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, 2019. 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
We
are a medical device company, founded in 2001, focused on the design, development and commercialization of non-invasive glucose
monitoring devices for use by people with diabetes and prediabetes. We have developed a non-invasive blood glucose monitor, the
GlucoTrack® model DF-F glucose monitoring device, which is designed to help people with diabetes obtain blood glucose level
readings without the pain, inconvenience, cost and difficulty of conventional (invasive) spot finger stick devices. The GlucoTrack®
model DF-F utilizes a patented combination of ultrasound, electromagnetic and thermal technologies to obtain blood glucose measurements
in less than one minute via a small sensor that is clipped onto one’s earlobe and connected to a small, handheld control
and display unit, all without drawing blood.
We
are currently nearing the completion of our own companion mobile application for both Android and iOS and a cloud-based solution,
to offer a digital platform to provide real time, data driven personalized tools to effectively help a user manage their diabetes.
In addition to being a critical and effective management tool for the end user, we believe that third parties such as insurers,
pharmaceutical companies and advertisers would be willing to pay for the de-identified data that we will obtain through our platform,
and that this is an opportunity for us to develop an additional revenue source. We are also nearing the completion of the GT-Link®,
a technology that enables the current version of GlucoTrack® to be Bluetooth and wi-fi enabled.
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 2014, we received CE Mark approval for nine months’ calibration validity of the same device. This
approval eliminated the need for monthly re-calibrations and enabled the calibration process to be conducted only when the sensor
is replaced, once every 6 months. In 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. Also in 2015, we received approval from the Notified Body for further improvements
to the GlucoTrack® model DF-F that increase the accuracy and efficacy of the device.
On
January 21, 2020, the Company announced that it has received CE Mark approval for a major enhancement to GlucoTrack, allowing
for a user to perform the calibration process by themselves, without the need for a certified calibrator. The initial CE Mark
approval received for GlucoTrack required a calibration process that took three hours to complete, required eight invasive finger
stick reference measurements, needed to be repeated every thirty days and required a certified calibrator to perform the calibration.
After a series of successful enhancements and approvals, the calibration process now takes just thirty minutes, requires just
three invasive reference measurements, and needs to be repeated only once every six months. With self-calibration, a user can
now perform this simplified process in the privacy and convenience of their own home. 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.
We
continue to invest resources on our intellectual property to protect our existing patents and trademarks, and anticipate additional
patents for our existing technology, as well as future products in development. In addition, we are exploring improvements and
changes to our algorithms and sensor technologies with a goal of increasing our Mean Absolute Relative Difference (MARD) and overall
accuracy.
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.
We
have identified, what we believe, are the critical success factors necessary for the successful commercialization of Glucotrack®.
These factors include: 1) selecting the right distribution partner within countries that have knowledge and experience in diabetes,
the appropriate capabilities and proven performance in the sales, marketing, and customer service in support of medical devices,
and a commitment to investing the appropriate resources required for a successful launch and building of the business; 2) segmenting
and targeting the right customers including key opinion leaders, treating physicians, and diabetes nurses within the healthcare
provider communities as well as those patient groups that will benefit most from the use of a non-invasive device; 3) creating
a cost structure and end user price point 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 commercial approach with the Netherlands, and signed an exclusive distribution agreement
with MediReva B.V. We have been working closely with our new distributor on product and disease area training across the organization,
and segmentation of the local target audiences including key opinion leaders, treating physicians, and diabetes nurses. An 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 insurance companies on steps towards reimbursement approval. In addition to the Netherlands,
we are in the process of identifying and negotiating with additional distributors in other key geographic regions.
Following
our successful capital raise in the first quarter of this year of $15,000,000, we have been planning for an up-listing of our
Common Stock to a national exchange. While we believe we have been taking the appropriate steps to up-list, we cannot provide
assurances at this time as to whether and when we will be successful with respect to this plan.
This
year, as we have begun the commercialization stage of the Company, we continue to add to our talent base in important management
positions and advisors, each with expertise in their respective fields, such as artificial intelligence, data analytics, digital
health and wearables.
We
may be at risk as a result of the current COVID-19 pandemic. Risks that could affect our business include the duration and scope
of the COVID-19 pandemic and the impact on the demand for our products; actions by governments, businesses and individuals taken
in response to the pandemic; the length of time of the COVID-19 pandemic and the possibility of its reoccurrence; the timing required
to develop effective treatments and a vaccine in the event of future outbreaks; the eventual impact of the pandemic and actions
taken in response to the pandemic on global and regional economies; and the pace of recovery when the COVID-19 pandemic subsides.
Critical
Accounting Policies
This
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates
about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related
disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that
management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management
reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly
and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual
results could differ from our assumptions and estimates, and such differences could be material. As applicable to the consolidated
financial statements included elsewhere in this report, the most significant estimates and assumptions relate to determination
of net realizable value of inventory.
Our
significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated
Financial Statements included elsewhere in this report.
Results
of Operations
The
following discussion of our operating results explains material changes in our results of operations for the nine-month period
ended September 30, 2020 compared with the same period ended September 30, 2019. The discussion should be read in conjunction
with the financial statements and related notes included elsewhere in this report.
Nine
Months ended September 30, 2020 compared to Nine Months ended September 30, 2019
Revenues
During
the nine-month period ended September 30, 2020, we had revenues of $2,271 from orders for our GlucoTrack® model DF-F glucose
monitoring device and PEC that are replaced every six months, as compared with $140,255 for the prior-year period due to a decrease
in orders for our products.
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 $1,270,295 for the nine-month period ended September 30, 2020, as compared to $1,203,616 for the
prior-year period. The increase is immaterial.
Research
and development expenses consist primarily of salaries and other personnel-related expenses, including stock-based compensation
expenses, materials, (including provision for slow inventory), travel expenses, clinical trials and other expenses. We expect
research and development expenses to increase in 2020 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 $274,183 for the nine-month period ended September 30, 2020, as compared to $444,555 for the prior-year
period. The decrease is primarily attributable to the Company’s decision to reduce
its business development personnel in the European market until such a time when the proof of concept of obtaining reimbursement
for the product in test markets is realized.
Selling
and marketing expenses consist primarily of professional services, salaries, travel expenses and other related expenses. We expect
selling and marketing expenses to increase in 2020 and beyond as we continue our focus on marketing and sales of the GlucoTrack®
model DF-F and potential FDA clinical trials.
General
and administrative expenses
General
and administrative expenses were $711,795 for the nine-month period ended September 30, 2020, as compared to $1,391,916 for the
prior-year period. The decrease is primarily attributable to the departure of our former President and CFO, a reduction in professional
fees and the reduction of stock based compensation during the last half of 2019.
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.
Financing
income, net
Financing
income, net was $98,978 for the nine-month period ended September 30, 2020, as compared to financing expenses of $17,455 for the
prior-year period. For more information see Note 5 to the financial statements.
Net
Loss
Net
loss was $1,816,957 for the nine-month period ended September 30, 2020, as compared to $2,917,287 for the prior-year period. The
decrease in net loss is attributable primarily to the decrease in our operating expenses, as described above.
Three
Months ended September 30, 2020 compared to Three Months ended September 30, 2019
Revenues
During
the three-month period ended September 30, 2020, we had zero revenues from orders for our GlucoTrack® model DF-F glucose monitoring
device and PEC that are replaced every six months, as compared with $4,175 for the prior-year period due to a decrease in orders
for our products.
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 $476,364 for the three-month period ended September 30, 2020, as compared to $377,377 for the prior-year
period. The increase is attributable to an increase in salary and other personnel-related expenses during 2020.
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. We expect research and development expenses to increase
in 2020 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 $93,366 for the three-month period ended September 30, 2020, as compared to $168,259 for the prior-year
period. The decrease is primarily attributable to the Company’s decision to reduce
its business development personnel in the European market until such a time when the proof of concept of obtaining reimbursement
for the product in test markets is realized.
Selling
and marketing expenses consist primarily of professional services, salaries, travel expenses and other related expenses. We expect
selling and marketing expenses to increase in 2020 and beyond as we continue our focus on marketing and sales of the GlucoTrack®
model DF-F and potential FDA clinical trials.
General
and administrative expenses
General
and administrative expenses were $317,597 for the three-month period ended September 30, 2020, as compared to $439,012 for the
prior-year period. The decrease is primarily attributable to the departure of our former President and CFO, a reduction in professional
fees and the reduction of stock based compensation during the last half of 2019.
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.
Financing
income (expenses), net
Financing
income, net was $40,245 for the three-month period ended September 30, 2020, as compared to financing expenses of $16,304 for
the prior-year period. For more information see Note 5 to the financial statements.
Net
Loss
Net
loss was $509,015 for the three-month period ended September 30, 2020, as compared to $996,777 for the prior-year period. The
decrease in net loss is attributable primarily to the decrease in our operating expenses, as described above.
Liquidity
and Capital Resources
As
of September 30, 2020, cash on hand was approximately $10.7 million as a result of our $15 million private placement which closed
during February 2020, for which we received net cash of approximately $13 million. 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 in excess of one year
from the date of this report. In order to fund our anticipated liquidity needs beyond such period (or possibly earlier if our
current cash burn rate, strategy or operating plan change in a way that accelerates or increases our liquidity needs), we will
need to raise additional capital.
Messrs.
Avner Gal and Zvi Cohen collectively loaned Integrity Israel NIS 176,000 ($51,764 based on the exchange rate of 3.4 NIS/dollar
as of September 30, 2020) on May 15, 2002 pursuant to a board approval. Messrs. Nir Tarlovsky, Yitzhak Fisher and Asher Kugler
loaned Integrity Israel NIS 336,300 ($98,912 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 September 30, 2020, the contingent
liability with respect to royalty payment on future sales equaled approximately $34,000, excluding interest.
Net
Cash Used in Operating Activities for the Nine-month Periods Ended September 30, 2020 and September 30, 2019
Net
cash used in operating activities was $2,656,834 and $3,102,508 for the nine-month periods ended September 30, 2020 and 2019,
respectively. Net cash used in operating activities primarily reflects the net loss for those periods of $1,816,957 and $2,917,287,
respectively.
Net
Cash Used in Investing Activities for the Nine-month Periods Ended September 30, 2020 and September 30, 2019
Net
cash used in investing activities was $45,900 and $22,554 for the nine-month periods ended September 30, 2020 and 2019, respectively,
and was used to purchase equipment (such as computers, research and development, and office equipment).
Net
Cash Provided by Financing Activities for the Nine-month Periods Ended September 30, 2020 and September 30, 2019
Net
cash provided by financing activities was $13,009,269 and $4,198,574 for the nine-month periods ended, September 30, 2020 and
2019, respectively. Cash provided by financing activities for the nine-month period ended September 30, 2020 reflected net capital
raised from the February 2020 private placement and issuance of our common stock. Cash provided by financing activities for the
nine-month period ended September 30, 2019, reflected net capital raised from the issuance of Series D Units.
Off-Balance
Sheet Arrangements
As
of September 30, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.