Integrity Applications, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 30, 2015. The filing is by Integrity Applications, Inc., developer of GlucoTrack, not a registrant identified as Glucotrack, Inc. The “2014 Q4” metadata refers to a 10-K reporting the full fiscal year, not Q4 results alone.
Business context
The company develops and commercializes GlucoTrack DF-F, a non-invasive glucose monitor that measures through an earlobe sensor using ultrasound, electromagnetic and thermal technologies. It received CE Mark approval in 2013, and approval for six-month calibration validity in March 2014. It had not received U.S. FDA marketing approval. Initial wholesale orders arrived in 2014, with first revenue recognized in the third quarter.
Financial results and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $59,775 | $0 |
| Research and development expense | $1,849,624 | $1,986,754 |
| Selling, marketing and G&A expense | $1,817,510 | $1,041,140 |
| Operating loss | $3,607,359 | $3,027,894 |
| Net income (loss) | $2,980,426 | $(9,796,853) |
| Net cash used in operating activities | $(3,361,645) | $(3,217,767) |
- FY 2014 net income included $6.6 million of non-cash financing income from a decrease in the estimated fair value of warrants with down-round protection. The company remained loss-making at the operating level; the filing does not present a meaningful operating margin given minimal revenue.
- Cash and cash equivalents were $5.83 million at year-end, versus $2.39 million a year earlier. Current assets were $6.05 million and current liabilities $1.00 million. Total liabilities were $3.43 million; stockholders’ deficit was $4.83 million. No bank line borrowings were outstanding; approximately $77,141 of secured credit capacity remained available.
- Financing activities provided $6.97 million net cash. The company raised approximately $7.3 million net from Series B preferred-stock units during August–December 2014. Series B preferred stock carries a 5.5% cumulative dividend and is convertible at an initial $5.80 per share; associated warrants are exercisable at $5.80 and $10.00. Series A cash dividends paid in 2014 were $370,441; Series B dividends were paid in shares.
- Revenue was $32,000 from Europe and $27,775 from Asia-Pacific. The filing reports no material recurring revenue source.
Material changes versus prior year
- Revenue began in 2014, but totaled only $59,775. Inventory and accounts receivable also appeared at year-end.
- R&D expense decreased about 7%, while selling, marketing and G&A expense increased about 75%, reflecting a shift toward commercialization, higher salaries, travel and Dimri arbitration-related consulting costs.
- Net results swung from a $9.8 million loss to $3.0 million income, principally because warrant remeasurement changed from a $6.3 million expense in 2013 to a $6.6 million gain in 2014. This did not translate into positive operating cash flow.
Outlook, risks and unusual items
- Management expected year-end cash to support approximately 18 months of operations from the report date, based on its then-current cash burn, strategy and plan. Additional capital would be needed thereafter, or sooner if needs increased. The auditor expressed substantial doubt about the company’s ability to continue as a going concern.
- Management expected R&D spending to remain at similar levels in 2015 and selling, marketing and G&A spending to increase. It planned to submit a U.S. clinical-trial protocol to the FDA by the end of the first half of 2015 and anticipated trials during 2015, subject to FDA approval.
- Wistron was preparing a production line, expected to be operational in Q2 2015; the company planned to use Wistron alongside its Israeli contract manufacturer. Production, quality, regulatory approval, distributor execution, reimbursement and market acceptance remain material risks.
- Preferred-stock terms include covenants, potential cash redemption obligations upon specified events, cumulative dividends and conversion/dilution features. The filing cites substantial potential dilution from preferred stock, warrants and options. Cash needs, limited OTCQB trading and dependence on external financing add risk.
- Subsequent event: A March 2015 arbitration settlement required repayment to Dimri of NIS 1,767,674 (about $439,939), plus approximately NIS 290,000 (about $72,175) in attorney-fee reimbursement, and transfer of 440,652 company shares by certain individuals. The settlement releases the parties’ claims on completion of the transfers and payments.
Investor verification priorities
- Confirm current cash, subsequent cash burn and financing runway; the 18-month estimate was management’s projection as of the filing.
- Separate recurring operating performance from the non-cash warrant fair-value gain when assessing FY 2014 net income.
- Verify FDA protocol approval, clinical-trial progress, local market registrations, and the status and capacity of Wistron’s production line.
- Review preferred-stock redemption and dividend terms, conversion adjustments, warrant dilution and any resale registrations.
- Confirm completion and accounting treatment of the Dimri settlement payments and share transfer.