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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
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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, an Israeli corporation and a wholly owned subsidiary of ours, pursuant
to which Integrity Acquisition merged with and into Integrity Israel and all of the stockholders and option holders of Integrity
Israel received shares and options in us in exchange for their shares and options in Integrity Israel (the “Reorganization”).
Following the Reorganization, the former equity holders of Integrity Israel were entitled to the same proportional ownership in
us as they had in Integrity Israel prior to the Reorganization. As a result of the Reorganization, Integrity Israel became a wholly
owned subsidiary of ours. We operate primarily through Integrity Israel.
Integrity
Israel was founded in 2001 with a mission to develop, produce and market non-invasive glucose monitors for home use by diabetics.
We have developed a non-invasive glucose monitor, the GlucoTrack® model DF-F glucose monitoring device, which is designed
to help people with diabetes and 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 us 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. It becomes more often that organizations in the industry
are expected to demonstrate their quality management processes and ensure best practice in everything they do. ISO 13485 is an
internationally agreed upon standard that sets out the requirements for 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 systems. The scope of the certification is design, development, manufacture and service of non-invasive glucose
monitoring systems for home use. Annex II also addresses quality control systems. The certification allows us to self-certify
certain modifications and changes and simplifies some of the reporting to and review by the relevant Notified Body. This can shorten
the CE-mark review process of future GlucoTrack® model DF-F enhancements or revisions, including software updates and other
improvements of the device that do not affect the intended use and/or safety performance. 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 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 2018.
We have been working closely with our new distributor and have accomplished: product and disease area training across the organization;
segmentation of the local target audiences including key opinion leaders, treating physicians, and diabetes nurses. We received
our first order of 30 units from MediReva and this has been shipped and received in their warehouse. The most important aspect
of our launch preparations are the discussions being held with many health insurance companies. Approval of full or partial reimbursement
by the health insurance companies will be a key factor in enabling us to achieve significant sales volume. We are currently working
with several of these companies to initiate pilots with GlucoTrack® before the end of this year as the first step towards
reimbursement approval.
We have been in negotiations
with a new strategic partner for Israel with the goal of identifying a new distributor to replace the previous distributor where
we terminated our distribution agreement due to a lack of performance over the last two years. In the meantime, we are exploring
the use of direct-to-consumer web campaigns to evaluate the potential of a direct marketing approach for Israel.
On July 3, 2018 we
signed a new exclusive distribution agreement for GlucoTrack® with CuraTec Nordic for the Scandinavian countries (Denmark,
Sweden, Norway, and Finland). We anticipate that they will be a strong partner due to their previous experience in diabetes, strong
sales presence in all four countries, and established relationships with key opinion leaders. Launch preparations are underway
to enter the markets in the fourth quarter of this year. On August 6, 2018 we received our first order of 100 units which will
be delivered in mid-September and be available for the start of our commercialization in the Scandinavian countries.
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 June 30, 2018, have incurred an accumulated deficit
of $52,240,613, stockholders’ deficit of $16,984,761 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 six months of 2018, we received aggregate net proceeds of approximately $2.4 million (net of related cash
expenses), from the issuance and sale in a private placement transaction of 621,556 Series D Units. As of June 30, 2018, the
Series D Warrants (issued on December 1, 2017 and in the first half of 2018) are exercisable for an aggregate of 2,148,000
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 six months of 2018, the Company is required
to issue to the placement agent: (a) 5-year warrants to purchase up to 124,311 shares of Common Stock at an exercise price of
$4.50 per share, (b) 5-year warrants to purchase up to 62,156 shares of Common Stock at an exercise price of $5.75 per share,
and (c) 5-year warrants to purchase up to 62,156 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 research and development 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.
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2.
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Digital
Health Applications
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We
intend to develop smart device applications (“Apps”) to facilitate the interaction of users with Glucotrack® DF-F
and the glucose data collected. We intend to develop Apps that support the management of Type 2 diabetics and pre-diabetic patients
by provided immediate feedback and insights as to the glucose measurements. The goal is to provide relevant information to guide
patients to change behavior and improve the management of their condition. The Apps are expected to have a user-directed capability
to connect with third party healthcare providers (physicians, dieticians, and nurse practitioners), in order to receive professional
guidance based on the accumulated information ultimately leading to improved management of the 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 its potential by expanding
the addressable market, e.g. into Type 1 diabetes. The research projects include further improving the algorithms involved in
computing our glucose measurement data, as well as deeper research on the existing sensing technologies to improve sensitivity.
The ultimate goal being to eventually commercialize a non-invasive device for all types of diabetics.
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. On June 6, 2018, the Company received a response from
the distributor denying all the allegations of breaches. On June 25, 2018, the Company sent a formal written notice to the distributor
to terminate the agreement, effective immediately, to which the distributor responded on July 20, 2018 continuing to deny all
the allegations of breaches. Notwithstanding the distributor’s denials, we are of the belief that the agreement has been
terminated. The distributor played a critical role in assisting the Company to obtain regulatory approval by the China Food
and Drug Administration (“CFDA”) for the GlucoTrack® model DF-F. As a result of the breaches of the distributor
and the termination of such relationship, the Company may likely be unable to re-submit the file to the CFDA for the current product
for a period of up to five years. While the Company is of the opinion that such termination will have little adverse effect on
its future business opportunities in China, as it believes that it should be able to file applications with the CFDA for its next
generation products through another distributor in China, there can be no assurance that the Company will be successful in this
endeavor. If we were unable to partner with another distributor in China on terms mutually agreed upon by us and receive CFDA
clearance to sell its future products in China, we would not have the ability to distribute our products in China and accordingly
our business potential could be materially adversely affected.
Significant
Accounting Policies
Our
consolidated financial statements are prepared in accordance with 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 June 30, 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 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, management
believes that its provisions might impact the accounting of the financial instruments issued by the Company that include down-round
protection.
3.
Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting
In
June 2018, the FASB issued Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting (asu 2018-07). ASU 2018-07 aligns the measurement and classification guidance for
share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions.
Consistent
with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope
of Topic 718 will be measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the
good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from
the instruments have been satisfied. Equity-classified nonemployee share-based payment awards will be measured at the grant date.
With
respect to awards with performance conditions ASU 2018-07 concludes that, consistent with the accounting for employee share-based
payment awards, an entity will consider the probability of satisfying performance conditions when nonemployee share-based payment
awards contain such conditions.
ASU
2018-07 also requires that the classification of equity classified nonemployee share-based payment awards will continue to be
subject to the requirements of Topic 718 unless the award was modified after the good has been delivered, the service has been
rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee
is no longer providing goods or services. This eliminates the requirement to reassess classification of such awards upon vesting.
In
addition, ASU 2018-07 includes certain Non-public Entity-Specific Amendments
ASU
2018-07 is effective for Public entities in annual periods beginning after 15 December 2018, and interim periods within those
years (first quarter of 2019 for the company). Early adoption is permitted, including in an interim period, but not before an
entity adopts the new revenue guidance (which was adopted by the Company in its interim financial statements for 2018).
An
entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified
awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of
the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these nonemployee awards at fair
value as of the adoption date.
The
Company is evaluating the impact of ASU 2018-07 on its financial statements.
Results
of Operations
The
following discussion of our operating results explains material changes in our results of operations for the six-month period
ended June 30, 2018 compared with the same period ended June 30, 2017. The discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this report.
Six
Months ended June 30, 2018 compared to Six Months ended June 30, 2017
Revenues
During
the six-month period ended June 30, 2018, we had revenues of $43,488 from orders for our GlucoTrack® model DF-F glucose monitoring
device and personal ear-clip (“PEC”) that are replaced every six months, as compared with $104,981 for the prior-year
period. The decrease in revenues is due to the fact that 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 $1,284,591 for the six-month period ended June 30, 2018, as compared to $1,198,363 for the prior-year
period. The increase is attributable to the stock based compensation issued to all employees during the first quarter of 2018,
offset by the decrease in our cost of revenues which is in line with the decrease in revenues.
Research
and development expenses consist primarily of salaries and other personnel-related expenses, including materials, travel expenses,
clinical trials and other expenses. Subject to the receipt of additional funds to finance our operations (of which there can be
no assurance), we expect research and development expenses to increase during the remainder of 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 $592,104 for the six-month period ended June 30, 2018, as compared to $598,234 for the prior-year
period. There was no material change in selling and marketing expenses between the two periods.
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 $2,082,858 for the six-month period ended June 30, 2018, as compared to $3,556,078 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 as well as stock based compensation in the amount of $152,000 during the six months ending June 30, 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 $868,000 paid to our new Chairman and CEO, recruiting fees of $195,000 and the related
professional fees associated with the changes in management paid during the six months ending June 30, 2017.
General
and administrative expenses consist primarily of professional services, salaries, travel expenses and other related expenses for
executive, finance and administrative personnel, including stock-based compensation expenses. Other general and administrative
costs and expenses include facility-related costs not otherwise included in research and development costs and expenses, and professional
fees for legal and accounting services. Subject to the receipt of additional funds to finance our operations (of which there can
be no assurance), we expect selling, general and administrative expenses to increase during the remainder of 2018 and beyond.
Financing
income, net
Financing
income, net was $105,788 for the six-month period ended June 30, 2018, as compared to $160,168 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 option pricing model , with the changes in fair value recognized as finance expense or income, as applicable, in
our consolidated statement of operations. The decrease in the estimated fair value of our warrants with down-round protection
during the six-month period ended June 30, 2018 and 2017 amounted to $160,028 and $191,075, respectively, resulting primarily
from the decrease in the expected term of warrants and the changes in the estimated expected volatility. In addition, the Company
recorded an expense in the amount of $44,280 related to the late fee penalty resulting from the non-issuance of dividend payments
at the required time.
Net
Loss
Net
loss was $3,810,277 for the six-month period ended June 30, 2018, as compared to $5,087,526 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.
Three
Months ended June 30, 2018 compared to three Months ended June 30, 2017
Revenues
During
the three-month period ended June 30, 2018, we had revenues of $15,279 from orders for our GlucoTrack® model DF-F glucose
monitoring device and PEC that are replaced every six months, as compared with $8,744 for the prior-year period. There was no
material change between the two periods.
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 $691,894 for the three-month period ended June 30, 2018, as compared to $616,824 for the prior-year
period. The increase is attributable to the stock based compensation issued to all employees during the first quarter of 2018 .
Research
and development expenses consist primarily of salaries and other personnel-related expenses, including materials, travel expenses,
clinical trials and other expenses. Subject to the receipt of additional funds to finance our operations (of which there can be
no assurance), we expect research and development expenses to increase during the remainder of 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 $283,467 for the three-month period ended June 30, 2018, as compared to $361,295 for the prior-year
period. The decrease is attributable to higher professional fees and the attendance of trade exhibitions incurred during 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 $1,046,174 for the three-month period ended June 30, 2018, as compared to $1,678,719 for the
prior-year period. The decrease is primarily attributable to stock based compensation paid to our current Chairman and CEO and
our former Chairman and CEO of approximately $565,000 and $152,000, respectively during the second 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 selling, general and administrative expenses to increase during the remainder of 2018 and beyond.
Financing
income, net
Financing
income, net was $43,773 for the three-month period ended June 30, 2018, as compared to $90,893 for the prior-year period. The
decrease in income is attributable to an expense in the amount of $44,280 related to the late fee penalty resulting from the non-issuance
of dividend payments at the required time.
Net
Loss
Net
loss was $1,962,483 for the three-month period ended June 30, 2018, as compared to $2,557,201 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 August 14,
2018, cash on hand was approximately $1,800,000. During 2018 we received aggregate net proceeds of approximately $4.7
million (net of related cash expenses) from the issuance and sale of Series D Units. During the first six months of 2018,
we did not collect a material amount in cash proceeds from the fulfillment of orders for our improved GlucoTrack® model DF-F.
While we expect to generate additional cash from sales, we do not anticipate that our income from operations will be sufficient
to sustain our operations in the next 12 months. Based on our current cash burn rate, strategy and operating plan, we believe
that our cash and cash equivalents will enable us to operate for a period of five months from the date of this report.
In order to fund our anticipated liquidity needs beyond such period (or possibly earlier if our current cash burn rate, strategy
or operating plan change in a way that accelerates or increases our liquidity needs), we will need to raise additional capital.
We
have a credit line with Bank HaPoalim of NIS 150,000 (approximately $41,096 based on the exchange rate of 3.65 NIS/dollar as of
June 30, 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 ($48,219 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
($92,137 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 June 30, 2018, the contingent liability
with respect to royalty payment on future sales equaled approximately $34,244, excluding interest.
Net
Cash Used in Operating Activities for the Six-Month Periods Ended June 30, 2018 and June 30, 2017
Net
cash used in operating activities was $2,442,209 and $3,606,014 for the six-month periods ended June 30, 2018 and 2017, respectively.
Net cash used in operating activities primarily reflects the net loss for those periods of $3,810,277 and $5,087,526, respectively,
increased by non-cash changes in fair value of warrants with down-round protection of $160,028 and $191,075, respectively. Net
cash used in operating activities was also partially offset by changes in operating assets and liabilities in the aggregate amounts
of $336,739 and $431,301, respectively.
Net
Cash Used in Investing Activities for the Six-Month Periods Ended June 30, 2018 and June 30, 2017
Net
cash used in investing activities was $1,912 and $4,849 for the six-month periods ended June 30, 2018 and 2017, respectively,
and was used to purchase equipment (such as computers, research and development, and office equipment).
Net
Cash Provided by Financing Activities for the Six-Month Periods Ended June 30, 2018 and June 30, 2017
Net
cash provided by financing activities was $2,418,490 and $4,520,229 for the six-month period ended, June 30 2018 and 2017, respectively.
Cash provided by financing activities for the six-month period ended June 30, 2018 reflected net capital raised from the issuance
of Series D Units. Cash used in financing activities for the six-month period ended June 30, 2017 reflected net capital raised
from the issuance of Series C Units.
Off-Balance
Sheet Arrangements
As
of June 30, 2018, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.