Business context and reporting period
The filing is for Integrity Applications, Inc. (the company named in the 10-Q; the request metadata identifies Glucotrack, Inc.) for the quarter ended June 30, 2014. The development-stage medical-device company is developing GlucoTrack, a non-invasive glucose monitor for home use. It had CE Mark approval for the DF-F model but had not received U.S. approval or generated operating revenue.
Financial performance and liquidity
- Revenue: $0 for both the second quarter and first half of 2014, and for the comparable 2013 periods. The company reported $7,840 in customer advances for initial wholesale orders, expected to be recognized as revenue in the second half of 2014.
- Operating costs and loss: Second-quarter R&D expense was $454,789 versus $461,303 a year earlier; selling, marketing and G&A was $427,537 versus $370,491. First-half expenses were $905,873 and $863,639, respectively, compared with $965,548 and $554,070 in 2013. First-half operating loss was $1,769,512 versus $1,519,618.
- Reported net income: $5,261,928 for Q2 and $4,525,009 for the first half, compared with losses of $576,597 and $1,920,192 in the 2013 periods. The 2014 profits primarily reflect noncash gains from revaluing warrants with down-round protection, not product sales.
- Cash flow: First-half operating cash use was $1,556,095, investing cash use was $47,919, and financing cash use was $185,263. Cash fell from $2,385,911 at year-end 2013 to $589,736 at June 30, 2014.
- Balance sheet and debt: Current assets were $708,397 against current liabilities of $517,105. Total liabilities were $3,376,820, including $698,375 in long-term stockholder loans and a $1,923,000 warrant liability. Stockholders’ deficit was $6,713,663; convertible preferred stock is presented as temporary equity. No revenue-based margins are meaningful.
- Liquidity: Management reported cash of approximately $385,000 as of August 10, 2014 and estimated it would fund operations for about two months from the report date. A bank credit line was secured by cash deposits; approximately $83,000 had been borrowed by August 10.
Changes, outlook, and risks
Compared with 2013, first-half R&D spending declined while selling, marketing and G&A increased, reflecting a shift toward marketing and public-company expenses. The apparent return to profitability was driven principally by a $6,293,705 decrease in the estimated fair value of down-round-protected warrants; the valuation is Level 3 and depends on management estimates.
Management expected R&D spending to remain at similar levels through the rest of 2014, subject to resources and business needs, and expected selling, marketing and G&A to increase. It planned U.S. clinical trials during 2014 if the FDA approved the trial protocol. In July 2014, the company entered a manufacturing and servicing agreement with Wistron Corp. The filing states that substantial doubt exists about the company’s ability to continue as a going concern: it has no recurring revenue, accumulated losses of $20,561,670, and cumulative operating cash use of $16,347,922, and requires additional financing. The filing provides no assurance that financing will be available. Other risks include product-development completion, clinical performance, market acceptance, competition, and regulatory approval.
Investor verification points
- Verify the reported 2014 first-half net income and warrant-related financing figures: the financial statements report net income of $4,525,009 and warrant fair-value income of $6,293,705, while MD&A contains inconsistent figures, including net income of $5,525,009 and financing income of $6,249,521.
- Assess the company’s near-term financing needs against the stated approximately two-month cash runway, subsequent cash balance, and borrowing under the secured credit line.
- Confirm whether the $7,840 in customer advances converted to recognized revenue and whether initial wholesale orders developed into recurring sales.
- Track FDA trial-protocol status, U.S. clinical-trial progress, and the commercial and manufacturing implications of the Wistron agreement.
- Consider potential dilution and valuation sensitivity from preferred stock, options and warrants; the filing reports 5,304,072 common shares outstanding as of August 19, 2014.