Glucotrack, Inc. (then Integrity Applications, Inc.) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The filing was signed August 14, 2017. Financial statements are unaudited and reported in U.S. dollars.
Business context
The company develops and commercializes GlucoTrack DF-F, a non-invasive glucose monitor for people with diabetes and pre-diabetes. The device measures glucose through an earlobe sensor. The company had not generated material recurring revenue and remained dependent on external financing.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $8,744 | $381,731 | $104,981 | $470,878 |
| Operating expenses | $2,656,838 | $1,965,161 | $5,352,675 | $3,318,705 |
| Operating loss | $2,648,094 | $1,583,430 | $5,247,694 | $2,847,827 |
| Net loss | $2,557,201 | $1,588,998 | $5,087,526 | $2,815,762 |
| Basic and diluted loss per share | $(0.48) | $(0.30) | $(0.96) | $(0.54) |
| Operating cash used | — | $3,606,014 | $2,887,167 |
Gross profit and gross margin are not separately stated. At June 30, 2017, cash and cash equivalents were $1,132,622; current assets were $2,929,098 and current liabilities $2,746,462. Total assets were $3,387,593, total liabilities $3,873,223, temporary equity $12,880,447, and stockholders’ deficit $13,366,077. Accumulated deficit was $41,466,658.
Six-month investing cash use was $4,849 in the cash-flow statement. Financing activities provided $4,520,229, primarily from Series C preferred-stock and warrant issuances; cash increased $983,786 to $1,132,622. The company reported $178,186 of long-term loans from stockholders and a $42,906 bank credit line secured by deposits. Accounts payable were $1,789,026. The filing does not present a conventional consolidated debt total.
Material changes versus prior periods
- Revenue fell 78% for the first half and 98% for Q2 year over year. Management attributed the prior-year comparison to revenue following notified-body approval in late 2015; it reported no material cash collections from product orders in the first half of 2017.
- First-half net loss increased by $2.27 million. General and administrative expense rose $2.38 million to $3.56 million, mainly reflecting executive transition and compensation costs, stock-based compensation, recruiting and related professional fees. First-half stock-based compensation was $1.21 million, compared with $34,297 a year earlier.
- Research and development expense declined to $1.20 million from $1.53 million; selling and marketing expense was $598,234 versus $614,121. Management expected both R&D and selling and marketing costs, as well as G&A, to increase if financing allowed.
- The company raised approximately $4.52 million net from Series C financing in the first half. Series C preferred shares and associated warrants could convert into or be exercised for approximately 7.34 million common shares, subject to adjustments. Common shares outstanding were 6,381,149 at June 30.
Outlook, risks and unusual items
- Liquidity and going concern: Management said cash was expected to fund operations for less than three months from the report date and that operating income would not sustain operations over the next 12 months. The filing states that substantial doubt exists about the company’s ability to continue as a going concern; additional financing is needed and not assured.
- Subsequent financing: On July 31, 2017, the company sold 1,000 Series C units for $1 million gross proceeds, with placement-agent fees and additional warrants also due. This was after quarter-end and is not included in June 30 cash.
- Product and regulatory execution: China approval was expected in 2017. A U.S. clinical trial was expected to begin before year-end, subject to funding and finalizing site arrangements. The device was not approved for U.S. commercial sale; further local approvals and registrations may be required in other markets. Management also cited product-development, clinical, market-acceptance, competition and financing risks.
- Financing terms and dilution: Series C securities carry 5.5% cumulative dividends and include conversion, warrant, anti-dilution and certain redemption provisions. Series C holders have rights that can constrain additional debt, liens, distributions and certain transactions while specified ownership conditions apply. Preferred stock and warrants were excluded from diluted EPS as anti-dilutive.
- Non-cash and compensation items: A $191,075 decrease in the estimated fair value of warrants with down-round protection contributed to financing income. Management compensation changes included a $375,000 one-time CEO payment, substantial option awards and accelerated vesting; these contributed to higher reported costs, including stock-based compensation.
- Other contingency: The company disclosed approximately $53,639, excluding interest, of potential future royalties payable to the Israeli Office of the Chief Scientist on qualifying product sales.
- Management reported effective disclosure controls as of June 30, 2017 and no material quarterly change in internal control over financial reporting. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Current cash runway, subsequent financing proceeds net of fees, and the company’s ability to raise additional capital.
- Actual timing and funding for the U.S. clinical trial, China regulatory decision, and other required market approvals.
- Realized GlucoTrack sales, cash collections, repeat orders and commercial progress versus distributor plans.
- Fully diluted share count and the potential effects of preferred-stock conversion, warrants, plan expansion and executive equity awards.
- Preferred-stock dividend, redemption and covenant obligations, including any events that could trigger cash payments.
- The filing’s cash-flow statement reports investing cash use of $4,849, while MD&A says $4,489; confirm the correct figure against the filed financial statements.