Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 report on Form 10-K for the year ended December 31, 2017. The following discussion should be read in conjunction
with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form
10-Q.
Overview
Incorporated
in Delaware in May 2010, we are a medical device company focused on the design, development and commercialization of non-invasive
glucose monitoring devices for use by people with diabetes and pre-diabetics. On July 15, 2010, we completed a reverse triangular
merger with Integrity Israel and Integrity Acquisition Corp. Ltd., an Israeli corporation and a wholly owned subsidiary of ours,
pursuant to which Integrity Acquisition Corp. Ltd. merged with
and
into Integrity
Israel and all of the stockholders and option holders of Integrity Israel received shares and options in us in exchange
for their shares and options in Integrity Israel (the “Reorganization”). Following the Reorganization, the former
equity holders of Integrity Israel were entitled to the same proportional ownership in us as they had in Integrity Israel prior
to the Reorganization. As a result of the Reorganization, Integrity Israel became a wholly owned subsidiary of ours. We operate
primarily through Integrity Israel.
Integrity
Israel was founded in 2001 with a mission to develop, produce and market non-invasive glucose monitors for home use by diabetics.
We have developed a non-invasive glucose monitor, the GlucoTrack® model DF-F glucose monitoring device, which is designed
to help people with diabetes and pre-diabetics obtain glucose level readings without the pain, inconvenience, cost and difficulty
of conventional (invasive) spot finger stick devices. The GlucoTrack® model DF-F utilizes a patented combination of ultrasound,
electromagnetic and thermal technologies to obtain glucose measurements in less than one minute via a small sensor that is
clipped onto one’s earlobe and connected to a small, handheld control and display unit, all without drawing blood or interstitial
fluid.
In
June 2013, we received the initial Conformité Européene (CE) Mark (indicating the conformity of the Company’s
product with health, safety, and environmental protection standards for products sold within the European Economic Area) approval
for the GlucoTrack® model DF-F non-invasive glucose monitoring device from DEKRA Certification B.V., our European notified
body (the “Notified Body”), which is an entity that has been accredited by a member state of the European Union (“EU”)
to assess whether a product to be placed on the market meets certain preordained standards.
This
original approval required that the device be re-calibrated every 30 days, with each such re- calibration taking between 2.5 and
3 hours to complete. In March 2014, we received CE Mark approval for six months’ calibration validity of the same device.
This approval eliminates the need for monthly re-calibrations and enables the calibration process to be conducted only when the
sensor is replaced, once every 6 months. We believe that this is a significant feature of the GlucoTrack® model DF-F. On August
31, 2015, we received a further approval from the Notified Body for improvements to the GlucoTrack® model DF-F to simplify
and shorten the initial calibration process for the device (from approximately 2.5 hours to approximately half an hour). All these
improvements enhance the competitiveness of the device and its commercial viability. In addition, we received approval from the
Notified Body on the updated intended use for the device, which expands the intended user population to include not only Type
2 diabetics, but also people suffering from pre-diabetes conditions, which we believe represents a material expansion of the potential
market for the device. In December 2015, we received approval from the Notified Body for further improvements to the GlucoTrack®
model DF-F that increase the accuracy and efficacy of the device. As a result of these incremental, but important, enhancements
to the performance of the device we believe that the product is ready for commercial launch in specific market segments.
Receipt
of the CE Mark allows us to market and sell the GlucoTrack® model DF-F glucose monitoring device in EU member countries that
have adopted the European Medical Device Directive (the “MDD”) without being subject to additional national regulations
with regard to demonstration of performance and safety. However, although the MDD is applicable throughout the EU, in practice
it does not ensure uniform regulation throughout the EU. Accordingly, member countries may apply and enforce the MDD’s terms
differently, and certain EU member countries may request or require performance and/or safety data in addition to the MDD’s
requirements from time to time, on a case-by-case basis. The CE Mark also permits the sale in countries that have an MDD Mutual
Recognition Agreement with the EU. This would include some countries in South East Asia as well as Latin America opening new potential
markets for Integrity on a global basis.
Safety
and quality are non-negotiables in the medical devices industry. Regulatory requirements are increasingly stringent throughout
every step of a product’s life cycle, including service and delivery. More and more, organizations in the industry are expected
to demonstrate their quality management processes and ensure best practice in everything they do. ISO 13485, is an internationally
agreed standard that sets out the requirements for a quality management system specific to the medical devices industry. On February
19, 2016, we received an extension of our ISO 13485:2003 certificate and Annex II certification from the EU. The ISO 13485:2003
certification signifies that we have met the standards required for company-wide implementation of device quality management system(s).
The scope of the certification is design, development, manufacture and service of non-invasive glucose monitoring systems for
home use. Annex II also addresses quality control systems. The certification allows us to self-certify certain modifications and
changes and simplifies some of the reporting to and review by the relevant Notified Body. This can shorten the CE-mark review
process of future GlucoTrack® model DF-F enhancements or revisions, including software updates and other improvements of the
device that do not affect the intended use and/or safety performance. The ISO 13485:2003 and Annex II certifications enable us
to potentially reduce the time to market for product sales on new, enhanced or modified GlucoTrack® model DF-F devices.
The
GlucoTrack® model DF-F has not yet been approved for commercial sale in the United States. On August 10, 2015, we submitted
pre- submission documents to the U.S. Food and Drug Administration (the “FDA”) in connection with our proposed future
application for FDA approval of our U.S. clinical trial protocol. The pre-submission documentation was submitted to the FDA in
order to obtain the FDA’s guidance regarding the U.S. regulatory pathway for the GlucoTrack® model DF-F, the proper
approach to refining the trial protocol and preparing the pre-marketing application. On October 19, 2015, we met with the FDA
to discuss the pre-submission documents, including the approach to and details of the clinical trial protocol for the GlucoTrack®
model DF-F. On May 10, 2016, we submitted a pre-submission supplement (including clinical trial protocol) to the FDA which reflects
the feedback received from the FDA at our October 2015 meeting. On July 18, 2016, we completed a teleconference with the FDA to
further discuss our pre-submission supplement. At the end of this discussion, we received verbal confirmation from the FDA that
clinical trials of the GlucoTrack® model DF-F constitute non-significant risk device studies, which allows the trials to proceed
without an Investigational Device Exemption (IDE) application. Such trials are assessed by the FDA and not considered to present
a potential for serious risk to the health, safety or the welfare of subjects. We expect that the regulatory pathway would be
that of a
de novo
510k, requiring a clinical trial design based on feedback from the agency. The initiation of clinical
trials in the USA is subject to raising adequate financing to fund the clinical program through completion. If we are unable to
raise additional capital of at least $10 million, we do not expect to commence such clinical trials.
Clinical
trials conducted recently in Germany by Pfutzner Science & Health Institute, GmbH, headed by Prof. Dr. Andreas Pfutzner, on
subjects with Type 2 diabetes and pre-diabetics, as well as at Soroka University Medical Center, Beer-Sheva, Israel, demonstrated
favorable results, which were presented on November 10, 2016 by the Company at the 16th annual Diabetes Technology Meeting (DTM),
Bethesda, MD in an invited presentation. Most notably, the presentation included data validating that GlucoTrack’s accuracy
has increased significantly. Results from the trials show 99.7% of the study data points within the clinically accepted A and
B zones of the Consensus Error Grid (which is a new tool for evaluating the accuracy of a blood glucose meter) (Type 2), 99.3%
of the study data points were within the clinically accepted A and B zones of the Clarke Error Grid (which is a tool used to quantify
the clinical accuracy of blood glucose estimates generated by meters as compared to a reference value), 17.0% Mean Absolute Relative
Difference, and 12.9% Median Absolute Relative Difference. In addition, the German trial concluded that the data confirms the
performance of the GlucoTrack® among its intended users, including pre-diabetic patients.
In
the second half of 2017 we conducted a strategic review of our previous commercial activities. We established a cross-functional
task force with the goal of reviewing the current commercial performance in all countries and identifying the critical success
factors (CSF’s) necessary for successful commercialization. The CSF’s that were determined to be most important to
our future commercial success include: 1) selecting the right distribution partners within countries that have knowledge
and experience in diabetes, the appropriate capabilities and proven performance in the sales, marketing, and customer service
in support of medical devices, and a commitment to investing the appropriate resources required for a successful launch and building
of the business; 2) segmenting and targeting the right customers including key opinion leaders, treating physicians, and diabetes
nurses within the healthcare provider communities as well as those patient groups that will benefit most from the use of a non-invasive
device; 3) revising the cost structure for GlucoTrack® so that it will be more affordable on a monthly basis for patients;
and 4) working with government authorities and health insurance companies to achieve full or partial reimbursement for GlucoTrack®
within covered medical plans.
We
have started the implementation of this new commercial program by selecting two countries where we will pilot this approach as
our proof-of-concept; the Netherlands and Israel. These countries were chosen based on the relatively smaller size of these marketplaces
that will allow us to be able to rapidly assess our performance and make adjustments as necessary. On December 22, 2017 we signed
an exclusive distribution agreement with a new partner in the Netherlands (MediReva B.V.) and are underway with launch
preparations for the second quarter of 2018. We have been working closely with our new distributor and have accomplished:
product and disease area training across the organization; segmentation of the local target audiences including key opinion leaders,
treating physicians, and diabetes nurses; and discussions with the majority of health insurance companies.
We
are also in negotiations with a new partner for Israel with the goal of launching in the third quarter of 2018. As soon as these
two pilots demonstrate that our new strategic approach is successful, we plan to rapidly rollout this approach across prioritized
European countries in the last quarter of 2018 and throughout 2019.
In
the meantime, we have assessed the performance of all of our current distributors in Europe and Asia. A number of these agreements
have been terminated given that they did not perform in the past and had minimal or no sales over the course of 2017. We are also
initiating discussions with our distributors in the remaining countries to focus on changes needed to address the CSF’s
for future success with implementation foreseen in the second half of 2018.
We
do not own commercial manufacturing facilities and do not intend to build commercial manufacturing facilities of our own in the
foreseeable future. We currently utilize a third-party manufacturer in Israel to manufacture the GlucoTrack® model DF-F. Moreover,
in July 2014, we entered into a manufacturing agreement with Wistron Corp. (“Wistron”), a Taiwanese entity and the
manufacturing arm of Acer Inc. Pursuant to such agreement, Wistron has agreed to mass produce and service, on a non-exclusive
basis, the GlucoTrack® model DF-F and any future products, if any, introduced by us. Pursuant to such agreement, Wistron has
also agreed to provide full turn-key manufacturing services for the GlucoTrack® model DF- F, including components procurement,
unit assembly, device integration, testing, packaging and delivery to customers (distributors). In November 2015, we sent a delegation
to Wistron’s main production facility in Taiwan to, among other things, inspect the readiness of Wistron’s production
line for the GlucoTrack® model DF-F. Wistron has produced a small pilot batch and recently produced a second pilot batch of
the GlucoTrack® model DF-F device. Following the receipt of an official clearance from the Taiwanese authorities on January
11, 2017 and the successful completion of a GMP (Good Manufacturing Practice) audit by the local regulatory authorities in July
2017, the production line for the GlucoTrack® model DF-F is now operational. We intend to utilize the services of both Wistron
and the Israeli third-party manufacturer to produce the GlucoTrack® model DF-F.
In
support of the commercialization effort, we intend to conduct further post-market clinical trials, as well as publish scientific
and clinical studies, case studies, and white papers. To that end, we have engaged with a leading clinic in Germany, Pfutzner
Science & Health Institute, GmbH, headed by Prof. Dr. Andreas Pfutzner, to conduct additional clinical trials on subjects
with Type 2 diabetes and pre-diabetics. We anticipate adding additional sites in Europe.
In September 2016,
we had a booth at the 52nd annual conference of the European Association for Study of Diabetes (EASD) in Munich.
In
December 2016, we had a poster at the 9th Annual World Congress on Prevention of Diabetes and its Complications (WCPD, in
Atlanta, GA). This Congress provided the Company with an opportunity to showcase GlucoTrack® model DF-F as a tool to fight
diabetes and its complications, as well as using GlucoTrack® model DF-F as a tool to assist pre-diabetics.
In
February 2017, the Company presented at the 10th International Conference on Advanced Technologies & Treatments for Diabetes
(ATTD 2017) in Paris, France. The Company presented key findings including (1) the latest generation GlucoTrack® algorithm,
which compensates for the tissue-lagging effect relative to blood glucose changes post-meal intake, significantly improves GlucoTrack®
accuracy at different post-prandial (post- meal) states, and equalizes accuracy for pre- and post-meal glucose readings; (2) GlucoTrack®
clinical accuracy as measured by Consensus Error Grid (CEG) showed 100% of the pre-prandial readings in the A+B zones, and 98.2%
of the post-prandial readings in the A+B zones; (3) GlucoTrack® Model DF-F demonstrates consistent glucose measurement repeatability
between different GlucoTrack® devices and on each earlobe of the same subject; (4) the repeatability of different GlucoTrack®
devices is similar at all tested glucose ranges and post-prandial time periods; and (5) the GlucoTrack® mean precision absolute
relative difference (PARD) of 8.2% is equivalent or better than the independently reported PARD values of commercially available
continuous glucose monitoring systems.
On
June 12, 2017, we announced new data demonstrating the clinical performance of GlucoTrack®, further supporting its suitability
for people with type 2 diabetes across various medication regimes. The data was recently presented at the American Diabetes Association’s
(ADA) 77
th
Scientific Sessions in San Diego, CA.
In
September 2017, we presented key findings at the European Association for the Study of Diabetes Congress (EASD) in Lisbon, Portugal.
The study evaluated GlucoTrack®’s accuracy in 172 adults with type 2 diabetes who were prescribed one or more medications
for major medical conditions associated with diabetes. The experiment stratified participants into five medication groups, focusing
on anti-cholesterolemia, anti-hypertension, anti-thrombotic, and anti-diabetic (prolonged duration and short and mixed duration)
medications. The study demonstrated that the use of these common concomitant medications in diabetes had no effect on the performance
of GlucoTrack®. We also had a display booth at this conference that was well attended by hundreds of treating physicians and
diabetes nurses.
We
have not yet generated any material revenues from our operations and, as of March 31, 2018, have incurred an accumulated deficit
of $49,724,998, stockholders’ deficit of $16,286,538 and negative operating cash flows. We currently have
no material sources of recurring revenue and therefore are dependent upon external sources for financing our operations. There
can be no assurance that we will succeed in obtaining the necessary financing to continue our operations. As a result, substantial
doubt exists regarding our ability to continue as a going concern.
Recent
Developments
During
the first quarter of 2018, we received aggregate net proceeds of approximately $1.7 million (net of related cash expenses), from
the issuance and sale in a private placement transaction of 435,556 Series D Units. As of March 31, 2018, the Series D Warrants
(issued on December 1, 2017 and on the first quarter of 2018) are exercisable for an aggregate of 1,590,000 shares of Common
Stock, in each case subject to adjustment in certain circumstances.
Pursuant
to a placement agent agreement (the “Placement Agent Agreement”) with the placement agent, the Company paid the
placement agent, as a commission, an amount equal to 10% of the aggregate sales price of the Series D Units sold in each
closing, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Series D Units sold in such
closing. In addition, pursuant to the Placement Agent Agreement, in connection with the closings in the first quarter of 2018,
the Company is required to issue to the placement agent: (a) 5-year warrants to purchase up to 87,112 shares
of Common Stock at an exercise price of $4.50 per share, (b) 5-year warrants to purchase up to 43,556 shares of Common
Stock at an exercise price of $5.75 per share, and (c) 5-year warrants to purchase up to 43,556 shares of
Common Stock at an exercise price of $7.75 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
March 23, 2018, the Company held its 2018 Special Meeting of Stockholders. At the Meeting, the Company’s stockholders voted
on the proposal to approve and ratify the increase of the total number of shares authorized for issuance under the Company’s
Compensation Plan to 7,000,000 shares, including an amendment to the Incentive Plan on April 7, 2017 to increase from 1,000,000
shares to 5,625,000 shares and another amendment on February 15, 2018 to increase from 5,625,000 shares to 7,000,000 shares.
We
recently laid out our strategic priorities in terms of product enhancements and a future generation of products. As a result of
the review of our corporate strategy, we have decided to concentrate our R&D activities around 4 main strategic pillars;
We
have developed a wireless module (“WLM”) with embedded Bluetooth Low-Energy (BLE) and Wi-Fi technologies, which enables
the transmission of measurement data captured by the GlucoTrack® model DF-F to a cloud-based server or a smart device. We
expect this module and the related applications to facilitate viewing of glucose related data and correlate it closely with lifestyle
choices made by the users, be that dietary choices or activity-based choices, among other things. The wireless module will also
facilitate sharing, viewing and analysis of GlucoTrack® measurements and profile by clinicians and others caregivers.
|
2.
|
Digital
Health Applications
|
We
intend to develop smart device applications (“Apps”) to facilitate the interaction of users with Glucotrack and the
glucose data collected. We intend to develop Apps that support the management of Type 2 diabetics and pre-diabetic patients by
provided immediate feedback and insights as to the glucose measurements. The goal is to provide relevant information to guide
patients to change behavior and improve the management of their condition. The Apps are expected to have a user-directed capability
to connect with third party healthcare providers (physicians, dieticians, and nurse practitioners), in order to receive professional
guidance based on the accumulated information ultimately leading to improved management of the condition and better disease outcomes.
While
the accuracy of the Glucotrack DF-F is sufficient for the management of Type 2 diabetics and pre-diabetic patients (and approved
as such by the EU authorities) we strive to further improve the product in future iterations and maximize it’s potential
by expanding the addressable market, e.g. into Type 1 diabetes. The research projects include further improving the algorithms
involved in computing our glucose measurement data, as well as deeper research on the existing sensing technologies to improve
sensitivity. The ultimate goal being to eventually commercialize a non-invasive device for all types of diabetics.
The
objective of this project is to reduce the existing device to a simple, aesthetically designed, wireless ear-clip which would
measure glucose and communicate the results seamlessly to any other platform whether through a wireless connection to the cloud
or a Bluetooth connection to a smart device such as a smartphone, tablet or computer. As a result, the current handheld display
would be eliminated completely. The result would be a user- friendly, inconspicuous measuring device for the management of diabetes
and pre-diabetes. With a significantly cheaper cost to manufacture than our current device.
Simultaneously
we will be working to further simplify the calibration process eventually enabling self-calibration
After months of protracted
negotiations with our China distributor we finally reached an impasse on several critical issues and decided that it would be
in the best interests of the Company to terminate the existing agreements with such distributor due to various breaches of the
distributor. On May 14, 2018, the Company sent notices to the distributor regarding the Company’s intention to terminate
the agreement unless the breaches are cured within 30 days. The distributor plays a critical role in assisting the Company to
obtain regulatory approval by the China Food and Drug Administration (“CFDA”) for the GlucoTrack® model DF-F.
If the breaches are not cured within the given timeframe and the relationship is terminated, and as previously reported, the registration
of GlucoTrack® in China will be delayed significantly while we seek new partnering options with the intent to re-submit the
dossier at a later date. If we were unable to partner with another distributor in China on terms mutually agreed upon by us, we
would not have the ability to distribute our products in China or obtain regulatory approve from the CFDA.
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 report on Form 10-K for the year ended December 31, 2017. Our management believes
that, as for the financial statements for the periods included in this report, the going concern assessment and assumptions relate
to (i) the fair value estimate of the Warrants with down-round protection, (ii) the allocation of the proceeds and the related
issuance costs of the Series D Units, is a critical accounting policy, (iii) measurement of stock based compensation,
and (iv) 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 report on Form 10-K for the year ended December 31,
2017. (See also Note 1B to our interim financial statements for the period ended March 31, 2018). As a result,
our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going
concern in our Annual Report on Form 10-K for year ended December 31, 2017. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Recently
Issued Accounting Pronouncements
1.
Accounting Standard Update 2014-09, “Revenue from Contracts with Customers”
commencing
January 1, 2018, the company adopted
Accounting Standard Update
2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").
ASU
2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose
sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount,
timing and uncertainty of revenue and cash flows arising from contracts with customers.
An
entity should apply the amendments in ASU 2014-09 using one of the following two methods: 1. Retrospectively to each prior reporting
period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of
initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method,
it also should provide certain additional disclosures.
During
2016, the FASB issued several Accounting Standard Updates (“ASUs”) that focus on certain implementation issues of
the new revenue recognition guidance including Narrow-Scope Improvements, Practical Expedients and technical corrections.
In
accordance with an amendment to ASU 2014-09, introduced by Accounting Standard 2015-14, “Revenue from contracts with Customers
– Deferral of the Effective Date”, for a public entity, the amendments in ASU 2014-09 are effective for annual reporting
periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal
year 2018 for the Company). Earlier application is permitted only as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within that reporting period.
Since
the company did not report significant revenues, the adoption of ASU 2014-09 did not have a significant impact on its consolidated
financial statements.
2
.
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
Company is evaluating the impact of ASU 2017-11 on its financial statements. Although this process has not been completed, managements
believes that its provisions might impact the accounting of the financial instruments issued by the Company that include down-round
protection.
Results
of Operations
The
following discussion of our operating results explains material changes in our results of operations for the three-month period
ended March 31, 2018 compared with the same period ended March 31, 2017. The discussion should be read in conjunction with the
financial statements and related notes included elsewhere in this report.
Revenues
During
the three-month period ended March 31, 2018, we had revenues of $28,209 from orders for our GlucoTrack® model DF-F glucose
monitoring device and PECs that are replaced every six months, as compared with $96,237 for the prior-year period. During
the first quarter of 2017 we received an initial order from a customer in Hong Kong.
We
recognize revenues from sales of the GlucoTrack® model DF-F and PECs when control is transferred to the customer and collectability
is probable.
Research
and development expenses
Research
and development expenses were $592,697 for the three-month period ended March 31, 2018, as compared to $581,539 for the
prior-year period. There was no material change in research and development expenses between the two periods.
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 2018 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 $308,637 for the three-month period ended March 31, 2018, as compared to $236,939 for the prior-year
period.
The increase is attributable the hiring of a new Chief Commercialization Officer during
the second quarter of 2017.
Selling
and marketing expenses consist primarily of salaries, travel expenses and other related expenses. Subject to the receipt of additional
funds to finance our operations (of which there can be no assurance), we expect selling and marketing expenses to increase during
the remainder of 2018 and beyond as we continue our focus on marketing and sales of the 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 $
1,036,684
for the three-month
period ended March 31, 2018, as compared to $1,877,359 for the prior-year period. The decrease is primarily attributable to severance
paid to our former Chairman and CEO and former CFO of approximately $162,000 during the first quarter of 2017. In addition, the
decrease is attributable to a one time signing bonus of $412,500 including employer payroll taxes and stock-based compensation
in the amount of approximately $303,000 paid to our new Chairman and CEO, recruiting fees of $295,000 and the related professional
fees associated with the changes in management, which occurred during the first quarter of 2017.
General
and administrative expenses consist primarily of professional services, salaries, travel expenses and other related expenses for
executive, finance and administrative personnel, including stock-based compensation expenses. Other general and administrative
costs and expenses include facility-related costs not otherwise included in research and development costs and expenses, and professional
fees for legal and accounting services. Subject to the receipt of additional funds to finance our operations (of which there can
be no assurance), we expect general and administrative expenses to increase during the remainder of 2018 and beyond.
Financing
income, net
Financing
income, net was $62,015 for the three-month period ended March 31, 2018, as compared to $69,275 for the prior-year period. The
change is primarily attributable to changes in fair market value adjustments relating to our Warrants with down-round protection.
In accordance with U.S. GAAP, we mark the warrants to market on a quarterly basis based on the fair value estimate derived by
using a binomial pricing model, with the changes in fair value recognized as finance expense or income, as applicable, in our
consolidated statement of operations. The decrease in the estimated fair value of our Warrants with down-round protection during
the three-month period ended March 31, 2018 and 2017 amounted to $77,947 and $84,099, respectively, resulting primarily from the
decrease in the expected term of Warrants and the changes in the estimated expected volatility.
Net
Loss
Net
loss was $1,847,794 for the three-month period ended March 31, 2018, as compared to $2,530,325 for the prior-year period. The
decrease in net loss is attributable primarily to the decrease in our general and administrative expenses, as described
above.
Liquidity
and Capital Resources
As
of March 31, 2018, cash on hand was approximately $314,000.
During the first quarter of 2018,
we received aggregate net proceeds of approximately $1.7 million (net of related cash expenses), from the issuance and sale in
a private placement transaction of 435,556 Series D Units. While we expect to generate additional cash from sales, we do not anticipate
that our income from operations will be sufficient to sustain our operations in the next 12 months. Based on our current cash
burn rate, strategy and operating plan, we believe that our cash and cash equivalents will enable us to operate for a period of
less than one month from the date of this report. In order to fund our anticipated liquidity needs beyond such period (or possibly
earlier if our current cash burn rate, strategy or operating plan change in a way that accelerates or increases our liquidity
needs), we will need to raise additional capital.
We
have a credit line with Bank HaPoalim of NIS 150,000 (approximately $42,686 based on the exchange rate of 3.514 NIS/dollar as
of March 31, 2018). Borrowings under the line of credit are secured by our funds on deposit with the bank at the time of borrowing,
which generally must be sufficient to cover the principal amount of the borrowings in full.
Messrs.
Avner Gal and Zvi Cohen collectively loaned Integrity Israel NIS 176,000 ($50,085 based on the same exchange rate) on May 15,
2002 pursuant to a board approval. Messrs. Nir Tarlovsky, Yitzhak Fisher and Asher Kugler loaned Integrity Israel NIS 336,300
($95,703 based on the same exchange rate) on March 16, 2004. These loans are not required to be repaid until the first
year in which we realize profits in our annual statement of operations (accounting profit). At such time, the loans are to be
repaid on a quarterly basis in an amount equal to 10% of our total sales in the relevant quarter, beginning on the quarter following
the first year in which we realize profits in our annual statement of operations. The total amount to be repaid by us to each
lender shall be an amount equal to the aggregate principal amount loaned by such lender to us, plus an amount equal to the product
of the amount of each payment made by us in respect of such loan multiplied by the percentage difference between the Israeli Consumer
Price Index on the date on which the loan was made and the Israeli Consumer Price Index on the date of such payment. However,
notwithstanding the above-mentioned mechanism, we will not be required to repay the loans during any time when such repayment
would cause a deficit in our working capital. Our Board of Directors is entitled to modify the repayment terms of these loans,
so long as such modification does not discriminate against any particular lender, and provided that all payments must be allocated
among the lenders on a pro-rata basis.
Integrity
Israel is required to pay royalties to the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the State
of Israel at a rate ranging between 3-5% of the proceeds from the sale of the Company’s products arising from the development
plan up to an amount equal to $93,300, plus interest at LIBOR from the date of grant. As of March 31, 2018, the contingent liability
with respect to royalty payment on future sales equaled approximately $34,717, excluding interest.
Net
Cash Used in Operating Activities for the Three-Month Periods Ended March 31, 2018 and March 31, 2017
Net
cash used in operating activities was $1,426,868 and $1,146,113 for the three-month periods ended March 31, 2018
and 2017, respectively. Net cash used in operating activities primarily reflects the net loss for those periods of $1,847,794
and $2,530,325, respectively, increased by non-cash changes in fair value of Warrants with down-round
protection of $77,947 and $84,099, respectively and partially offset by the increase of $187,302 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 amounts of $283,276 and $873,678, respectively. The
decrease in operating assets and liabilities during the three-month period ended March 31, 2018 resulted primarily from decrease
in our current liabilities as a result of deferral of the payment of the one-time signing bonus to our new Chairman and CEO which
was paid during the second quarter of 2017.
Net
Cash Used in Investing Activities for the Three-Month Periods Ended March 31, 2018 and March 31, 2017
Net
cash used in investing activities was $931 and $1,477 for the three-month periods ended March 31, 2018, and 2017, respectively,
and was used to purchase equipment (such as computers, R&D and office equipment).
Net
Cash Provided by Financing Activities for the Three-Month Periods Ended March 31, 2018 and March 31, 2017
Net
cash provided by financing activities was $1,697,700 and $2,599,071 for the three-month period ended March 31, 2018 and
2017, respectively.
Cash provided by financing activities for the
three-month
period ended March 31, 2018
reflected net capital raised from the issuance of Series D Units.
Cash used in financing activities for the three-month period ended March 31, 2017
reflected
net capital raised from the issuance of Series C Units
.
Off-Balance
Sheet Arrangements
As
of March 31, 2018, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.