UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period endedMarch 31, 2019 | ||
or | ||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ________________ to ________________ |
Commission file number:File Number: 000-54785
INTEGRITY APPLICATIONS, INC.
(Exact name of Registrantregistrant as Specifiedspecified in Its Charter)
Delaware | 98-0668934 | |
(State or of | (I.R.S. Employer Identification No.) | |
19 Ha’Yahalomim Street P.O. Box 12163 Ashdod, Israel | L3 7760049 | |
(Address of | (Zip Code) |
972 (8) 675-7878
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer [ ] | |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [X] | |
Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☒Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
None. |
As of November 14, 2017, 6,521,993May 15, 2019, 146,922,381 shares of the Company’s common stock, par value $0.001 per share, were outstanding.
INTEGRITY APPLICATIONS, INC.
TABLE OF CONTENTS
Page | ||
PART I - FINANCIAL INFORMATION | 3 | |
3 | ||
3 | ||
4 | ||
5 | ||
6 | ||
8 | ||
25 | ||
Item 6. Exhibits. | 26 | |
EXHIBIT INDEX |
2 |
INTEGRITY APPLICATIONS, INC.
US dollars (except share data) | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | ||||||||
A S S E T S | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | 461,708 | 148,836 | ||||||
Accounts receivable, net | 119,123 | 92,061 | ||||||
Inventories | 1,494,208 | 1,419,604 | ||||||
Other current assets | 122,038 | 356,994 | ||||||
Total current assets | 2,197,077 | 2,017,495 | ||||||
Property and Equipment, Net | 230,309 | 240,452 | ||||||
Long-Term Restricted Cash | 38,868 | 35,673 | ||||||
Funds in Respect of Employee Rights Upon Retirement | 182,309 | 167,326 | ||||||
Total assets | 2,648,563 | 2,460,946 | ||||||
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
Current Liabilities | ||||||||
Accounts payable | 1,985,797 | 1,634,642 | ||||||
Other current liabilities | 958,065 | 713,549 | ||||||
Total current liabilities | 2,943,862 | 2,348,191 | ||||||
Long-Term Liabilities | ||||||||
Long-Term Loans from Stockholders | 176,870 | 162,034 | ||||||
Liability for Employee Rights Upon Retirement | 182,310 | 176,719 | ||||||
Warrants with down-round protection | 767,887 | 681,970 | ||||||
Total long-term liabilities | 1,127,067 | 1,020,723 | ||||||
Total liabilities | 4,070,929 | 3,368,914 | ||||||
Temporary Equity | ||||||||
Convertible Preferred Stock of $ 0.001 par value (“Preferred Stock”): | ||||||||
10,000,000 shares of Preferred Stock authorized as of September 30, 2017 and December 31, 2016; 376 shares of Series A Preferred Stock issued and outstanding as of June 30, 2017 and December 31, 2016 | 221,152 | 221,152 | ||||||
15,031 shares of Series B Preferred Stock issued and outstanding as of September 30, 2017 and December 31, 2016 | 6,715,844 | 6,715,844 | ||||||
12,004 and 5,829 shares of Series C Preferred Stock issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 6,484,337 | 3,104,466 | ||||||
Total temporary equity | 13,421,333 | 10,041,462 | ||||||
Stockholders’ Deficit | ||||||||
Common Stock of $ 0.001 par value (“Common Stock”): | ||||||||
40,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 6,521,993 and 6,026,527 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively | 6,525 | 6,028 | ||||||
Additional paid in capital | 29,310,432 | 24,586,142 | ||||||
Accumulated other comprehensive income | 114,936 | 62,576 | ||||||
Accumulated deficit | (44,275,592 | ) | (35,604,176 | ) | ||||
Total stockholders’ deficit | (14,843,699 | ) | (10,949,430 | ) | ||||
Total liabilities, temporary equity and stockholders’ deficit | 2,648,563 | 2,460,946 |
US dollars (except share data) | ||||||||
March 31, 2019 | December 31, 2018 | |||||||
(unaudited) | ||||||||
A S S E T S | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | 30,576 | 97,079 | ||||||
Accounts receivable, net | 33,471 | 22,779 | ||||||
Inventories | 157,344 | 170,999 | ||||||
Other current assets | 40,527 | 23,288 | ||||||
Total current assets | 261,918 | 314,145 | ||||||
Operating lease right-of-use assets, net | 198,324 | - | ||||||
Property and Equipment, Net | 147,435 | 149,779 | ||||||
Long-Term Restricted Cash | 54,285 | 52,605 | ||||||
Funds in Respect of Employee Rights Upon Retirement | 177,140 | 171,657 | ||||||
Total assets | 839,102 | 688,186 | ||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current Liabilities | ||||||||
Accounts payable | 1,850,716 | 2,064,259 | ||||||
Operating lease liabilities, current | 120,182 | - | ||||||
Other current liabilities | 1,125,153 | 1,157,350 | ||||||
Total current liabilities | 3,096,051 | 3,221,609 | ||||||
Long-Term Liabilities | ||||||||
Long-Term Loans from Stockholders | 174,117 | 168,221 | ||||||
Operating lease liabilities, non-current | 78,142 | - | ||||||
Liability for Employee Rights Upon Retirement | 177,140 | 171,657 | ||||||
Total long-term liabilities | 429,399 | 339,878 | ||||||
Total liabilities | 3,525,450 | 3,561,487 | ||||||
Stockholders’ Deficit | ||||||||
Common Stock of $ 0.001 par value (“Common Stock”): | ||||||||
200,000,000 and 40,000,000 shares authorized as of March 31, 2019 and December 31, 2018; 146,440,814 and 141,634,700 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | 146,447 | 141,638 | ||||||
Additional paid in capital | 85,244,557 | 84,007,612 | ||||||
Accumulated other comprehensive income | 131,084 | 164,232 | ||||||
Accumulated deficit | (88,208,436 | ) | (87,186,783 | ) | ||||
Total stockholders’ deficit | (2,686,348 | ) | (2,873,301 | ) | ||||
Total liabilities and stockholders’ deficit | 839,102 | 688,186 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
3
US dollars (except share data) | ||||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenues | 125,881 | 482,177 | 20,900 | 11,299 | ||||||||||||
Research and development expenses | 1,833,841 | 2,226,833 | 635,478 | 695,437 | ||||||||||||
Selling and marketing expenses | 1,064,048 | 939.264 | 465,814 | 325,143 | ||||||||||||
General and administrative expenses | 5,124,048 | 1,650,240 | 1,567,970 | 477,052 | ||||||||||||
Total operating expenses | 8,021,937 | 4,816,337 | 2,669,262 | 1,497,632 | ||||||||||||
Operating loss | 7,896,056 | 4,334,160 | 2,648,362 | 1,486,333 | ||||||||||||
Financing income, net | 223,790 | 63,654 | 63,622 | 31,589 | ||||||||||||
Loss for the period | 7,672,266 | 4,270,506 | 2,584,740 | 1,454,744 | ||||||||||||
Other comprehensive (income) loss: | ||||||||||||||||
Foreign currency translation loss (income) | (52,360 | ) | 10,383 | 12,076 | (19,656 | ) | ||||||||||
Comprehensive loss for the period | 7,619,906 | 4,280,889 | 2,596,816 | 1,435,088 | ||||||||||||
Loss per share (Basic and Diluted) | (1.40 | ) | (0.84 | ) | (0.44 | ) | (0.30 | ) | ||||||||
Common shares used in computing loss per share (Basic and Diluted) | 6,207,844 | 5,746,838 | 6,386,772 | 5,806,724 |
US dollars (except share data) | ||||||||
Three-month period ended March 31, | ||||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
Revenues | 25,562 | 28,209 | ||||||
Research and development expenses | 425,117 | 592,697 | ||||||
Selling and marketing expenses | 125,343 | 308,637 | ||||||
General and administrative expenses | 500,155 | 1,036,684 | ||||||
Total operating expenses | 1,050,615 | 1,938,018 | ||||||
Operating loss | 1,025,053 | 1,909,809 | ||||||
Financing income, net | 3,400 | 62,015 | ||||||
Loss for the period | 1,021,653 | 1,847,794 | ||||||
Other comprehensive income: | ||||||||
Foreign currency translation loss (income) | 33,148 | (7,304 | ) | |||||
Comprehensive loss for the period | 1,054,801 | 1,840,490 | ||||||
Loss per share (Basic and Diluted) | 0.01 | 0.34 | ||||||
Weighted average number of Common shares used in computing loss per share (Basic and Diluted) | 143,615,503 | 7,021,533 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
US dollars (except share data) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Number of shares | Common Stock Amount | Additional paid in capital | Accumulated other comprehensive income | Accumulated deficit | Total Stockholders’ deficit | |||||||||||||||||||
Balance as of January 1, 2017 | 6,026,527 | 6,028 | 24,586,142 | 62,576 | (35,604,176 | ) | (10,949,430 | ) | ||||||||||||||||
Loss for the period of nine months | (7,672,266 | ) | (7,672,266 | ) | ||||||||||||||||||||
Other comprehensive income | 52,360 | 52,360 | ||||||||||||||||||||||
Amounts allocated to Series C-1 and Series C-2 Warrants, net | 1,672,766 | 1,672,766 | ||||||||||||||||||||||
Stock dividend on Series C Preferred Stock | 154,869 | 156 | 370,169 | (370,325 | ) | |||||||||||||||||||
Stock dividend on Series B Preferred Stock | 256,450 | 257 | 609,325 | (609,582 | ) | |||||||||||||||||||
Cash dividend on Series A Preferred Stock | (19,243 | ) | (19,243 | ) | ||||||||||||||||||||
Stock-based compensation | 84,147 | 84 | 2,072,030 | 2,072,114 | ||||||||||||||||||||
Balance as of September 30, 2017 | 6,521,993 | 6,525 | 29,310,432 | 114,936 | (44,275,592 | ) | (14,843,699 | ) |
US dollars (except share data) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Common Stock | Additional | Accumulated other | Total | |||||||||||||||||||||
Number of shares | Amount | paid in capital | comprehensive income | Accumulated deficit | Stockholders’ deficit | |||||||||||||||||||
Balance as of January 1, 2018 | 6,821,792 | 6,824 | 30,676,180 | 110,675 | (47,368,612 | ) | (16,574,933 | ) | ||||||||||||||||
Loss for the period of three months | (1,847,794 | ) | (1,847,794 | ) | ||||||||||||||||||||
Other comprehensive income | - | - | - | 7,304 | - | 7,304 | ||||||||||||||||||
Amounts allocated to Series D-1, D-2 and Series D-3 Warrants, net | - | - | 716,093 | - | - | 716,093 | ||||||||||||||||||
Stock dividend on Series C Preferred Stock | 91,283 | 91 | 223,642 | - | (223,733 | ) | - | |||||||||||||||||
Stock dividend on Series B Preferred Stock | 114,304 | 114 | 280,045 | - | (280,159 | ) | - | |||||||||||||||||
Cash dividend on Series A Preferred Stock | - | - | - | - | (4,700 | ) | (4,700 | ) | ||||||||||||||||
Amounts allocated to issuance of Common Stock from Series D offering | 435,556 | 436 | 855,574 | - | - | 856,010 | ||||||||||||||||||
Stock-based compensation | 6,669 | 67 | 561,415 | - | - | 561,482 | ||||||||||||||||||
Balance as of March 31, 2018 | 7,469,604 | 7,532 | 33,312,949 | 117,979 | (49,724,998 | ) | (16,286,538 | ) |
US dollars (except share data) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Common Stock | Additional | Accumulated other | Total | |||||||||||||||||||||
Number of shares | Amount | paid in capital | comprehensive loss | Accumulated deficit | Stockholders’ deficit | |||||||||||||||||||
Balance as of January 1, 2019 | 141,634,700 | 141,638 | 84,007,612 | 164,232 | (87,186,783 | ) | (2,873,301 | ) | ||||||||||||||||
Loss for the period of three months | (1,021,653 | ) | (1,021,653 | ) | ||||||||||||||||||||
Other comprehensive (loss) | - | - | - | (33,148 | ) | - | (33,148 | ) | ||||||||||||||||
Amounts allocated to Series D-1, D-2 and Series D-3 Warrants, net | - | - | 5,628 | - | - | 5,628 | ||||||||||||||||||
Amounts allocated to issuance of Common Stock from Series D offering | 3,499,693 | 3,500 | 700,737 | - | - | 704,237 | ||||||||||||||||||
Issuance of shares as settlement of financial liabilities | 1,190,141 | 1,190 | 305,866 | - | - | 307,056 | ||||||||||||||||||
Warrants issued as consideration for placement services | - | 46,246 | - | - | 46,246 | |||||||||||||||||||
Stock-based compensation | 116,280 | 119 | 178,468 | - | - | 178,587 | ||||||||||||||||||
Balance as of March 31, 2019 | 146,440,814 | 146,447 | 85,244,557 | 131,084 | (88,208,436 | ) | (2,686,348 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
US dollars | ||||||||
Nine-month period ended September 30, | ||||||||
2017 | 2016 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Loss for the period | (7,672,266 | ) | (4,270,506 | ) | ||||
Adjustments to reconcile loss for the period to net cash used in operating activities: | ||||||||
Depreciation | 50,341 | 41,951 | ||||||
Stock-based compensation | 2,072,030 | 55,405 | ||||||
Remeasurement adjustment of warrants issued to placement agent | - | 211,077 | ||||||
Change in the fair value of Warrants with down-round protection | (240,613 | ) | (110,498 | ) | ||||
Linkage difference on principal of loans from stockholders | 373 | 27 | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) in accounts receivable | (18,748 | ) | (51,356 | ) | ||||
Decrease in inventory | 49,255 | 170,274 | ||||||
Decrease in other current assets | 256,997 | 157,149 | ||||||
(Decrease) increase in accounts payable | 235,138 | (815,795 | ) | |||||
Increase in other current liabilities | 170,632 | 265,983 | ||||||
Decrease in liability for employee rights upon retirement | (10,148 | ) | - | |||||
Net cash used in operating activities | (5,107,009 | ) | (4,346,289 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (19,467 | ) | (75,269 | ) | ||||
Net cash used in investing activities | (19,497 | ) | (75,269 | ) | ||||
Cash flows from financing activities: | ||||||||
Cash dividend on Series A Preferred Stock | (5,143 | ) | (13,529 | ) | ||||
Proceeds allocated to Series C Preferred Stock, net of cash issuance expenses | 3,598,254 | 3,021,063 | ||||||
Proceeds allocated to Series C Warrants, net of cash issuance expenses | 1,780,963 | 1,496,077 | ||||||
Net cash provided by financing activities | 5,374,074 | 4,503,611 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 65,274 | 5,405 | ||||||
Increase in cash and cash equivalents | 312,872 | 87,458 | ||||||
Cash and cash equivalents at beginning of the period | 148,836 | 608,701 | ||||||
Cash and cash equivalents at end of the period | 461,708 | 696,159 |
US dollars | ||||||||
Three-month period ended March 31, | ||||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Loss for the period | (1,021,653 | ) | (1,847,794 | ) | ||||
Adjustments to reconcile loss for the period to net cash used in operating activities: | ||||||||
Depreciation | 13,518 | 16,138 | ||||||
Stock-based compensation | 178,587 | 561,482 | ||||||
Change in the fair value of Warrants with down-round protection | - | (77,947 | ) | |||||
Linkage difference on principal of loans from stockholders | 523 | (911 | ) | |||||
Changes in assets and liabilities: | - | |||||||
(Increase) in accounts receivable | (9,981 | ) | (27,585 | ) | ||||
Decrease in inventory | 19,149 | 10,442 | ||||||
(Increase) decrease in other current assets | (16,600 | ) | 5,128 | |||||
Operating lease right-of-use assets | 26,412 | - | ||||||
(Decrease) increase in accounts payable | (244,646 | ) | 66,355 | |||||
(Decrease) increase in other current liabilities | 260,080 | (132,176 | ) | |||||
Operating lease liabilities | (26,412 | ) | - | |||||
Net cash used in operating activities | (821,023 | ) | (1,426,868 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (6,378 | ) | (931 | ) | ||||
Net cash used in investing activities | (6,378 | ) | (931 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds allocated to Common Stock from Series D offering, net of cash issuance expenses | 750,116 | 924,398 | ||||||
Proceeds allocated to Series D Warrants, net of cash issuance expenses | 5,995 | 773,302 | ||||||
Net cash provided by financing activities | 756,111 | 1,697,700 | ||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 6,467 | (9,296 | ) | |||||
Increase (decrease) in cash, cash equivalents, and restricted cash | (64,823 | ) | 260,605 | |||||
Cash, Cash equivalents, and restricted cash at beginning of theperiod | 149,684 | 53,782 | ||||||
cash, cash equivalents, and restricted cash at end of theperiod | 84,861 | 314,387 |
The accompanying notes are an integral part of these condensed consolidated financial
INTEGRITY APPLICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
Supplementary information on financing activities not involving cash flows:
During the three months ending March 31, 2019, the company settled a portion of the outstanding board fees and management payroll obligations in the amount of $307,056 through the issuance of 1,190,141 shares of common stock in total to five board members and three members of the senior management team
During the three months ending March 31, 2019, $46,246 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 in additional paid in capital.
The accompanying notes are an integral part of these condensed consolidated financial statements.
7 |
6
NOTE 1
– GENERALA. | Integrity Applications, Inc. (the “Company”) was incorporated on May 18, 2010 under the laws of the State of Delaware. On July 15, 2010, Integrity Acquisition Corp. Ltd. (hereinafter: “Integrity Acquisition”), a wholly owned Israeli subsidiary of the Company, which was established on May 23, 2010, completed a merger with A.D. Integrity Applications Ltd. (hereinafter: “Integrity Israel”), an Israeli | |
B. | Going concern uncertainty | |
Since its incorporation, the Company has not conducted any material operations other than those carried out by Integrity Israel. The development and | ||
During the three months ended March 31, 2019, the Company raised funds in an aggregate amount of approximately $756,111 (net of related cash expenses) through the issuance of 200,652 units (the “Series D Units”) consisting of (a) 3,499,693 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 200,652 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 200,652 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 200,652 shares of Common Stock, at an exercise price of $5.40 per share, one share of Common Stock. | ||
Until such time as the Group generates sufficient revenue to fund its operations (if ever), the Group plans to finance its operations through the sale of equity or equity-linked securities and/or debt securities and, to the extent available, short term and long-term loans. There can be no assurance that the Group will succeed in obtaining the necessary financing to continue its operations as a going concern. |
8 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
NOTE 1– GENERAL (cont.)
Use of estimates in the preparation of financial statements | ||
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to (i) the going concern assumptions,(ii) measurement of stock based compensation, and (iii) determination of net realizable value of inventory. |
NOTE 2
– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESA. | Basis of presentation | |
Accounting Principles | ||
The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with our consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on April 15, 2019. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC related to interim financial statements. As permitted under those rules, certain information and footnote disclosures normally required or included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are considered necessary to present fairly the results of the Company’s financial position and operating results for the interim periods. All such adjustments are of a normal recurring nature. | ||
The results for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any future period. | ||
Principles of Consolidation | ||
The consolidated financial statements include the accounts of the Company and its subsidiary. Significant intercompany balances and transactions have been eliminated in consolidation. |
9 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
B. | Recently issued accounting pronouncements |
1. | 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 adoption of ASU 2018-07 did not have a significant impact on its consolidated financial statements. |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Warrants with down-round Protection September 30, | ||||||||
2017 | 2016 | |||||||
(unaudited) | ||||||||
Balance, Beginning of the period | 681,970 | 321,695 | ||||||
Warrants issued as consideration for placement services | 359,650 | 282,221 | ||||||
Amount classified out of stockholders’ deficit and presented as Warrants with down-round protection | - | 341,662 | ||||||
Change in fair value Warrants with down-round protection | (273,733 | ) | (110,498 | ) | ||||
Balance, End of period | 767,887 | 835,080 |
September 30, | ||||||||
2017 | 2016 | |||||||
Dividend yield (%) | - | - | ||||||
Expected volatility (%) (*) | 56.59 | 62.16 | ||||||
Risk free interest rate (%) | 0.92 | 0.72-1.21 | ||||||
Expected term of options (years) | 0.45-4.83 | 1.45-5.00 | ||||||
Exercise price (US dollars) | 4.50, 7.75 | 4.50, 7.75 | ||||||
Share price (US dollars) (**) | 2.38 | 2.38 | ||||||
Fair value (US dollars) (***) | 0.02-0.74 | 0.26-0.60 |
Recently issued accounting pronouncements
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 | |
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. | |
The company applied the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the | |
The new standard also provides practical expedients for an entity’s ongoing accounting. The company elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means, for those leases, the company does not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. In addition, the company also elected the transition expedient for short-term leases. Accordingly, the new guidance was not applied for leases that has a term of 12 or fewer months at commencement and does not have a purchase option that the lessee is reasonably certain to exercise. | |
Upon adoption, the company recognized total right of use (“ROU”) assets of $225 thousand, with corresponding liabilities of $225 thousand on the condensed consolidated balance sheets. The adoption did not impact our beginning retained earnings, or our prior year condensed consolidated statements of income and statements of cash flows. | |
Under Topic 842, we determine if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the | |
Operating leases are included in | |
See also Note 5. |
11 |
Investors | AGI– Series A | AG- - Series B | AGI – Series C | AGI – Series C |
Minimum | Maximum | |||
0.02 | 0.36 | 0.36 | 0.29 | 0.74 |
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
NOTE 23 – RECENT EVENTS– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
During 2016, the FASB issued several Accounting Standards Updates (“ASUs”) that focus on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements, Practical Expedients and technical corrections.
Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with AGI, at the initial closing of the sale of the Series C Units,placement agent, the Company paid AGI, as a commission, an amount equal to 6% of the aggregate sales price of the Series C Units, plus 4% 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 C Units. At the end of the second, third, fourth, fifth, sixth, seventh, eighth, ninth, tenth, eleventh and twelfth closings of the sale of the Series C Units, the Company paid AGI,placement agent, as a commission, an amount equal to 10% of the aggregate sales price of the Series CD Units sold in sucheach closing, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Series CD Units sold in such closing. In addition, pursuant to the Placement Agent Agreement, in connection with the closings in the first quarter of 2019, the Company is required to issue to AGI:the placement agent: (a) 5-year warrants to purchase up to 533,509349,972 shares of Common Stock at an exercise price of $0.258 per share, (b) 5-year warrants to purchase up to 20,068 shares of Common Stock at an exercise price of $1.80 per share.(c) 5-year warrants to purchase up to 20,068 shares of Common Stock at an exercise price of $3.60 per share, and d) 5-year warrants to purchase up to 20,068 shares of Common Stock at an exercise price of $5.40 per share The terms of such warrants are substantially similar to the Series D Warrants except that the warrants issued to the placement agent are exercisable on a cashless basis and include full ratchet anti-dilution protection.
On January 1, 2019, we issued a ten-year non-qualified stock option to our President, for the purchase of 75,000 shares of Common Stock at an exercise price of $4.50 per share, and (b) 5-year warrants to purchase up to 266,753 shares of Common Stock at an exercise price of $7.75 per share. The terms of such warrants are substantially similar to the Series C Warrants except that the warrants issued to AGI are exercisable on a cashless basis and include full ratchet anti-dilution protection.
Year ended December 31, 2016 | Nine-month period ended September 30, 2017 | |||||||
Thousands of U.S. $ (except units sold) (unaudited) | ||||||||
Number of units sold | 5,828.9 | 6,174.9 | ||||||
Gross amount | 5,829 | 6,175 | ||||||
Net of related cash expenses | 4,951 | 5,379 | ||||||
Net amount | 4,642 | 5,019 |
NOTE 4 – INVENTORIES
US dollars | ||||||||
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
Raw materials | 13,364 | 13,522 | ||||||
Work in process | 1,533,267 | 1,546,764 | ||||||
Finished products | 67,310 | 67,310 | ||||||
1,613,941 | 1,627,596 | |||||||
Less – provision for slow moving inventory (*) | (1,456,597 | ) | (1,456,597 | ) | ||||
157,344 | 170,999 |
(*) | 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 during 2017 and 2018. |
12 |
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
NOTE 35 – LEASES
– RECENT EVENTS (cont.)
We have entered into several non-cancelable operating lease agreements relating to the issuancefor our offices and saleone vehicle. Our leases have original lease periods expiring between 2019 and 2021. Payments due under such lease contracts include primarily fix payments. We do not assume renewals in our determination of the Series A Units andlease term unless the Series B Units, the Company was required to and did notify the holders of the Series A Preferred Stock and Series B Preferred Stock of the closing of the sale of the Series C Units, and following receipt thereof such holders of Series A Preferred Stock and Series B Preferred Stock will be entitled, pursuant to the “most favored nation” provisions contained in their respective purchase agreements (as described above), to elect to amend the terms of their purchase of Series A Units and Series B Units, respectively, to match the terms of the Series C Units. The Company is obligated to amend the terms of any of Series A Units or Series B Units who timely makes such election and tenders its Series A Units or Series B Units for exchange.
The components of the issuances dateslease costs, lease term and discount rate are as follows:
US dollars | ||||
Three Months Ended | ||||
March 31, 2019 | ||||
(unaudited) | ||||
Operating lease cost: | ||||
Office space | 30,000 | |||
vehicle | 1,907 | |||
31,907 | ||||
Remaining Lease Term | ||||
Office space | 1.67 years | |||
vehicle | 2.17 years | |||
Weighted Average Discount Rate | ||||
Office space | 10 | % | ||
vehicle | 10 | % |
The following is a schedule, by years, of the Series C Preferred Stock the exercise pricematurities of the conversion feature (based on the effective conversion rate of 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 given the current market price, conversion at the conversion price was not a beneficial transaction. Also, due to the liquidation preference and certain redemption rights for the benefit of the holders of the Series C Preferred Stock, upon the occurrence of certain contingent events, which are not considered as solely within the Company’s control management determined that the Series C Preferred Stock were to be presented as temporary equity. On each balance sheet date, the Company’s management assesses the probability of redemption of the outstanding Preferred Stock. In the event that management determines such redemption to be probableoperating lease liabilities as of an applicable balance sheet date, the Company will reclassify the amount allocated to the preferred stock from temporary equity to liability. In addition, upon such determination, the difference between the amount that was allocated to the Preferred Stock (after deduction of issuance expenses) and the aggregate redemption amount of the Preferred Stock will be accreted over the period beginning on the date that it becomes probable that the instrument will become redeemable and ending on the earliest redemption date.
US dollars | ||||
March 31, 2019 | ||||
(unaudited) | ||||
Period: | ||||
The remainder of 2019 | 95,721 | |||
2020 | 117,628 | |||
2021 | 3,178 | |||
Total operating lease payments | 216,527 | |||
Less: imputed interest | 18,203 | |||
Present value of lease liabilities | 198,324 |
13 |
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)
US dollars | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | ||||||||
Raw materials | 661,609 | 735,201 | ||||||
Work in process | 828,146 | 633,132 | ||||||
Finished products | 4,453 | 51,271 | ||||||
1,494,208 | 1,419,604 |
NOTE 5
US dollars | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | ||||||||
Employees and related institutions | 337,377 | 363,738 | ||||||
Accrued expenses | 607,595 | 261,651 | ||||||
Other current liabilities | 13,093 | 88,160 | ||||||
958,065 | 713,549 |
US dollars | ||||||||
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
Employees and related institutions | 242,061 | 239,964 | ||||||
Accrued expenses and other | 883,092 | 917,386 | ||||||
1,125,153 | 1,157,350 |
NOTE 67 – FINANCING INCOME, NET
US dollars | US dollars | |||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Israeli CPI linkage difference on principal of loans from stockholders | 373 | 27 | 347 | 666 | ||||||||||||
Exchange rate differences | 30,154 | 33,329 | 12,960 | 9,118 | ||||||||||||
Change in fair value of Warrants with down-round protection | (273,733 | ) | (110,498 | ) | (82,658 | ) | (46,286 | ) | ||||||||
Interest expenses on credit from banks and other | 19,416 | 13,488 | 5,729 | 4,913 | ||||||||||||
(223,790 | ) | (63,654 | ) | (63,622 | ) | (31,589 | ) |
US dollars | ||||||||
Three-month period ended March 31, | ||||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
Israeli CPI linkage difference on principal of loans from stockholders | (523 | ) | 911 | |||||
Exchange rate differences | 8,063 | (13,627 | ) | |||||
Interest expenses on credit from banks and other | (4,140 | ) | (3,216 | ) | ||||
Change in fair value of Warrants with down round protection | - | 77,947 | ||||||
3,400 | 62,015 |
NOTE 7–8– LOSS PER SHARE
In periods of net loss, basic loss per share is computed by dividing net loss for the period after consideration of the effect of dividends on preferred stock by the weighted average number of shares outstanding during the period.
The loss and the weighted average number of shares used in computing basic and diluted loss per share for the nine and three-month periods ended September 30, 2017March 31, 2019 and 20162018 are as follows:
US dollars | ||||||||
Three-month period ended March 31, | ||||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
Loss for the period | 1,021,653 | 1,847,794 | ||||||
Cash dividend on Series A Preferred Stock | - | 4,700 | ||||||
Stock dividend on Series B Preferred Stock | - | 280,159 | ||||||
Stock dividend on Series C Preferred Stock | - | 223,733 | ||||||
Loss for the period attributable to common stockholders | 1,021,653 | 2,356,386 |
14 |
US dollars | US dollars | |||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Loss for the period | (7,672,266 | ) | (4,270,506 | ) | (2,584,740 | ) | (1,454,744 | ) | ||||||||
Cash dividend on Series A Preferred Stock | (19,243 | ) | (13,529 | ) | (12,529 | ) | (4,076 | ) | ||||||||
Stock dividend on Series B Preferred Stock | (609,582 | ) | (449,051 | ) | (117,914 | ) | (194,950 | ) | ||||||||
Stock dividend on Series C Preferred Stock | (370,325 | ) | (80,082 | ) | (93,751 | ) | (59,727 | ) | ||||||||
Loss for the period attributable to common stockholders | (8,671,416 | ) | (4,813,168 | ) | (2,808,934 | ) | (1,713,497 | ) |
Number of shares | Number of shares | |||||||||||||||
Nine-month period ended September 30, | Three-month period ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Number of shares: | ||||||||||||||||
Common shares used in computing basic income (loss) per share | 6,207,844 | 5,746,838 | 6,386,772 | 5,806,724 | ||||||||||||
Common shares used in computing diluted income (loss) per share | 6,207,844 | 5,746,838 | 6,386,772 | 5,806,724 | ||||||||||||
Total weighted average number of common shares related to outstanding convertible Preferred Stock, options and warrants excluded from the calculations of diluted income (loss) per share (*) | 20,304,950 | 12,125,368 | 23,378,950 | 13,915,740 |
INTEGRITY APPLICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 8 – LOSS PER SHARE (cont.)
Number of shares | ||||||||
Three-month period ended March 31, | ||||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
Number of shares: | ||||||||
Weighted average number of shares used in the computation of basic and diluted earnings per share | 143,615,503 | 7,021,533 | ||||||
Total weighted average number of common shares related to outstanding options and warrants excluded from the calculations of diluted loss per share (*) | 76,597,357 | 25,524,332 |
(*) | All outstanding |
19NOTE 9 – SUBSEQUENT EVENTS
Subsequent to March 31, 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 28,890 units of the Company (each a “Unit” and, collectively, the “Units”), consisting of (a) 503,877 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 28,890 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 28,890 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 28,890 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 $130,000 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 50,388 shares of Common Stock at an exercise price of $0.258 per share (b) 5 year warrants to purchase up to 2,890 shares of Common Stock at an exercise price of $1.80 per share (c) 5 year warrants to purchase up to 2,890 shares of Common Stock at an exercise price of $3.60 per share and (d) 5 year warrants to purchase up to 2,890 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 investors Warrants except that the Placement Agent warrants will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains 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 and prospects. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including statements regarding our future activities, events or developments, including such things as future revenues, capital raising and financing, product development, clinical trials, regulatory approval, market acceptance, responses from competitors, capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of our business and operations, plans, references to future success, projected performance and trends, and other such matters, are forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “may,” “will,” “could,” “would,” “should” and other similar words and phrases, are intended to identify forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q are based on certain historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. These statements relate only to events as of the date on which the statements are made and we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. All of the forward-looking statements made in this Quarterly Report on Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to or effects on us or our business or operations. Whether actual results will conform to our expectations and predictions is subject to a number of risks and uncertainties that may cause actual results to differ materially. Risks and uncertainties, the occurrence of which could adversely affect our business, include the risks identified under the caption “Risk Factors” included in our Annual Reportannual report on Form 10-K for the year ended December 31, 2016.2018. The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.
16 |
Overview
We are a medical device company focused on the design, development and commercialization of non‑invasivenon-invasive glucose monitoring devices for use by people with diabetes and pre-diabetics.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 and individuals with pre-diabetics 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 or interstitial fluid.
On June 4, 2013, we received initial CE Mark (marking the Company’s declaration that the product meets the requirements of the applicable European Union directives) approval for the GlucoTrack® model DF-F non-invasive glucose monitoring device from DEKRA Certification B.V., our European notified body (the “Notified Body”). 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. 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 in additionadditional 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 towhich simplify and shorten (from approximately 2.5 hours to approximately half an hour) the initial calibration process for the device. These improvements are intended to reduce the backlog created as purchasers of the device await calibration. In addition, we received approval from the Notified Body on the updated intended use for the device, which expands the intended user population to include not only Type 2 diabetics, but also peoplepersons 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 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.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 reduceimprove the time to market for product sales on new, enhanced or modified GlucoTrack® model DF-F devices.
In addition 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 submittedimprovements 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 approachdescribed above, we have also continued 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)work on additional improvements to the FDA which reflectsdevice and the feedback received from the FDA atdevelopment of new devices and, subject to 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 have identified and are currently negotiating agreements with two diabetes and endocrinology institutions in the United States, as well as prominent endocrinologists to conduct the clinical trials as primary investigators. Subject to finalizing these agreements and raising adequate financingsufficient funds to do so, intend to continue these efforts in 2019. Specifically, we expect to begin clinical trials in the United States in the second half of 2018.
Recent Developments
During the first halfquarter of 2018. If2019, we received aggregate net proceeds of approximately $756 thousand (net of related cash expenses), from the renegotiation is unsuccessful, we plan to seek another distributorissuance and sale in China which may further significantly delay a private placement transaction of 200,652 Series D Units. As of March 31, 2019, 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 relySeries D Warrants (issued on December 1, 2017, during 2018 and 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.
Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with Andrew Garrett, Inc. (“AGI”), the placement agent, for the offering of the Series C Units,, at the closing of the sale of the Series C Units the Company paid AGI,the placement agent, as a commission, an amount (payable in cash and Common Stock) equal to 10% of the aggregate sales price of the Series CD Units sold in each closing, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Series C Units.D Units sold in such closing. In addition, pursuant to the Placement Agent Agreement, in connection with the closings in the first quarter of 2019, the Company is required to issue to AGI:the placement agent: (a) 5 year5-year warrants to purchase up to 44,445349,972 shares of Common Stock at an exercise price of $0.258 per share, (b) 5-year warrants to purchase up to 20,068 shares of Common Stock at an exercise price of $1.80 per share.(c) 5-year warrants to purchase up to 20,068 shares of Common Stock at an exercise price of $3.60 per share, and d) 5-year warrants to purchase up to 20,068 shares of Common Stock at an exercise price of $5.40 per share The terms of such warrants are substantially similar to the Series D Warrants except that the warrants issued to the placement agent are exercisable on a cashless basis and include full ratchet anti-dilution protection.
On January 1, 2019, we issued a ten-year non-qualified stock option to our President, for the purchase of 75,000 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.
Our strategic priorities include the research and (b) 5 year warrantsdevelopment of product enhancements that will improve the ease and usability of GlucoTrack for patients with a future generation of products. We are focusing our research and development activities around 4 main strategic pillars:
1. | Wireless Connectivity |
We have developed a wireless module (“GlucoTrack Link”) with embedded Bluetooth Low-Energy (BLE), which enables the transmission of measurement data captured by the GlucoTrack® model DF-F to purchase upa cloud-based server or a smart device. This module and the related applications 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 facilitate sharing, viewing and analysis of GlucoTrack® measurements and glucose profiles by clinicians and other caregivers.
2. | Digital Health Applications |
We intend to 22,223 sharesdevelop smart device applications (“Apps”) to facilitate the interaction of Common Stock at an exercise price of $7.75 per share.users with Glucotrack® DF-F and the glucose data collected. The terms of these warrantsApps will be substantially similarcompatible with both IOS and Android operating systems. We intend to develop Apps that support the warrants issued tomanagement of Type 2 diabetes and pre-diabetic patients by providing immediate feedback and insights that can be derived from glucose measurements. Enhanced capabilities within the investors except that the AGI warrantsApps may include goal setting, alarms and reminders, and diabetes management tips and tools. It will also be exercisabledesigned to provide analyses of trends over multiple time periods. The goal is to provide relevant information to guide patients in their journey to change behaviors and improve the management of their condition. The Apps are expected to have a user-directed capability to connect with third party healthcare providers (physicians, dieticians, and nurse practitioners) in order to receive professional guidance based on a cashless basis and will include full ratchet anti-dilution protection.
3. | Self-Personalization |
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 Series C Units, pursuantpersonal ear clip is replaced. We are developing a self-calibration module for Glucotrack® DF-F which will allow all patients to set up the termsdevice 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.
4. | Miniaturization |
The objective of this project is to transform the warrants issued by usexisting device into a simple, easy to purchasersuse wireless ear-clip which would measure glucose and communicate the results seamlessly to any other platform through a wireless connection or a Bluetooth connection to a smart device such as a smartphone, tablet or computer, eliminating the current handheld display. The result would be a user-friendly, inconspicuous measuring device for the management of units consisting of shares of its Series A 5% Convertible Preferred Stock (the “Series A Preferred Stock”)diabetes and warrantspre-diabetes. We expect this new device to have much greater patient desire to purchase shares of Common Stock (the “Series A Warrants”), on April 8, 2016, the exercise price per share of the Series A Warrants decreased from $5.80 per shareand user acceptance. We also expect this new device will have a significantly lower cost to $4.50 per share and the number of shares of Common Stock issuable upon exercise of each of the Series A Warrants, in the aggregate, increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, will be equal to the aggregate exercise price prior to such adjustment. Also as a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the certificates of designations formanufacture than our Series A Preferred Stock and Series B 5.5% Convertible Preferred Stock (the “Series B Preferred Stock”), on April 8, 2016, the conversion price per share of Series A Preferred Stock and Series B Preferred Stock decreased to $4.50 per share.
Significant Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements appearing in our Annual Reportannual report on Form 10-K for the year ended December 31, 2016.2018. Our management believes that, as for the financial statements for the interim periods included in this report, the estimatesgoing concern assessment and assumptions relatingrelate to (i) the fair value estimatemeasurement of the Warrants with down-round protection, (ii) the allocation of the proceeds and the related issuance costs of the Series C Units, and (iii) the going concern assumption are consideredstock based compensation is a critical accounting policies.policy and, (ii) determination of net realizable value of inventory. However, due to the early stage of operations of the Company, there are no other accounting policies that are considered to be critical accounting policies by management.
Going Concern Uncertainty
The development and commercialization of our product will require substantial expenditures. We have not yet generated any material revenues and have incurred a substantial accumulated deficit and negative operating cash flows. We currently have no sources of recurring revenue and are therefore dependent upon external sources for financing our operations. There can be no assurance that we will succeed in obtaining the necessary financing to continue our operations. Management’s plans concerning these matters are described in Note 1B to our Annual Reportannual report on Form 10-K for the year ended December 31, 2016.2018. (see also Note 1B to our interim financial statements for the period ended March 31, 2019). As a result, our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.concern in our annual report for year ended December 31, 2018. 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 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 adoption of ASU 2018-07 did not have a significant impact on its consolidated financial statements. |
2. | 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. |
The company applied the 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 do 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 new standard also provides practical expedients for an entity’s ongoing accounting. The company elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means, for those leases, the company does not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. In addition, the company also elected the transition expedient for short-term leases. Accordingly, the new guidance was not applied for leases that has a term of 12 or fewer months at commencement and does not have a purchase option that the lessee is reasonably certain to exercise. | |
Upon adoption, the company recognized total right of use (“ROU”) assets of $225 thousand, with corresponding liabilities of $225 thousand on the condensed consolidated balance sheets. The adoption did not impact our beginning retained earnings, or our prior year condensed consolidated statements of income and statements of cash flows. | |
Under Topic 842, we determine if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremented borrowing rate is the expected interest rate that the company would have to pay to borrow on a collateralized basis on a similar term and amounts equal to the lease payment and under similar economic environment. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. | |
Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current and operating lease liabilities, non-current on our condensed consolidated balance sheets. See also Note 5. |
Results of Operations
The following discussion of our operating results explains material changes in our results of operations for the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2019 compared with the same period ended September 30, 2016.March 31, 2018. The discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report.
Revenues
During the nine-monththree-month period ended September 30, 2017,March 31, 2019, we had revenues of $125,881$25,562 from orders for our GlucoTrack® model DF-F glucose monitoring device and personal ear-clip (“PEC”)PECs that are replaced every six months, as compared with $482,177$28,209 for the prior-yearprior-year’s period. The decreaseThere was no material change in the revenues is due primarily tobetween the fact that during the nine-month period ended September 30, 2016 we had revenues which resulted from the approval of the Notified Body in late 2015.
We recognize revenues from sales of the GlucoTrack® model DF-F and PECs when delivery has occurred, persuasive evidence of an agreement exists,control is transferred to the fee is fixedcustomer and determinable, collectability is reasonably assured and no further obligations exist.
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Research and development expenses were $1,833,841$425,117 for the nine-monththree-month period ended September 30, 2017,March 31, 2019, as compared to $2,226,833$592,697 for the prior-yearprior-year’s period. The decrease is mainly attributable primarily to the completion of our clinical trials for the current version of the DF-F during 2018 and the decrease in our cost of revenues, which is in line with the decrease in revenues. Additionally,salary and other personnel-related expenses, including stock-based compensation expenses during the nine-month period ended September 30, 2016 the Company had higher materials expenses primarily as a resultfirst quarter of the engagement of research and development in the initial manufacturing of the GlucoTrack DF-F, and higher regulation related expenses relating primarily to our efforts in seeking regulatory approval for the GlucoTrack® model DF-F in China.
Research and development expenses consist primarily of salaries and other personnel-related expenses, including stock-based compensation expenses, materials, travel expenses, clinical trials and other expenses. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect research and development expenses to increase during the remainder of 20172019 and beyond, primarily due to hiring additional personnel and developing our product line, as well as improvement of the GlucoTrack® model DF-F; however, we may adjust or allocate the level of our research and development expenses based on available financial resources and based on our commercial needs including the FDA registration process, specific requirements from customers, development of new GlucoTrack® models and others.
Selling and marketing expenses
Selling and marketing expenses were $1,064,048$125,343 for the nine-monththree-month period ended September 30, 2017,March 31, 2019, as compared to $939,264$308,637 for the prior-yearprior-year’s period. The increasedecrease is primarily attributable to the Company’s decision to reduce its business development personnel in the European market until such a time when the proof of concept of obtaining reimbursement for the product in test markets is realized. In addition during the fourth quarter 0f 2018, our Chief Commercialization Officer was appointed as our President and theChief Operating Officer and as a result his salary and related stock based compensation which he received.
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 during the remainder of 2017in 2019 and beyond as we continue our focus on marketing and sales of the GlucoTrack®GlucoTrack® model DF-F; however, we may adjust or allocate the level of our marketing based on available financial resources and based on our commercial needs including the FDA registration process, specific requirements from customers, development of new GlucoTrack® models and others.
General and administrative expenses
General and administrative expenses were $5,124,048$500,155 for the nine-monththree-month period ended September 30, 2017,March 31, 2019, as compared to $1,650,240$1,036,684 for the prior-yearprior-year’s period. The increasedecrease is primarily attributable to severance paid tothe departure of our former Chairman and CEO, of approximately $162,000 as well as stock-based compensationa reduction in the amount of $152,000. In addition, the increase is attributable to a one time signing bonus of $412,500 including employer payroll taxes and stock-based compensation in the amount of approximately $1,939,000 paid to our new Chairman and CEO, recruitingprofessional fees of $195,000 and the related professional fees associated withreduction of stock based compensation during the changes in management. The company also incurred approximately $245,000 related to stock-based compensation and fees paid to our Board members.
General and administrative expenses consist primarily of professional services, salaries, travel expenses and other related expenses for executive, finance and administrative personnel, including stock-based compensation expenses. Other general and administrative costs and expenses include facility-related costs not otherwise included in research and development costs and expenses, and professional fees for legal and accounting services. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect selling, general and administrative expenses to increase during the remainder of 20172018 and beyond.
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Financing income, net was $223,790$3,400 for the nine-monththree-month period ended September 30, 2017,March 31, 2019, as compared to $63,654$62,015 for the prior-yearprior-year’s period. The change is primarily attributable to changes in fair market value adjustments relating to ourthe early adoption of ASU 2017-12. Until the early adoption of ASU 2017-12 we marked the warrants which all include down-round protection. In accordance with U.S. GAAP, we mark the warrantsdown round protection 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 2017-12 we reclassified the warrants with down round protection from long term liabilities to stockholders deficit and stopped marking them to market on a quarterly basis. The decrease in the estimated fair value of our warrantsWarrants with down-round protection during the nine-monththree-month period ended September 30, 2017 and 2016March 31, 2018 amounted to $273,733 and $110,498,$77,947, respectively, resulting primarily from the decrease in the expected term of warrantsWarrants and the changes in the estimated expected volatility.
Net Loss
Net loss was $7,672,266$1,021,653 for the nine-monththree-month period ended September 30, 2017,March 31, 2019, as compared to $4,270,506$1,847,794 for the prior-yearprior-year’s period. The increasedecrease in net loss is attributable primarily to the increasedecrease in all of our general and administrative expenses, as described above.
Liquidity and Capital Resources
As of September 30, 2017,March 31, 2019, cash on hand was approximately $462,000.$31,000 and long-term restricted cash was approximately $54,000. During the first nine monthsquarter of 20172019, we received aggregate net proceeds of approximately $5.4 million$756 thousand (net of related cash expenses), from the issuance and sale in a private placement transaction of 200,652 Series CD Units. During the first nine months of 2017, we did not collect a material amount in cash proceeds from the fulfillment of orders for our improved GlucoTrack® model DF-F. While we expect to generate additional cash from sales, we do not anticipate that our income from operations will be sufficient to sustain our operations in the next 12 months. Based on our current cash burn rate, strategy and operating plan, we believe that our cash and cash equivalents will enable us to operate for a period of less than three monthsone 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 Integrity Israel NIS 176,000 ($49,87248,458 based on the same exchange rate)rate of 3.632 NIS/dollar as of March 31, 2019) on May 15, 2002 pursuant to Boarda board approval. Messrs. Nir Tarlovsky, Yitzhak Fisher and Asher Kugler loaned Integrity Israel NIS 336,300 ($95,29692,594 based on the same exchange rate) on March 16, 2004.2004 . As of March 31, 2019, the outstanding balances on these loans were $57,578 and $116,539, respectively. These loans are not required to be repaid until the first year in which we realize profits in our annual statement of operations (accounting profit). At such time, the loans are to be repaid on a quarterly basis in an amount equal to 10% of our total sales in the relevant quarter, beginning on the quarter following the first year in which we realize profits in our annual statement of operations. The total amount to be repaid by us to each lender shall be an amount equal to the aggregate principal amount loaned by such lender to us, plus an amount equal to the product of the amount of each payment made by us in respect of such loan multiplied by the percentage difference between the Israeli Consumer Price Index on the date on which the loan was made and the Israeli Consumer Price Index on the date of such payment. However, notwithstanding the above-mentioned mechanism, we will not be required to repay the loans during any time when such repayment would cause a deficit in our working capital. Our Board of Directors is entitled to modify the repayment terms of these loans, so long as such modification does not discriminate against any particular lender, and provided that all payments must be allocated among the lenders on a pro-rata basis.
Integrity Israel is required to pay royalties to the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the State of Israel at a rate ranging between 3-5% of 3% from the proceeds from the sale of the Company’s products arising from the development plan up to an amount equal to $93,300, plus interest at LIBOR from the date of grant. As of September 30, 2017,March 31, 2019, the contingent liability with respect to royalty payment on future sales equaled approximately $52,453,$48,812, excluding interest.
Net Cash Used in Operating Activities for the Nine-MonthThree-Month Periods Ended September 30, 2017March 31, 2019 and September 30, 2016
Net cash used in operating activities was $5,107,009$821,023 and $4,346,289$1,426,868 for the nine-monththree-month periods ended September 30, 2017March 31, 2019 and 2016,2018, respectively. Net cash used in operating activities primarily reflects the net loss for those periods of $7,672,266$1,021,653 and $4,270,506, respectively, increased$1,847,794, respectively. The company also incurred a reduction in the stock based compensation of $382,895 between the two periods related to the departure of its former CEO. In addition, the decrease by non-cash changes in fair value of warrantsWarrants with down-round protection of $240,613 and $110,498, respectively and partially offset by the decrease of $2,072,052 related to stock-based compensation as described above in general and administrative expenses. Net cash used in operating activities was also partially offset by changes in operating assets and liabilities in the aggregate amounts of $683,125 and $273,745$77,947, respectively.
Net Cash Used in Investing Activities for the Nine-MonthThree-Month Periods Ended September 30, 2017March 31, 2019 and September 30, 2016
Net cash used in investing activities was $19,469$6,378 and $75,269$931 for the nine-monththree-month periods ended September 30, 2017,March 31, 2019, and 2016,2018, respectively, and was used to purchase equipment (such as computers, R&D and office equipment).
Net Cash Provided by Financing Activities for the Nine-MonthThree-Month Periods Ended September 30, 2017March 31, 2019 and September 30, 2016
Net cash provided by financing activities was $5,374,074$756,111 and $4,503,611$1,697,700 for the nine-monththree-month period ended September 30, 2017March 31, 2019 and 2016,2018, respectively. Cash provided by financing activities for the nine-monththree-month period ended September 30, 2017March 31, 2019 and 2016 March 31, 2018 reflected net capital raised from the issuance of Series CD Units.
Off-Balance Sheet Arrangements
As of September 30, 2017,March 31, 2019, 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.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officerpresident and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2017,March 31, 2019, our Chief Executive Officerpresident and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 1. Legal Proceedings.
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Offering of Series D Units
During the three-month period ending on March 31, 2019, the Company received aggregate gross proceeds of $902,920 from the private placement of its securities to accredited investors. The Company issued to the investors an aggregate of 200,652 units of the Company (each a “Series DUnit”), each consisting of (a) one share of the Company’s Common Stock, (b) a five year warrant to purchase, at an exercise price of $1.80 per share, one share of Common Stock, (c) a five year warrant to purchase, at an exercise price of $3.60 per share, one share of Common Stock, and (d) a five year warrant to purchase, at an exercise price of $5.40 per share, one share of Common Stock.
Issuance of Non-Qualified Stock Options to Employees
On January 1, 2019, we issued a ten-year non-qualified stock option to our President and Chief Operating Officer, for the purchase of 75,000 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
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
25 |
Exhibit No. | Description | |
4.1 | ||
4.5 | Form of Series D Registration Rights Agreement | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Schema Document | |
101.CAL | XBRL Calculation Linkbase Document | |
101.LAB | XBRL Label Linkbase Document | |
101.PRE | XBRL Presentation Linkbase Document | |
101.DEF | XBRL Definition Linkbase Document |
(1) | Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, as filed with the SEC on |
(2) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on March |
(3) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on |
(4) |
Pursuant to Rule | |
* | Compensation Plan or Arrangement or Management Contract. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 14, 2017
INTEGRITY APPLICATIONS, INC. | ||
By: | ||
Name: | David Podwalski | |
Title | Director, President and Chief Operating Officer (Principal Executive Officer) |
By: | /s/ Sami Sassoun | |
Name: | Sami Sassoun | |
Title | Chief Financial Officer (Principal |