Glucotrack, Inc. (then Integrity Applications, Inc.) — Q1 2017 10-Q
Reporting period: Three months ended March 31, 2017. The filing was submitted under the name Integrity Applications, Inc. The company develops and commercializes GlucoTrack, a non-invasive glucose monitor. The financial statements are unaudited and presented in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $96,237 | $89,147; up about 8% |
| Operating expenses | $2,695,837 | $1,353,544 |
| Operating loss | $2,599,600 | $1,264,397 |
| Net loss | $2,530,325 | $1,226,764 |
| Basic and diluted loss per share | $0.48 | $0.24 |
| Net cash used in operating activities | $1,146,113 | $486,381 |
| Cash and cash equivalents at period end | $1,639,003 | $148,836 at December 31, 2016 |
- Gross profit and gross margin are not separately stated in the provided filing text.
- Current assets were $3.34 million and current liabilities $3.28 million, for a current ratio of approximately 1.02. Total liabilities were $4.39 million; these include $170,150 in long-term stockholder loans and a $754,603 warrant liability. The company also disclosed a secured bank credit line of about $41,322.
- Accumulated deficit was $38.50 million and stockholders’ deficit was $12.27 million at March 31, 2017. Inventory was $1.42 million.
Material changes and notable items
- Net loss more than doubled year over year, primarily because general and administrative expense rose to $1.88 million from $460,654. The company attributed the increase chiefly to executive transition costs, including severance, a new CEO signing bonus, recruiting and professional fees, and board-related compensation.
- Research and development expense was broadly unchanged at $581,539. Selling and marketing expense declined to $236,939 from $313,395, partly because a marketing-firm engagement ended in 2016.
- Operating cash use increased substantially year over year. Q1 financing activities provided $2.60 million, mainly from Series C preferred-stock and warrant financing; the company reported approximately $2.6 million in net Series C proceeds during the quarter.
- Series C securities carry a 5.5% cumulative dividend and conversion and warrant terms that may dilute common shareholders. The preferred stock and warrants also have anti-dilution provisions; certain events can trigger redemption or higher dividends.
Outlook, risks and subsequent events
- Management stated that cash and cash equivalents were expected to fund operations for less than six months from the May 15, 2017 filing date. It said additional capital would be needed and that operating income was not expected to sustain operations over the following 12 months. The filing identifies substantial doubt about the company’s ability to continue as a going concern; the statements include no adjustments for the outcome of that uncertainty.
- The company had not generated material recurring revenue. It expected research and development and selling, general and administrative costs to increase, subject to available financing.
- The GlucoTrack device had CE Mark approval and South Korean market approval, but was not approved for commercial sale in the United States. U.S. clinical trials were expected to begin in the second half of 2017, subject to finalizing site agreements and obtaining adequate financing. China’s regulator required additional trials, delaying the review process by an estimated 12–18 months or longer.
- Of approximately $1.9 million in 2016 device orders, $400,000 had been delivered and paid; the remaining approximately $1.5 million was contingent on local approvals and had not been prepaid. Q1 2017 produced no material cash receipts from order fulfillment.
- After quarter-end, the company reported a further Series C issuance on April 28, 2017, with gross proceeds of $1.551 million. Subsequent events also included executive and board changes, compensation and option arrangements, and an increase in the share reserve under the incentive plan from 1 million to 5.625 million shares.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm current cash, financing availability, burn rate and runway, including whether the April 2017 financing and any later capital raises were sufficient to address the going-concern uncertainty.
- Review the fully diluted share count and potential dilution from Series A, B and C preferred shares, warrants, options and the expanded incentive-plan reserve.
- Track U.S. trial readiness and regulatory progress, China’s additional-trial requirements, and the status of local approvals in distributor territories.
- Verify whether contingent distributor orders convert to delivered, paid sales, and assess the company’s ability to generate recurring revenue.
- Assess the effect of executive transition and compensation costs, preferred-stock dividends and possible redemption obligations on liquidity.