GlucoTrack(GCTK) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements. This section presents the unaudited condensed consolidated financial statements, providing a snapshot of the company's financial position and performance Condensed Consolidated Balance Sheets | ASSETS (US dollars) | June 30, 2019 (unaudited) | December 31, 2018 | | :-------------------- | :------------------------ | :------------------ | | Cash and cash equivalents | 2,276,293 | 97,079 | | Total current assets | 2,505,504 | 314,145 | | Total assets | 3,055,032 | 688,186 | | LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | Total current liabilities | 2,627,741 | 3,221,609 | | Total liabilities | 3,039,681 | 3,561,487 | | Total stockholders' (deficit) surplus | 15,351 | (2,873,301) | Condensed Consolidated Statements of Operations and Comprehensive Loss | (US dollars) | Six-month period ended June 30, 2019 | Six-month period ended June 30, 2018 | Three-month period ended June 30, 2019 | Three-month period ended June 30, 2018 | | :------------- | :----------------------------------- | :----------------------------------- | :------------------------------------- | :------------------------------------- | | Revenues | 136,080 | 43,488 | 110,518 | 15,279 | | Operating loss | (1,919,359) | (3,916,065) | (894,306) | (2,006,256) | | Loss for the period | (1,920,510) | (3,810,277) | (898,857) | (1,962,483) | | Loss per share (Basic) | (0.01) | (0.67) | (0.01) | (0.33) | Condensed Consolidated Statement of Changes in Stockholders' Deficit | (US dollars) | Common Stock (Amount) | Additional paid in capital | Accumulated other comprehensive income/loss | Accumulated deficit | Total Stockholders' (deficit) surplus | | :------------- | :-------------------- | :------------------------- | :------------------------------------------ | :------------------ | :------------------------------------ | | Balance as of January 1, 2019 | 141,638 | 84,007,612 | 164,232 | (87,186,783) | (2,873,301) |\ | Loss for the period | | | | (1,920,510) | (1,920,510) |\ | Other comprehensive (loss) | | | (26,638) | | (26,638) |\ | Amounts allocated to issuance of Common Stock from Series D offering | 18,892 | 3,898,155 | | | 3,917,047 |\ | Balance as of June 30, 2019 | 161,955 | 88,823,095 | 137,594 | (89,107,293) | 15,351 | Condensed Consolidated Statements of Cash Flows | (US dollars) | Six-month period ended June 30, 2019 | Six-month period ended June 30, 2018 | | :------------- | :----------------------------------- | :----------------------------------- |\ | Net cash used in operating activities | (2,041,043) | (2,442,209) |\ | Net cash used in investing activities | (9,913) | (1,912) |\ | Net cash provided by financing activities | 4,198,574 | 2,418,490 |\ | Increase (decrease) in Cash, Cash equivalents, and restricted cash | 2,181,899 | (38,420) |\ | Cash, Cash equivalents, and restricted cash at end of the period | 2,331,583 | 54,924 | - During the six months ending June 30, 2019, the company settled $307 thousand in outstanding board fees and management payroll obligations by issuing 1,190,141 shares of common stock[20] - The fair value of warrants issued as consideration for placement agent services amounted to $249 thousand during the six months ending June 30, 2019, recognized as an increase in additional paid-in capital[20] Notes to Condensed Consolidated Financial Statements NOTE 1 – GENERAL - Integrity Applications, Inc. was incorporated on May 18, 2010, with its wholly-owned Israeli subsidiary focusing on designing, developing, and commercializing non-invasive glucose monitoring devices[25] - The company faces substantial doubt about its ability to continue as a going concern due to an accumulated deficit of $89.1 million, immaterial stockholder's surplus of $15 thousand, negative operating cash flows, and negative working capital as of June 30, 2019[26] - During the first six months of 2019, the company raised approximately $4.2 million (net) through the issuance of Series D Units, which included 18,889,618 shares of common stock and warrants[27] NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The financial statements are prepared in accordance with U.S. GAAP, requiring management estimates and assumptions, particularly for going concern, stock-based compensation, and inventory net realizable value[30] - The company adopted ASU 2018-07 (Nonemployee Share-Based Payment Accounting) in Q1 2019, which did not significantly impact its financial statements[35][39][41] - Upon adopting ASU 2016-02 (Leases) on January 1, 2019, the company recognized $225 thousand in right-of-use (ROU) assets and corresponding liabilities on its balance sheets, with no impact on retained earnings or prior year income/cash flow statements[43][49] NOTE 3 – RECENT EVENTS - In the first six months of 2019, the company received approximately $4.2 million (net) from the private placement of Series D Units, which included 18,889,618 common shares and warrants[52] - The company issued warrants to its placement agent as compensation, including 5-year warrants to purchase up to 1,888,966 shares of Common Stock at $0.258 per share, with cashless exercise and full ratchet anti-dilution protection[53] - On January 1, 2019, a ten-year non-qualified stock option for 75,000 shares at an exercise price of $4.50 per share was issued to the President, with three-year quarterly vesting[54] NOTE 4 – INVENTORIES | (US dollars) | June 30, 2019 (unaudited) | December 31, 2018 | | :------------- | :------------------------ | :------------------ | | Raw materials | 14,564 | 13,522 | | Work in process | 1,503,440 | 1,546,764 | | Finished products | 68,461 | 67,310 | | Total | 1,586,465 | 1,627,596 | | Less – provision for slow moving inventory | (1,456,597) | (1,456,597) | | Net Inventory | 129,868 | 170,999 | - The company has recorded a provision for slow-moving or obsolete inventory of approximately $1.457 million during 2017 and 2018 due to low sales volume of the GlucoTrack® model DF-F[57] NOTE 5 – LEASES | Lease Cost Component | Six Months Ended June 30, 2019 (US dollars) | | :------------------- | :------------------------------------------ | | Office space | 60,000 | | Vehicle | 3,826 | | Total Operating Lease Cost | 63,826 | | Remaining Lease Term (Office space) | 1.42 years | | Remaining Lease Term (Vehicle) | 1.92 years | | Weighted Average Discount Rate | 10% | | Operating Lease Liabilities Maturity (US dollars) | June 30, 2019 (unaudited) | | :-------------------------------- | :------------------------ | | The remainder of 2019 | 63,878 | | 2020 | 117,758 | | 2021 | 3,878 | | Total operating lease payments | 185,514 | | Less: imputed interest | 12,564 | | Present value of lease liabilities | 172,950 | NOTE 6 – OTHER CURRENT LIABILITIES | (US dollars) | June 30, 2019 (unaudited) | December 31, 2018 | | :------------- | :------------------------ | :------------------ | | Employees and related institutions | 264,778 | 239,964 | | Accrued expenses and other | 612,436 | 917,386 | | Total | 877,214 | 1,157,350 | NOTE 7 – FINANCING INCOME (EXPENSE), NET | (US dollars) | Six-month period ended June 30, 2019 | Six-month period ended June 30, 2018 | Three-month period ended June 30, 2019 | Three-month period ended June 30, 2018 | | :------------- | :----------------------------------- | :----------------------------------- | :------------------------------------- | :------------------------------------- | | Israeli CPI linkage difference on principal of loans from stockholders | (3,865) | 1,963 | (3,342) | 1,052 | | Exchange rate differences | 10,569 | (5,621) | 2,506 | 8,006 | | Change in fair value of warrants with down round protection | - | 160,028 | - | 82,081 | | Interest expenses on credit from banks and other | (7,855) | (6,302) | (3,715) | (3,086) | | Late fee penalty of dividend payments | - | (44,280) | - | (44,280) | | Total Financing income (loss), net | (1,151) | 105,788 | (4,551) | 43,773 | NOTE 8 – LOSS PER SHARE | (US dollars) | Six-month period ended June 30, 2019 | Six-month period ended June 30, 2018 | Three-month period ended June 30, 2019 | Three-month period ended June 30, 2018 | | :------------- | :----------------------------------- | :----------------------------------- | :------------------------------------- | :------------------------------------- | | Loss for the period | (1,920,510) | (3,810,277) | (898,857) | (1,962,483) | | Loss for the period attributable to common stockholders | (1,920,510) | (4,872,001) | (898,857) | (2,515,615) | | Weighted average number of shares used in the computation of basic and diluted earnings per share | 147,256,546 | 7,290,123 | 149,776,875 | 7,555,761 | - All outstanding stock options and warrants were excluded from diluted net loss per share calculations for all reported periods as their effect was anti-dilutive[64] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management discusses the company's financial condition and operational results, highlighting key developments, strategic priorities, and accounting policies Overview - The company is a medical device firm focused on developing and commercializing non-invasive glucose monitoring devices for diabetics, specifically the GlucoTrack® model DF-F[66] - The GlucoTrack® model DF-F uses ultrasound, electromagnetic, and thermal technologies for blood glucose measurements via an earlobe sensor, without drawing blood[66] - The device received initial CE Mark approval in June 2013, allowing marketing and sales in EU member countries, with subsequent approvals improving calibration, expanding user population, and increasing accuracy[67][69] Recent Developments - The company received approximately $4.2 million (net) from a private placement of Series D Units in the first six months of 2019, with Series D Warrants exercisable for 7,351,680 common shares as of June 30, 2019[71] - Strategic priorities include enhancing GlucoTrack® usability and developing new products, focusing on wireless connectivity (GlucoTrack Link), digital health applications, self-personalization, and miniaturization[74][75][76][77][78] - The company issued a ten-year non-qualified stock option for 75,000 shares to its President on January 1, 2019, with a $4.50 exercise price and three-year quarterly vesting[73] Significant Accounting Policies - The consolidated financial statements adhere to U.S. GAAP, requiring management to make assumptions and estimates, particularly for the going concern assessment, stock-based compensation measurement, and inventory net realizable value[79][80] Going Concern Uncertainty - The company's ability to continue as a going concern is in substantial doubt due to significant product development expenditures, lack of material revenues, accumulated deficit, and negative operating cash flows, necessitating external financing[81] Recently Issued Accounting Pronouncements - The company adopted ASU 2018-07 (Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting) in Q1 2019, aligning nonemployee share-based payment accounting with employee guidance, with no significant financial statement impact[82][87][89] - The company adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing $225 thousand in ROU assets and liabilities, and elected practical expedients for short-term leases, which did not impact beginning retained earnings or prior year income/cash flow statements[90][95][97] Results of Operations Six Months ended June 30, 2019 compared to Six Months ended June 30, 2018 | Metric (US dollars) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change (Absolute) | Change (%) | | :------------------ | :--------------------------- | :--------------------------- | :---------------- | :--------- | | Revenues | 136,080 | 43,488 | 92,592 | 212.9% | | R&D Expenses | 826,239 | 1,284,591 | (458,352) | (35.7%) | | S&M Expenses | 276,296 | 592,104 | (315,808) | (53.3%) | | G&A Expenses | 952,904 | 2,082,858 | (1,129,954) | (54.2%) | | Financing Income (Expense), net | (1,151) | 105,788 | (106,939) | (101.1%) | | Net Loss | (1,920,510) | (3,810,277) | 1,889,767 | (49.6%) | - Revenue increase was driven by orders shipped to two new markets in Q2 2019[102] - Decreases in R&D, S&M, and G&A expenses were primarily due to the completion of clinical trials, reduction in business development personnel, departure of the former CEO, and lower stock-based compensation[104][106][108] - The shift from financing income to expense was mainly due to the early adoption of ASU 2017-11, which reclassified warrants with down-round protection from liabilities to stockholders' deficit, ceasing quarterly fair value adjustments[110] Three Months ended June 30, 2019 compared to three Months ended June 30, 2018 | Metric (US dollars) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change (Absolute) | Change (%) | | :------------------ | :--------------------------- | :--------------------------- | :---------------- | :--------- | | Revenues | 110,518 | 15,279 | 95,239 | 623.3% | | R&D Expenses | 401,122 | 691,894 | (290,772) | (42.0%) | | S&M Expenses | 150,953 | 283,467 | (132,514) | (46.7%) | | G&A Expenses | 452,749 | 1,046,174 | (593,425) | (56.7%) | | Financing Income (Expense), net | (4,551) | 43,773 | (48,324) | (110.4%) | | Net Loss | (898,857) | (1,962,483) | 1,063,626 | (54.2%) | - Revenue growth was attributed to shipments to two new markets in Q2 2019[111] - Decreases in R&D, S&M, and G&A expenses were primarily due to reduced salary and personnel-related costs, including stock-based compensation, and the departure of the former CEO[112][114][116] - The change from financing income to expense was mainly due to the early adoption of ASU 2017-11, which eliminated quarterly fair value adjustments for warrants with down-round protection[118] Liquidity and Capital Resources - As of July 23, 2019, the company had approximately $1.98 million in cash on hand and expects its current cash and cash equivalents to sustain operations for five months from the report date[120] - The company raised approximately $4.2 million (net) from Series D Units issuance in 2019 but anticipates needing additional capital to fund operations beyond the current five-month period[120] - Net cash used in operating activities was $2.04 million for the six months ended June 30, 2019, a decrease from $2.44 million in the prior-year period, primarily reflecting a reduced net loss[123] - Net cash provided by financing activities increased to $4.2 million for the six months ended June 30, 2019, from $2.41 million in the prior-year period, mainly due to capital raised from Series D Units[125] Off-Balance Sheet Arrangements - As of June 30, 2019, the company had no off-balance sheet arrangements as defined by Regulation S-K[126] Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market risk disclosures are not required as the company qualifies as a smaller reporting company - Quantitative and qualitative disclosures about market risk are not required for the company as it is a smaller reporting company[127] Item 4. Controls and Procedures. This section evaluates the company's disclosure controls and procedures, reporting on changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - Management, including the President and Interim Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2019[129] Changes in Internal Control over Financial Reporting - There were no material changes in the company's internal control over financial reporting during the most recent fiscal quarter[130] PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details unregistered equity sales, including Series D Units private placement, placement agent compensation, and stock option issuance Offering of Series D Units - During the six-month period ending June 30, 2019, the company received aggregate gross proceeds of $4.87 million from a private placement of Series D Units to accredited investors[133] - The final closing on June 14, 2019, involved the issuance of 13,972,100 units at $0.258 per unit, each comprising one common share and fractional five-year warrants (Series D-1, D-2, D-3) with exercise prices of $1.80, $3.60, and $5.40 per share, respectively[134] Placement Agent Compensation - The company paid its placement agent a cash commission of 10% of the aggregate sales price of Series D Units and a 3% non-accountable expense allowance[136] - Additionally, the placement agent received warrants to purchase common stock equal to 10% of the aggregate shares sold and 10% of the total warrants issued to purchasers, with cashless exercise and full ratchet anti-dilution protection[136] Issuance of Non-Qualified Stock Options to Employees - On January 1, 2019, a ten-year non-qualified stock option for 75,000 shares of Common Stock at an exercise price of $4.50 per share was issued to the President and Chief Operating Officer, with three-year quarterly vesting[137] Item 6. Exhibits. This section lists all exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL data - The exhibits include the Merger Agreement, Certificate of Incorporation, Bylaws, CEO and CFO certifications (Sarbanes-Oxley Act Sections 302 and 906), and various XBRL interactive data files[138][139] SIGNATURES This section contains the required signatures from authorized officers, affirming the report's submission - The report was signed on August 14, 2019, by David Podwalski, Director, President and Chief Operating Officer (Principal Executive Officer), and Jolie Kahn, Interim Chief Financial Officer (Principal Accounting Officer)[141][142]