| Summary of Significant Accounting Policies | 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 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)”.
2019 2018
Official exchange rate of NIS 1 to US dollar 0.290 0.267
Increase (decrease) of the Official exchange rate of NIS 1 to US dollar during the year:
2019 8.45 %
2018 (7.50 %)
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.
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 related to long lived assets.
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
2019 2018
Cash and cash equivalents $ 418,621 $ 97,079
Restricted cash 57,092 52,605
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows $ 475,713 $ 149,684
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 2019 and 2018 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, 2019, and 2018 amounted to $79,190 and $120,753, 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 existed, 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).
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, 2019 and 2018 warranty expenses were clearly insignificant. ($4,699 and, $1,173, 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.
Until December 31, 2018 the Company applied ASC 505-50, “ Equity-Based Payments to Non-Employees
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. 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 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 equivalents, accounts receivable, and 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, 2019, the Group has recorded reserves with respect to its accounts receivable in the amount of approximately US$99,888 relating to the risk of the potential collectability from one customer. As of December 31, 2019, 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. 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 basic earnings 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 (cont.) 1. Accounting Standard
Update (ASU) No. 2017-11, “ Earnings Per Share” 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.
2. 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.
3. 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.
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. |
