitiesexchange. |
| F-25 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 – | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| 4. | Description of the rights attached to the SeriesCPreferred Stock (cont.) | |||
Subject to certain exceptions contained in the Certificate of Designations, if the Company failed to timely deliver certificates for shares of Common Stock issuableuponconversion of the Series C Preferred Stock (the“Conversion Shares”) and, as a result, the holder is required by its brokerage firm to purchase shares of CommonStock to deliver in satisfaction ofasale by such holder of the Conversion Shares (a “Buy-In”), the Company was required to: (a) pay the converting holder in cashan amount equal to the amount, if any, by which such holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock sopurchasedexceeds the product of (i) the aggregate number of Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving riseto such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares ofSeriesC Preferred Stock equal to the number of shares of Series C Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded)ordeliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements.Inaddition, the Company was required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series C Preferred Stock which have been converted by a holder and in respect of which the Company failed to deliver Conversion Shares by the fifth trading day following the applicable conversiondateand the Company will continue to pay such partial liquidated damages for each trading day after such eighth trading day until such certificates are delivered orthe holder rescinds suchconversion. | ||||
Subject to the beneficial ownership limitation described below, holders of Series C Preferred Stock could vote together with the holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock on an as-converted basis. Holders will not be permitted to convert their Series C Preferred Stock if such conversionwouldcause such holder to beneficially own more than 4.99% of the outstanding Common Stock (subject to increase to 9.99%, at the option of the holder, upon no lessthan61 days prior written notice to the Company) (the“Beneficial Ownership Limitation”).In addition, no holder may vote any shares of Series C Preferred Stock (on an as- converted to Common Stock basis) in excess of the Beneficial Ownership Limitation. | ||||
Subject to certain limitations, so long as any purchaser holds any shares of Series C Preferred Stock, if (a) the Company sells any shares of Common Stock orothersecurities convertible into, or rights to acquire, Common Stock and (b) a purchaser then holding Series C Preferred Stock, Warrants, Conversion Shares orWarrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser insuchsubsequent sale of securities than are the terms and conditions granted to such purchaser after taking into account all of the terms and conditions of the termsgrantedto the purchasers under the purchase agreement and the terms granted in such subsequent issuance or sale, including all of the components of the Series CUnitsandof the securities or units involved in such subsequent issuance or sale, then the purchaser will be permitted to require the Company to amend the terms ofthistransaction (only with respect to such purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any termsandprovisions that are or may be less favorable to suchpurchaser). |
| F-26 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 – | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| 5. | Description of the rights attached to the Series | |||
Holders of the Series D Units of the Company (each a“Unit”and, collectively, the“Units”),each consisted of (a) one share (collectively, the“Shares”) ofthe Company’s common stock, par value $0.001 per share (the“Common Stock”),(b) a five year warrant to purchase, at an exercise price of $4.50 per share, one shareofCommon Stock As a result of the Forced Conversion which occurred on December 31, 2018, the Series D units were exchanged and the Company issued (i) 23,852,721 shares of Common Stock to the holders of the Series D Common Stock,par value $0.001 per share, (ii) a five year warrant to purchase, at an exercise price of $1.80per share, 1,367,556 of shares of ourcommon stock (iii) a five year warrant to purchase, at an exercise price of $3.60per share, 1,367,556 of shares of ourcommon stock and (iv) a five year warrant to purchase, at an exercise price of $5.40per share, 1,367,556 of shares of ourcommon stock. |
| F-27 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 – | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| A. | Description of the rights attached to the Series | ||
| Placement Agent Compensation | |||
| Pursuant toaplacement agent agreement (the “Placement AgentAgreement”) with the placement agent for theOffering(the “PlacementAgent”),at the closing ofthesale of the Units the Company paid the Placement Agent, as acommission,acash amount equal to 7% of the aggregate sales price of the Units, plus 3% oftheaggregate sales price as amanagement fee plus anon-accountable expense allowance equal to 3% of the aggregate sales price of the Units. In addition, pursuanttothe placement agent agreement, we are required to issue to the Placement Agent warrants to purchase up to such number of shares of Common Stock equal to 10%of the aggregate Shares sold in theOfferingplus warrants equal to 10% of the total number of the Warrants issued to the Purchasersin the Offering (collectively, the“Placement Agent Warrants”). The terms of the Placement Agent Warrants will be substantially similar to the Warrants except that the Placement Agent Warrantswill also be exercisable on a cashless basis and will include full ratchet anti-dilutionprotection. | |||
| B. | The 2017Offering | ||
On December 1, 2017 and during 2018, the Company raised $6,154,000 in gross proceeds from the issuance of ten closings totaling 1,367,556 Series D Units. After giving effect to the payment of commissions to the Placement Agent (See Note 9C) for the offering and the payment of certain offering expenses, the Company received net proceeds from the offeringofapproximately $5,339,112. The Series DWarrants have afive-yearterm commencing on their respective issuance dates. Until the end of the applicable term, each Series D Warrant was exercisable at anytimeand from time to time at an exercise price of $4.50 per share (with respect to the Series D-1 Warrants) or $5.75 per share (with respect to the Series D-2Warrants) or $7.75 pershare (with respect to the Series D-3Warrants). | |||
TheSeries DWarrants have a five-year term. Until the end of the term, the Warrants will be exercisable at any time and from time to time. Subject to the beneficial ownership limitation, holders of the Warrants will not be permitted to exercise their Warrants if such exercise would cause such holdertobeneficially own more than 4.99% of the outstanding Common Stock (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days priorwrittennotice to the Company) (the“Beneficial Ownership Limitation”). If the Company fails to timely deliver certificates for shares of Common Stock issuable upon exercise of the Warrants (the“Warrant Shares”) and, as aresult,theholder is required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder of the Warrant Shares (a “Buy-In”),the Company will be required to: (a) pay in cash to the holder the amount, if any, by which (i) the holder’s total purchase price (including brokerage commissions, ifany) for the shares of Common Stock so purchased exceeds (ii) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was requiredtodeliver to the holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed; and (b)at the option of such holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (inwhichcase such exercise shall be deemed rescinded) or deliver to the holder the number of shares of Common Stock that would have been issued had the Companytimely complied with its exercise and delivery obligations. In connection with the sale of the Units which occurredin2017 and 2018, the Company entered into a Registration Rights Agreement with thePurchasers(the“RegistrationRightsAgreement”)pursuant to which, subject to certain exceptions, the Company has agreed to file with the Securities and Exchange Commission,no later than 90 days after the final issuance of Units, a registration statement covering the resale of all of (a) the Shares, (b) theshares of Common Stock issuableuponexercise of the Warrants in full (the“Warrant Shares”); (c) any additional shares of Common Stock issuable in connection with anyanti-dilution provisions intheWarrants; and (d) any securities issued or then issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect tothe foregoing. Subject to certain exceptions and limitations specified in the Registration Rights Agreement, the Company will be required to pay each holdermonthly partial liquidated damages in the amount of 2% of the aggregate purchase price paid by such holder pursuant to the Purchase Agreement, if the Company failstotimely file a registration statement; timely file a request for acceleration of a registration statement; timely respond to SEC comments with respect to aregistrationstatement; obtain the effectiveness of a registration statement within 120 days from the filing thereof; or maintain the effectiveness of a registration statement forthe periods required under the Registration RightsAgreement. | |||
| F-28 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| C. | The 2017 Offering (cont.) | |
In connection with the 2017 Offering the Company incurred a total of $1,209,144of issuance costs of which $394,256 attributable to non-cashcompensation expensesrelatingto warrants issued to the Placement Agent (See Notes 9C and Note 10D). The allocation method of the issuance proceeds to theSeries D Common Stock and tothe detachable Series DWarrants and their respective issuance costs was based on the relative fair value of suchinstallments. | ||
Pursuant to the purchase agreements relating to the issuance and sale of the SeriesAUnits the SeriesBUnits and SeriesCUnits, the Company was required to anddidnotify the holders of the Series A Preferred Stock, Series B Preferred Stock and Series and the C Preferred Stock of the closing of the sale of the Series D Units,andfollowing receipt thereof such holders of Series A Preferred Stock, Series B Preferred Stock and the Series C preferred Stock were entitled, pursuant to the“most favored nation” provisions contained in their respective purchase agreements, to elect to amend the terms of their Series A Units, Series B Units and Series C units,respectively,to match the terms of the Series D Units. The Company was obligated to amend the terms of any of Series A Units or Series B Units or Series C units who timely makessuchelection and tenders its Series A Units or Series B Units or Series C units for exchange. | ||
| Upon initial recognition, common stockissued together with detachable Series DWarrants (classified as equity) were measured based on the relative fair value basisandwere presented each net of the direct issuance expenses that were allocated tothem. | ||
| C. | Warrants with down round protection | |
| The placement agent Warrants(hereinafter “warrants”) have a five-year term commencing on their issuance date.In accordance with their original terms, the Warrants are exercisable at any time at a certain exercise price. These Warrants contain adjustment provisionssubstantiallysimilar to the adjustment provisions of the Series A Preferred Stock (See Note 10A.2), including provisions requiring an adjustment of the number of shares andthe exercise price to the price at which the Company subsequently issues share or other equity-linked financial instruments, if that price is less than the original exercise priceof the Warrants (down-round protection). In addition, the Warrants provide for protection for a Buy-Inon substantially the same terms as described above with respect to the Series A Preferred Stock. No holder may exercise its Warrants in excess of the Beneficial Ownership Limitation | ||
| As a result of future issuances, the exercise price per share and the number of shares of Common Stock issuable upon exercise of each such warrant were adjustedseveraltimes. | ||
| On December 31, 2018 as a result of the Forced Conversion all of the outstanding warrants with down round protection were exchanged. As of December 31, 2018, the number of warrants with down round protection is 51,001,332 at an exercise price of $0.258with a total fair value of approximately $6.6 million. |
| F-29 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10– | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| Warrants with down round protection (cont.) | ||
The Company has determined its derivative warrant liability to be a Level 3 fair value measurement and has used the Black and Scholes pricing model to calculate its fair value.Because the warrants contain aprice protection feature, the probability that the exercise price of the warrants would decrease as the stock price decreasedwas incorporated into the valuationcalculations. | ||
| The changes in the fair value of the Level 3 liability are as follows (in US dollars): |
| Warrants with Down-Round Protection | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Balance, Beginning of the year | 681,970 | 321,695 | ||||||
| Warrants issued as consideration for placement services | 353,721 | 308,239 | ||||||
| Stock based compensation to financial advisor | 32,880 | - | ||||||
| Amount classified out of stockholders’ deficit and presented as Warrants with Down-Round Protection | - | 341,662 | ||||||
| Change in fair value of Warrants with Down-Round Protection | (300,322 | ) | (289,626 | ) | ||||
| Balance, End of year | 768,249 | 681,970 | ||||||
| Warrants with Down-Round Protection | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Balance, Beginning of the year | 768,249 | 681,970 | ||||||
| Warrants issued as consideration for placement services | - | 353,721 | ||||||
| Stock based compensation to financial advisor | - | 32,880 | ||||||
| Change in fair value of Warrants with Down-Round Protection | - | (300,322 | ) | |||||
| Reclassification to stockholder’s deficit (*) | (768,249 | ) | - | |||||
| Balance, End of year | - | 768,249 | ||||||
| (*) | As a result of the early adoption of ASU 2017-11 the company reclassified all the warrants with down round protection to stockholder’s deficit (see Note 2U and 2W) |
The key inputs used in the fair value calculations were asfollows:
December 31, 2017 | December 31, 2016 | |||||||
| Dividend yield (%) | - | - | ||||||
| Expected volatility (%) (*) | 56.59 | 56.59 | ||||||
| Risk free interest rate (%) | 1.31 | 0.92 | ||||||
| Expected term of options (years) | 0.2 - 4.92 | 1.20 - 4.92 | ||||||
| Exercise price (US dollars) | 4.50 – 7.75 | 4.50 - 7.75 | ||||||
| Share price (US dollars) (**) | 2.45 | 2.38 | ||||||
| Fair value (US dollars) (***) | 0.002 - 0.81 | 0.16 – 0.75 | ||||||
| December 31,2017 | ||||
| Dividend yield (%) | - | |||
| Expected volatility (%) (*) | 56.59 | |||
| Risk free interest rate (%) | 1.31 | |||
| Expected term of options (years) | 0.2 - 4.92 | |||
| Exercise price (US dollars) | 4.50 - 7.75 | |||
| Share price (US dollars) (**) | 2.45 | |||
| Fair value (US dollars) | 0.002 – 0.81 | |||
| (*) | Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on a sample of 254 companies operating in theHealthcare Productsindustry. |
| (**) | The Common Stock price, per share reflects the Company’s management’s estimation of the fair value per share of Common Stock as of December 31, |
| F-30 |
| Investors | AGI - Series A | AGI - Series B | AGI - Series C | AGI - Series D | ||||||||||||||||
| Total quantity | 126,935 | 364,071 | 566,897 | 844,605 | 37,777 | |||||||||||||||
| Exercise price | 4.5 | 4.5 | 4.5, 7.75 | 4.5, 7.75 | 4.5 5.75, 7.75 | |||||||||||||||
| Fair value | 0.31 | 0.12 | 0.12 – 0.34 | 0.29 – 0.76 | 0.5 – 0.81 | |||||||||||||||
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 – | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| Stock-based compensation | ||||
| 1. | Grants to non-employees | |||
| a. | In connection with the 2010 Offering, the Company issued to the Placement Agent warrants to purchase 45,097 and 84,459 shares, respectively, ofthe |
| b. | In connection with the 2012 Offering, the Company issued to the Placement Agent (a) 5 year warrants to purchase up to 128,277 shares of Common Stock atan exercise price of $5.80 per share and (b) 5 year warrants to purchase up to 128,277 shares of Common Stock at an exercise price of $6.96 per share and (c) 5 year warrants to purchase up to 215 shares of Common Stock at an exercise price of $7.00 per share. Such warrants have substantially the same terms asthose issued to the Series AUnit Purchasers except that the Placement Agent warrants may also be exercisable on a cashless basis at all times. As a result ofthe issuance of the Series B Units, pursuant to the terms of the warrants, on August 29, 2014, the exercise price per share of the applicable warrants decreasedfrom |
| F-31 |
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Investors | Placement agent | Investors | Placement agent | |||||||||||||
| Dividend yield (%) | 0 | 0 | 0 | 0 | ||||||||||||
| Expected volatility (%) | 56.69 | 56.69 | 56.69 | 56.69 | ||||||||||||
| Risk free interest rate (%) | 1.31 | 1.31 | 0.92 | 0.92 | ||||||||||||
| Expected term of options (years) | 0.2 | 2 | 1.2 | 3 | ||||||||||||
Exercise price US dollars | 4.5 | 4.5 | 4.5 | 4.5 | ||||||||||||
| Share price (US dollars) | 2.45 | 2.45 | 2.38 | 2.38 | ||||||||||||
| Fair value (US dollars) | 0.002 | 0.311 | 0.159 | 0.481 | ||||||||||||
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 – | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| Stock-based compensation (cont.) | ||||
| 1. | Grants to non-employees (cont.) | |||
| c. | In connection with the 2014 Offering, the Company issued to the Placement Agent (a) 5 years warrants to purchase up to 293,115 shares of Common Stock at an exercise price of $5.80 per share and (b) 5 years warrants to purchase up to 146,559 shares of Common Stock at an exercise price of $10.00 per share. The terms of the Placement Agent warrants are substantially similar to the terms of the Series B Warrants except that the Placement Agent warrants may also be exercisable on a cashless basis at all times. The warrants include customary adjustment provisions forstocksplits, reorganizations and other similar transactions and in addition adown-round protection provision. As a result of future issuances, the exercise price per share and the number of shares of Common Stock issuable upon exercise of each such warrant were adjusted several times. As of December 31, 2017, and 2016 the Placement Agent was entitled to an aggregate of 703,479 shares of Common Stock, respectively, at an exercise price of $4.50 in connection with the 2014 offering. | |||
| d. | In connection with the 2016 Offering, the Company issued to the Placement Agent (a) | |||
The warrants include customary adjustment provisions forstocksplits, reorganizations and other similar transactions and in addition adown-round protection provision. As a result of future issuances, the exercise price per share and the number of shares of Common Stock issuable upon exercise of each such warrant were adjusted. As of December 31, 2017, the Placement Agent was entitled to an aggregate of 992,816 shares of Common Stock, respectively, at an exercise price of $4.50 in connection with the 2016 offering. |
December 31, 2017 | December 31, 2016 | |||||||
| Dividend yield (%) | - | - | ||||||
| Expected volatility (%) | 56.59 | 56.59 | ||||||
| Risk free interest rate (%) | 1.31 | 0.92 | ||||||
| Expected term of options (years) | 3.27 - 4.58 | 4.27 - 4.92 | ||||||
| Exercise price (US dollars) | 4.50, 7.75 | 4.50, 7.75 | ||||||
| Share price (US dollars) | 2.45 | 2.38 | ||||||
| Fair value (US dollars) | 0.29 - 0.76 | 0.39 – 0.75 | ||||||
| e. | In connection with the 2017 Offering, the Company issued to the Placement Agent (a) 5 | |||
As a result of the early adoption of ASU 2017-11 the company reclassified all the warrants with down round protection (warrants held by the placement agent) from long term liabilities to stockholder’s deficit (see Note 2U and 2W) | ||||
| On December 31, 2018 as a result of the Forced Conversion all of the outstanding warrants with down round protection (approximately 2,787,323) were exchanged. As of December 31, 2018, the number of warrants with down round protection is 51,001,332 at an exercise price of $0.258. | ||||
| As of December 31, 2018, and 2017, the key inputs used in the fair value calculations of the warrant that were affected by thedown-roundprotectionwere as follows: |
| December 31, 2018 | December 31, 2017 | |||||
| Dividend yield (%) | - | - | ||||
| Expected volatility (%) | 56.32 | 56.59 | ||||
| Risk free interest rate (%) | 2.50 | 1.31 | ||||
| Expected term of options (years) | 5 | 0.2 - 4.92 | ||||
| Exercise price (US dollars) | 0.258 | 4.50, 5.75, 7.75 | ||||
| Share price (US dollars) | 0.258 | 2.45 | ||||
| Fair value (US dollars) | 0.13 | 0.12 – 0.81 | ||||
| Grants toemployees | ||||
| In August 2007, Integrity Israel’s Board of Directors (“Integrity Israel’s Board”) approved a stock option plan (“Integrity Israel’s plan”) for the grant,without consideration of options exercisable into ordinary shares of NIS 0.01 par value of Integrity Israel to employees, officers and directors of Integrity Israel. The exerciseprice and vesting period for each grantee of options was determined by Integrity Israel’s Board and specified in such grantee’s option agreement.The optionsvested over a period of 1-12 quarters based on each grantee’s option agreements. Any option not exercised within 10 years after the date of grant thereof willexpire. |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 – | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| Stock-based compensation (cont.) | |||
| Number | Weighted average exercise price (US$) | |||||||
| Balance outstanding as of December 31,2014 | 450,847 | 5.85 | ||||||
| Exercised during 2015 | (19,769 | ) | 1.82 | |||||
| Forfeited during 2015 | (17,605 | ) | 6.01 | |||||
| Balance outstanding as of December 31,2015 | 413,473 | 6.04 | ||||||
| Balance exercisable as of December 31,2015 | 293,736 | 5.95 | ||||||
| Granted during 2016 | 149,330 | 4.53 | ||||||
| Balance outstanding as of December 31,2016 | 562,803 | 5.64 | ||||||
| Balance exercisable as of December 31,2016 | 334,735 | 5.81 | ||||||
| Granted during 2017 | 4,740,318 | 5.22 | ||||||
| Forfeited during 2017 | (66,154 | ) | 3.93 | |||||
| Balance outstanding as of December 31,2017 | 5,236,967 | 5.28 | ||||||
| Balance exercisable of December 31,2017 | 2,428,716 | 5.28 | ||||||
Exercise price (US$) | Outstanding at December 31, 2017 | Weighted average remaining contractual life (years) | Exercise price (US$) | Exercisable at December 31, 2017 | Weighted average remaining contractual life (years) | |||||||||||||||||
| 6.25 | 351,712 | 4.19 | 6.25 | 351,712 | 4.19 | |||||||||||||||||
| 6.02 | 4,273 | 0.03 | 6.02 | 4,273 | 0.03 | |||||||||||||||||
| 7.00 | 22,000 | 6.50 | 7.00 | 22,000 | 6.50 | |||||||||||||||||
| 4.75 | 12,000 | 8.01 | 4.75 | 12,000 | 8.01 | |||||||||||||||||
| 4.50 | 79,998 | 8.21 | 4.50 | 79,998 | 8.21 | |||||||||||||||||
| 4.50 | 26,666 | 8.88 | 4.50 | 22,793 | 8.88 | |||||||||||||||||
| 4.50 | 1,673,996 | 9.21 | 4.50 | 1,231,016 | 9.21 | |||||||||||||||||
| 5.41 | 559,414 | 9.21 | 5.41 | 0 | 0 | |||||||||||||||||
| 7.75 | 844,130 | 9.21 | 7.75 | 0 | 0 | |||||||||||||||||
| 4.50 | 661,875 | 9.26 | 4.50 | 304,615 | 9.26 | |||||||||||||||||
| 7.75 | 50,000 | 9.26 | 7.75 | 16,667 | 9.26 | |||||||||||||||||
| 4.50 | 74,470 | 9.41 | 4.50 | 65,709 | 9.41 | |||||||||||||||||
| 4.50 | 290,585 | 9.48 | 4.50 | 140,660 | 9.48 | |||||||||||||||||
| 4.50 | 585,848 | 9.71 | 4.50 | 177,273 | 9.71 | |||||||||||||||||
| 5,236,967 | 2,428,716 | |||||||||||||||||||||
| 2017 | 2016 | |||||||
| Dividend yield (%) | 0 | 0 | ||||||
| Expected volatility (%) (*) | 56.59 | 62.16 | ||||||
| Risk free interest rate (%) | 0.92 | 1.08 | ||||||
| Expected term of options (years) | 5-10.5 | 6 | ||||||
| Exercise price (US dollars) | 4.50 - 7.75 | 4.50, 4.75 | ||||||
| Stock price (US dollars) (**) | 2.38 | 2.38 | ||||||
| Fair value (US dollars) | 0.58-1.28 | 1.01, 098 | ||||||
| US dollars | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Salaries and related expenses | 1,587,567 | 1,510,491 | 1,279,216 | |||||||||
| Professional fees | 5,169 | 58,954 | 71,930 | |||||||||
| Regulations related expenses | 374,049 | 620,535 | 488,536 | |||||||||
| Patents | 99,224 | 132,344 | 159,624 | |||||||||
| Materials* | 972,779 | 346,238 | 153,669 | |||||||||
| Depreciation | 33,786 | 32,508 | 19,133 | |||||||||
| Travel expenses | 31,973 | 66,211 | 39,324 | |||||||||
| Vehicle maintenance | 66,750 | 91,935 | 54,936 | |||||||||
| Other | 36,169 | 22,601 | 1,977 | |||||||||
| 3,207,466 | 2,881,817 | 2,268,345 | ||||||||||
| US dollars | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Salaries and related expenses | 1,272,830 | 707,111 | 318,716 | |||||||||
| Professional fees | 115,324 | 271,984 | 416,575 | |||||||||
| Travel & expenses | 51,623 | 76,022 | 178,167 | |||||||||
| Exhibitions and Shows | 85,391 | 72,798 | 175,176 | |||||||||
| Other | - | - | 38,800 | |||||||||
| 1,525,168 | 1,127,915 | 1,127,434 | ||||||||||
| US dollars | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Salaries and related expenses | 4,214,606 | 938,203 | 584,058 | |||||||||
| Professional fees | 1,832,165 | 1,046,987 | 573,815 | |||||||||
| Travel & expenses | 184,611 | 130,533 | 114,783 | |||||||||
| Depreciation | 34,092 | 27,076 | 25,759 | |||||||||
| Insurance | 93,746 | 63,182 | 63,146 | |||||||||
| Vehicle maintenance | 73,459 | 51,818 | 41,180 | |||||||||
| 6,432,679 | 2,257,799 | 1,402,741 | ||||||||||
| US dollars | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Israeli CPI linkage difference on principal of loans from stockholders | 3,034 | (629 | ) | (2,521 | ) | |||||||
| Exchange rate differences | 25,847 | 27,934 | 38,873 | |||||||||
| Change in fair value of Warrants with down-round protection | (300,322 | ) | (289,626 | ) | (149,092 | ) | ||||||
| Interest expenses on credit from banks and other | 24,396 | 16,216 | 15,205 | |||||||||
| Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants | - | - | 1,284,354 | |||||||||
| (247,045 | ) | (246,105 | ) | 1,186,819 | ||||||||
| US dollars | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Pretax income (loss) | (10,328,806 | ) | (5,409,737 | ) | (5,842,172 | ) | ||||||
| Federal tax rate | 34 | % | 34 | % | 34 | % | ||||||
| Income tax expenses (benefit) computed at the ordinary tax rate | (3,511,794 | ) | (1,839,311 | ) | (1,986, 338 | ) | ||||||
| Non-deductible expenses | 41,829 | 34,500 | 31,050 | |||||||||
| Stock-based compensation | 908,041 | 17,562 | 4,503 | |||||||||
| Warrants with down round protection | (102,110 | ) | (98,473 | ) | (50,691 | ) | ||||||
| Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants | - | - | 436,680 | |||||||||
| Tax in respect of differences in corporate tax rates | 524,134 | 396,956 | 340,263 | |||||||||
| Losses and timing differences in respect of which no deferred taxes assets were recognized | 2,139,900 | 1,488,766 | 1,224,533 | |||||||||
| - | - | - | ||||||||||
| US dollars | ||||||||||||
| December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Composition of deferred tax assets: | ||||||||||||
| Provision for employee-related obligation | 21,086 | 28,526 | 23,494 | |||||||||
| Non-capital loss carry forwards | 10,354,385 | 7,823,828 | 6,233,314 | |||||||||
| Valuation allowance | (10,375,471 | ) | (7,852,354 | ) | (6,256,808 | ) | ||||||
| - | - | - | ||||||||||
| US dollars | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Income (loss) for the year | (10,328,806 | ) | (5,409,737 | ) | (5,842,172 | ) | ||||||
| Cash dividend on Series A Preferred Stock | (14,950 | ) | (18,229 | ) | (57,061 | ) | ||||||
| Stock dividend on Series B Preferred Stock | (854,647 | ) | (647,215 | ) | (390,219 | ) | ||||||
| Stock dividend on Series C Preferred Stock | (566,033 | ) | (152,480 | ) | - | |||||||
| Income (loss) for the period attributable to common stockholders | (11,764,436 | ) | (6,227,661 | ) | (6,289,452 | ) | ||||||
| Number of shares | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Common shares used in computing Basic income (loss) per share | 6,285,324 | 5,788,842 | 5,476,870 | |||||||||
| Common shares used in computing Diluted income (loss) per share (*) | 6,285,324 | 5,788,842 | 5,476,870 | |||||||||
| 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 (**) | 21,300,975 | 12,745,874 | 9,431,728 | |||||||||
| Pursuant to the terms of their respective employment agreements with the Company, in March 2012, the Company issued to Avner Gal, which served on that dateas the Company’sChief Executive Officer, and David Malka, the Company’sExecutive Vice President of Operations, options to purchase up to 264,778 and 79,434 shares |
| Year ended December 31, | ||||||||||||
| Revenues based on the customer’s location: | 2017 | 2016 | 2015 | |||||||||
| Europe | 504,190 | 431,772 | 13,420 | |||||||||
| Asia and Pacific | 85,272 | 179,917 | 129,747 | |||||||||
| Total | 589,462 | 611,689 | 143,167 | |||||||||
| On March 17, 2016, the Company granted each one of three of its director’soptions to purchase up to an aggregate of 26,666 shares of the Company’sCommonStock, at an exercise price of $4.50 per share. Each director’s option grant will vest in eight equal quarterly increments of 3,333 each (subject to the director’s continued service as of | |||
| On November 15, 2016, the Company granted each one of its two other directors options to | |||
| Effective April 7, 2017 (the |
| F-33 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 – | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| D. | Stock-based compensation (cont.) | ||
| 2. | Grants to employees(cont.) | ||
Effective April 7, 2017, the Company entered into an amendment to the employment agreement (the“Graham Employment Amendment”)with John Graham, whom the Company appointed as Chief Executive Officer on March 20, 2017, to modify the base compensation provision and the equity compensation provisionunderthat certain Employment Agreement, dated March 20, 2017 (the“Graham EffectiveDate”),by and between the Company and Mr. Graham. Pursuant to the termsofthe Graham Employment Amendment the Company agreed, among other things to, (a) grant Mr. Graham an option to purchase up to 1,673,996 shares of Common Stock of the Company having an exercise price per share equal to | |||
| Effective April 7, 2017, Integrity Israel entered into an amended and restated personal employment agreement (the“Malka Employment Agreement”) with David Malka for his continued service as Vice President of Operations of the Company and Integrity Israel, effective as of March 20, 2017 (the“Malka Effective Date”). Pursuant to the terms of the Malka Employment Agreement, the Company agreed, among other things to (a) modify the terms of 26,478 option to purchaseCommonStock at an exercise price per share equal to $6.25 whereby the unvested portion of such options will accelerate and will be immediately exercisable, effective asof the Malka Effective Date (since the original performance conditions were not expected to be satisfied as of the date of the modification of the terms, the fair valueof such grant was measured based on the fair value of the modified award at the modification date); and (b) grant Mr. Malka 361,875 additional option topurchaseCommon Stock at an exercise price per share equal to $4.50 which shall vest on the two year anniversary of the Malka EffectiveDate. | |||
| OnJune1, 2017, the Company granted each one of itsfivedirector’s options to purchase up to an aggregate of14,894shares of the Company’sCommonStock, at an exercise price of $4.50 per share. Each director’s option grant will vest in equal monthly installments over one-year period (subject to the director’s continued service as of each such date) commencing on June 1,2018. | |||
| On June 7, 2017, the Board appointed David Podwalski as the Chief Commercial Officer of the Company, and approved a grant of stock option to purchase sharesof Common Stock equal to 1% of the total fully diluted shares of Common Stock as of the Podwalski Effective Date (290,585 options), with an exercise price of $4.50 per share or the fair market value of a share of Common Stock on the grant date, whichever is greater, vesting monthly over a | |||
| F-34 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10– | COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| D. | Stock-based compensation (cont.) | ||
| 2. | Grants to employees(cont.) | ||
| In September 2017, the Compensation Committee and the Board of Directors approved a grant of stock options to Sami Sassoun the Company’s CFO andEugene Naidis’sthe Company’sVP of Research and Development equating to 1% of the fully diluted number of shares of the Company after the closing of the offeringofSeriesCUnits (292,924 options), with astrike price of US$4.50, with three-yearmonthly vesting commencing on the first month after the effectivedate. | |||
| On February 15, 2018 and April 15, 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. | |||
| OnJune 1, 2018, the Company granted each one of itsfivedirector’s options to purchase up to an aggregate of3,111shares of the Company’sCommonStock, at an exercise price of $4.50 per share. Each director’s option grant will vest in equal monthly installments over one-year period (subject to the director’s continued service as of each such date) commencing on June 1,2018. | |||
| 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 | |||
| The aggregate intrinsic value of the awards outstanding as of December 31, 2018 and 2017 was $0, and $0, respectively. Such amount representsthe total intrinsic value based on the Company’smanagement estimation of the fair value per share of Common Stock based among other things, avaluation prepared by athird-party valuation firm following the issuance of the Series D Units and Series C Units, asapplicable. | |||
| The following tables present a summary of the status of the grants to employees, officers and directors as of December 31, 2018 and 2017: | |||
| Number | Weighted average exercise price (US$) | |||||||
| Balance outstanding as of December 31,2016 | 562,803 | $ | 5.64 | |||||
| Balance exercisable as of December 31,2016 | 334,735 | $ | 5.81 | |||||
| Granted during 2017 | 4,740,318 | $ | 5.22 | |||||
| Forfeited during 2017 | (66,154 | ) | $ | 3.93 | ||||
| Balance outstanding as of December 31,2017 | 5,236,967 | $ | 5.28 | |||||
| Balance exercisable of December 31,2017 | 2,428,716 | $ | 5.28 | |||||
| Granted during 2018 | 798,056 | $ | 4.50 | |||||
| Forfeited during 2018 (*) | (2,042,413 | ) | $ | 6.12 | ||||
| Balance outstanding as of December 31,2018 | 3,992,610 | $ | 4.70 | |||||
| Balance exercisable of December 31,2018 | 2,721,587 | $ | 4.63 | |||||
(*) during December 2018 Mr. John Graham resigned from his position as the company CEO, as a result 1,859,024 warrants were forfeited and the company revers the expenses that have been booked in 2018 and in prior periods regarding the forfeited warrants amounted approximately $1.17 million (the company recorded the reduction under general and administrative expenses)
The following tables summarize information about options outstanding at December 31, 2018:
| Exercise price (US$) | Outstanding at December 31, 2018 | Weighted average remaining contractual life (years) | Exercise price (US$) | Exercisable at December 31, 2018 | Weighted average remaining contractual life (years) | ||||||||||||||||
| 6.25 | 350,212 | 3.19 | 6.25 | 350,212 | 3.19 | ||||||||||||||||
| 7.00 | 2,000 | 5.50 | 7.00 | 2,000 | 5.50 | ||||||||||||||||
| 4.50 | 53,332 | 7.21 | 4.50 | 53,332 | 7.21 | ||||||||||||||||
| 4.50 | 26,666 | 7.88 | 4.50 | 26,666 | 7.88 | ||||||||||||||||
| 4.50 | 1,231,016 | 8.21 | 4.50 | 1,231,016 | 8.21 | ||||||||||||||||
| 4.50 | 661,875 | 8.26 | 4.50 | 382,618 | 8.26 | ||||||||||||||||
| 7.75 | 50,000 | 8.26 | 7.75 | 28,904 | 8.26 | ||||||||||||||||
| 4.50 | 59,576 | 8.41 | 4.50 | 47,171 | 8.41 | ||||||||||||||||
| 4.50 | 290,585 | 8.48 | 4.50 | 146,752 | 8.48 | ||||||||||||||||
| 4.50 | 585,848 | 8.71 | 4.50 | 250,390 | 8.71 | ||||||||||||||||
| 4.50 | 665,000 | 9.12 | 4.50 | 193,731 | 9.12 | ||||||||||||||||
| 4.50 | 16,500 | 9.24 | 4.50 | 8,795 | 9.24 | ||||||||||||||||
| 3,992,610 | 2,721,587 | ||||||||||||||||||||
As of December 31, 2018, approximately $508,654 of unrecognized compensation costs are expected to be recognized during the year ending December 31, 2019, 2020 and 2021.
| F-35 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10– | COMMONSTOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) |
| D. | Stock-based compensation (cont.) | ||
| 2. | Grants to employees(cont.) | ||
The fair value of options granted to employeesduring the years ended on December 31, 2018 and 2017 was estimated at the dates of grant using the Black-Scholesoption model. The following are the dataandassumptionsused: | |||
| 2018 | 2017 | |||||||
| Dividend yield (%) | 0 | 0 | ||||||
| Expected volatility (%) (*) | 56.59 | 56.59 | ||||||
| Risk free interest rate (%) | 1.31 | 0.92 | ||||||
| Expected term of options (years) | 5.5 - 6.5 | 5-10.5 | ||||||
| Exercise price (US dollars) | 4.5 | 4.50 - 7.75 | ||||||
| Stock price (US dollars) (**) | 2.45 | 2.38 | ||||||
| Fair value (US dollars) | 0.88-0.99 | 0.58-1.28 | ||||||
| (*) | Due to the low trading volume of the Company’s Common Stock, the expected volatility for 2018 and 2017 grant was based on a sample of 248 and 254 companies operating in theHealthcare Productsindustry, respectively. |
| (**) | The Common Stock price, per share for the yearended December 31, 2018 and 2017 reflects the Company’smanagement’s estimation of the fair valueper share of Common Stock. In reaching its estimation for December 31, 2018, management considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series DUnits. In reaching its estimation for December 31, 2017, management considered, among other things, avaluation prepared by athird-partyvaluation firm following the issuance of the Series CUnits. |
| NOTE 11– | RESEARCH AND DEVELOPMENT EXPENSES |
| 2018 | 2017 | |||||||
| Salaries and related expenses (*) | 1,776,146 | 1,587,567 | ||||||
| Professional fees | 113,514 | 5,169 | ||||||
| Regulations related | 132,585 | 374,049 | ||||||
| Patents | 91,302 | 99,224 | ||||||
| Materials * | 737,946 | 972,779 | ||||||
| Bad Debt Expense | 91,719 | - | ||||||
| Depreciation | 30,263 | 33,786 | ||||||
| Travel expenses | - | 31,973 | ||||||
| Vehicle maintenance | 56,112 | 66,750 | ||||||
| Other | 3,276 | 36,169 | ||||||
| 3,032,863 | 3,207,466 | |||||||
| (*) | net of effect of revers of SBC expenses due to forfeit See Note 10D | |
| * | Includes a reserve for slow moving inventory in the amount of approximant $700 thousand. See Note 3 |
| F-36 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 12 – | SELLING AND MARKETING EXPENSES |
| 2018 | 2017 | |||||||
| Salaries and related expenses | 964,876 | 1,272,830 | ||||||
| Professional fees | 80,971 | 115,324 | ||||||
| Travel & expenses | 40,672 | 51,623 | ||||||
| Exhibitions and Shows | 5,943 | 85,391 | ||||||
| 1,092,462 | 1,525,168 | |||||||
| NOTE13 – | GENERAL AND ADMINISTRATIVE EXPENSES |
| 2018 | 2017 | |||||||
| Salaries and related expenses | 1,002,906 | 4,214,606 | ||||||
| Professional fees | 1,255,107 | 1,832,165 | ||||||
| Travel & expenses | 39,845 | 184,611 | ||||||
| Depreciation | 28,526 | 34,092 | ||||||
| Insurance | 90,928 | 93,746 | ||||||
| Vehicle maintenance | 39,451 | 73,459 | ||||||
| 2,456,763 | 6,432,679 | |||||||
| NOTE 14 – | FINANCING (INCOME) EXPENSES, NET |
| 2018 | 2017 | |||||||
| Israeli CPI linkage difference on principal of loans from stockholders | (927 | ) | 3,034 | |||||
| Exchange rate differences | 32,400 | 25,847 | ||||||
| Change in fair value of Warrants with down-round protection | - | (300,322 | ) | |||||
| Interest expenses on credit from banks and other | 18,290 | 24,396 | ||||||
| Late fee on Dividends | 127,057 | - | ||||||
| 176,820 | (247,045 | ) | ||||||
| F-37 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 15 – | INCOME TAX |
| A. | Measurement of results for tax purposes under the Israeli Income Tax (Inflationary Adjustments) Law, 1985 (the “Inflationary AdjustmentLaw”) | |
| Commencing January 1, 2008, the results of operations of Integrity Israel for tax purposes are measured on a nominalbasis. | ||
| B. | Changes in the corporate tax rates | |
Israel- on December 22, 2016 the Knesset plenum passed the Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016, by which, inter alia, the corporate tax rate would be reduced from 25% to 23% in two steps. The first step would be to reduce the corporate tax rate to24% as of January 2017 and the second step would be to reduce the corporate tax rate to 23% as of January 2018.This change has no impact on the financialstatements. | ||
Untied states of America- On December 22, 2017, the Tax Cuts and Jobs Act was enacted and made key changes to US tax law which include (i) establish a flat corporate income tax rate of 21% to replace current rates that range from 15% to 35% and eliminates the corporate alternative minimum tax; (ii) create a territorial tax system rather than a worldwide system, which will generally allow companies to repatriate future foreign source earnings without incurring additional US taxes by providing a 100% exemption for the foreign source portion of dividends from certain foreign subsidiaries; (iii) subject certain foreign earnings on which US income tax is currently deferred to a one-time transition tax; (iv) create a “minimum tax” on certain foreign earnings and a new base erosion anti-abuse tax (BEAT) that subjects certain payments made by a US company to a related foreign company to additional taxes; (v) create an incentive for US companies to sell, lease or license goods and services abroad by effectively taxing them at a reduced rate; (vi) reduce the maximum deduction for Net Operating Loss (NOL) carryforwards arising in tax years beginning after 2017 to a percentage of the taxpayer’s taxable income, allows any NOLs generated in tax years beginning after December 31, 2017 to be carried forward indefinitely and generally repeals carrybacks; (vii) elimination of foreign tax credits or deductions for taxes (including withholding taxes) paid or accrued with respect to any dividend to which the new exemption applies, but foreign tax credits will continue to be allowed to offset tax on foreign income taxed to the US shareholder subject to limitations; (viii) limit the deduction for net interest expense incurred by US corporations, (ix) allow businesses to immediately write off (or expense) the cost of new investments in certain qualified depreciable assets made after September 27, 2017 (but would be phased down starting in 2023); (x) may require certain changes in tax accounting methods for revenue recognition; (xi) repeal the Section 199 domestic production deductions beginning in 2018; (xii) eliminate or reduce certain deductions, exclusions and credits, and adds other provisions that broaden the tax base. After the enactment of the Tax Act, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has calculated an estimate of the impact of the Tax Act in our year-end income tax provision in accordance with our understanding of the Tax Act and guidance available as of the date of this filing. The provisional amount related to the re-measurement of our net U.S. deferred tax asset, based on the rate at which they are now expected to reverse in the future, considered immaterial, but which was fully and equally offset by a corresponding reduction in the Company's valuation allowance. The effect of the change in federal corporate tax rate from 34% to 21% is subject to change based on resolution of estimates used in determining the amounts of deferred tax assets and liabilities that were re-measured. The change in U.S tax law has no impact on the consolidated financial statements | ||
| C. | Taxassessments | |
| For federal, state and local income tax purposes the Company remains open for examination by the tax authorities for the tax years from 2015 through 2017 under the general statute oflimitations. | ||
| Notwithstanding, pursuant and subject to the provisions of article 145 of the Income Tax Ordinance, Integrity Israel’s tax returns that were filled with the tax authorityup to and including 2014 are considered final. | ||
| D. | Carryforward tax losses | |
| As of December 31, 2018, the Company had cumulative net operating losses (NOL) for US federal purposes of approximately $7.0 million that will expire between the years 2032-2036. Integrity Israel has losses carry forward balances for Israeli income tax purposes of approximately $31 million to offset against future taxable income for anindefinite period of time. | ||
| E. | The following is a reconciliation between the theoretical tax on pre-tax income, at the tax rate applicable to the Company (federal tax rate) and the tax expense reported in the financialstatements: |
| 2018 | 2017 | |||||||
| Pretax income (loss) | (6,715,420 | ) | (10,328,806 | ) | ||||
| Federal tax rate | 21 | % | 34 | % | ||||
| Income tax expenses (benefit) computed at the ordinary tax rate | (1,410,238 | ) | (3,511,794 | ) | ||||
| Non-deductible expenses | 17,392 | 41,829 | ||||||
| Stock-based compensation | 148,102 | 908,041 | ||||||
| Warrants with down round protection | - | (102,110 | ) | |||||
| Tax in respect of differences in corporate tax rates | (98,222 | ) | 524,134 | |||||
| Losses and timing differences in respect of which no deferred taxes assets were recognized | 1,342,966 | 2,139,900 | ||||||
- | - | |||||||
| F-38 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 15– | INCOME TAX (cont.) |
| F. | Deferred taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and income tax reporting purposes. Significant components of the Group’s future tax assets are asfollows: |
| 2018 | 2017 | |||||||
| Composition of deferred tax assets: | ||||||||
| Provision for employee-related obligation | 23,304 | 21,086 | ||||||
| Non-capital loss carry forwards | 8,925,430 | 10,354,385 | ||||||
| Valuation allowance | (8,948,734 | ) | (10,375,471 | ) | ||||
| - | - | |||||||
| NOTE |
The loss and the weighted average number of shares used in computing basic and diluted loss per share for the years ended December 31, 2018 and 2017 are asfollows:
| 2018 | 2017 | |||||||
| Income (loss) for the year | (6,715,420 | ) | (10,328,806 | ) | ||||
| Conversion of preferred Shares into common | (13,989,595 | ) | - | |||||
| Conversion of warrants | (182,093 | ) | - | |||||
| Reclassification of warrants with down round protection as a result of early adoption of ASU 2017-11 | (2,505,723 | ) | ||||||
| Remeasurement of warrants issued to placement agent | (5,840,896) | |||||||
| Additional shares issued to Series D Holders on Conversion | (5,801,172 | ) | - | |||||
| Cash dividend on Series A Preferred Stock | (18,454 | ) | (14,950 | ) | ||||
| Stock dividend on Series B Preferred Stock | (2,649,188 | ) | (854,647 | ) | ||||
| Stock dividend on Series C Preferred Stock | (2,115,629 | ) | (566,033 | ) | ||||
| Income (loss) for the period attributable to common stockholders | (39,818,168 | ) | (11,764,436 | ) | ||||
| 2018 | 2017 | |||||||
Common shares used in computing Basic loss per share | 8,396,847 | 6,285,324 | ||||||
Common shares used in computing Diluted loss per share (*) | 8,396,847 | 6,285,324 | ||||||
Total weighted average number of Common shares related to outstanding convertible Preferred Stock, options and warrants excluded from the calculations of diluted loss per share (**) | 27,272,569 | 21,300,975 | ||||||
| In applying the treasury method, the average market price of Common Stock was based on management estimate. For December 31, 2018, managementconsidered, among other things, avaluation prepared by athird-party valuation firm following the occurrence of the Forced Conversion.For December 31, 2017 management estimation considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series D Units and Series C Units (See Note 10C). | ||
| (**) | The Company excludes from the calculation of diluted income (loss) per share, shares that will be issued upon the exercise of options and warrantswith exercise prices, that are greater than the estimated average market value of the Company’sCommon Stockand shares issuable upon conversion ofPreferred Stock because their effect would be anti-dilutive. Outstanding shares that will be issued upon conversion or exercise, as applicable, of allconvertiblePreferred Stock, stock options and warrants, have been excluded from the calculation of the diluted net loss per share for all the reported periods forwhich net loss was reported because the effect of the common shares issuable as aresult of the exercise or conversion of these instruments was anti-dilutive. |
| F-39 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 17– |
The Company operates in one operating segment, the following is a summary of operations within geographicareas:
| Revenues based on the customer’s location: | 2018 | 2017 | ||||||
| Europe | 41,488 | 504,190 | ||||||
| Asia and Pacific | 2,000 | 85,272 | ||||||
| Total | 43,488 | 589,462 | ||||||
All long-lived assets are owned by Integrity Israel and are located inIsrael.
| NOTE 18 – | RELATEDPARTIES |
| A. | David Malka, the beneficial owner of |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE |
B. | On | |
| C. | 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 was 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 a January The Board also approved that no later than December 30, 2018, the Company In addition, as a |
| NOTE 19 – | MAJOR CUSTOMERS AND VENDORS |
| For the year |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 20– | SUBSEQUENT EVENTS |
During 2019 the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Purchasers”) pursuant to which, the Company issued to the Purchasers an aggregate of 216,208 units of the Company (each a “Unit” and, collectively, the “Units”), consisting of (a) 3771,011 shares (collectively, the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), (b) a five year warrant to purchase up to 216,208 shares of Common Stock, at an exercise price of $1.80 per share, one share of Common Stock (c) a five year warrant to purchase up to 216,208 shares of Common Stock, at an exercise price of $3.60 per share, one share of Common Stock, and (d) a five year warrant to purchase up to 216,208 shares of Common Stock, at an exercise price of $5.40 per share, one share of Common Stock. The Company received aggregate gross proceeds of $972,920 from the sale of the Units pursuant to the Purchase Agreement.
Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with the placement agent for the offering of the Units (the “Placement Agent”), at the closing of the sale of the Units the Company paid the Placement Agent, as a commission, an amount equal to 10% of the aggregate sales price of the Units, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Units. In addition, pursuant to the Placement Agent Agreement, the Company is required to issue to the Placement Agent: (a) 5 year warrants to purchase up to 14,000377,104 shares of Common Stock at an exercise price of $4.50$0.258 per share (b) 5 year warrants to purchase up to 7,00021,624 shares of Common Stock at an exercise price of $5.75$1.80 per share and (C)(c) 5 year warrants to purchase up to 7,00021,624 shares of Common Stock at an exercise price of $7.75$3.60 per share and (d) 5 year warrants to purchase up to 21,624 shares of Common Stock at an exercise price of $5.40 per share. The terms of the Placement Agent warrants will be substantially similar to the Warrants except that the Placement Agent warrants will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection.