Glucotrack, Inc. annual report, FY2011

Business context and reporting period

This is Integrity Applications, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed March 14, 2012. Although the request identifies Glucotrack, Inc., the filing’s registrant is Integrity Applications, Inc.; GlucoTrack is its product. The company is a development-stage medical-device business developing a non-invasive glucose monitor and has not generated revenue.

Financial results and liquidity

Gross profit and operating margins are not meaningful because there were no sales. The 15% narrowing in net loss reflected sharply lower financing expense, while operating loss rose about 68% as R&D and administrative spending increased. Operating cash use increased about 40%. Financing activities provided $2.38 million in 2011, principally from equity issuance.

At December 31, 2011, current assets were $1.99 million and current liabilities were $0.28 million; total assets were $2.18 million, total liabilities $1.21 million, and stockholders’ equity $0.97 million. Long-term stockholder loans were $0.61 million, indexed to the Israeli CPI, non-interest-bearing, and generally repayable only after the company reports annual accounting profit. There was no bank credit outstanding at year-end; an unused credit line was approximately $79,000. Management estimated year-end cash would fund about 12 months of operations from January 1, 2012, assuming its existing plan.

Material changes versus the prior comparable period

• R&D expense increased approximately 92%, mainly due to higher compensation, development of a new main-unit model, and preparation for clinical trials.
• G&A expense increased approximately 19%, partly reflecting stock compensation, salaries, and CFO costs.
• Financing expense declined from $1.40 million to $31,000, largely because 2010 included substantial non-cash stock-based interest compensation related to convertible notes.
• Cash rose by $402,000 during 2011, supported by approximately $2.40 million of net equity proceeds; operating cash outflow remained substantial.

Outlook, risks, contingencies, and unusual items

• The auditor expressed substantial doubt about the company’s ability to continue as a going concern, citing accumulated losses of $12.52 million, cumulative negative operating cash flow of $9.28 million, no operating revenue, and dependence on external financing. Management’s financing plans are not assured.
• Management expected formal performance and safety trials in Israel to begin by Q2 2012, U.S. trials by late 2012 or early 2013 subject to FDA protocol approval, a CE Mark no earlier than Q4 2012, and FDA approval roughly a year later. These are expectations, not assured milestones. The device had no commercial marketing approval at filing.
• In limited pre-clinical work, 96% of 2,364 readings in 116 subjects and approximately 97% of 1,306 home-study readings in 24 participants fell in Clarke Error Grid zones A/B. The company cautions that small, informal studies may not predict formal trial outcomes; reported MARD was approximately 23% and 25%, respectively.
• The company reported a potential South African clinic-chain arrangement requiring approval by the chain’s headquarters and device testing; if approved, the chain would be obligated to buy at least 10,000 units in year one at $835 each. No sales were assured, and the filing reports no revenue.
• A dispute with Y.H. Dimri Holdings over claimed anti-dilution and other rights following the 2010 reorganization was proceeding to arbitration. The relief sought was not yet specified, and the company could not estimate a reasonably possible loss; no provision was recorded. Founder indemnities may not cover all consequences.
• Investors in the private placement had anti-dilution protection through September 1, 2012 for certain below-$6.25-per-share issuances. The placement agent also held warrants with related protection. These terms could increase dilution from future financing.
• The company relied on third parties for manufacturing and had no commercial-scale facilities or sales force. A supplier associated with a director entered insolvency proceedings; the company was pursuing alternative suppliers.
• Other risks include uncertain reimbursement and market acceptance, regulatory and clinical-trial failure or delay, competition, intellectual-property challenges, Israel-related geopolitical and operating risks, and Office of the Chief Scientist restrictions and future sales royalties. No dividends were anticipated; there was no public trading market for the common stock.

Most important facts for investors to verify

1. Whether the company obtained enough financing to continue operations beyond management’s estimated 12-month cash runway, and the resulting dilution or financing terms.
2. Progress, design, enrollment, results, and regulatory status of formal Israeli and U.S. clinical trials, CE Mark review, and FDA review.
3. Whether GlucoTrack’s accuracy and reliability hold up in adequately sized, controlled studies, including recalibration needs and the effects of ambient conditions and user error.
4. The status and potential outcome of Dimri arbitration, including any claims for shares, damages, or other relief and the scope of founder indemnification.
5. Whether the South African clinic-chain arrangement advanced to approval and actual purchases, and whether reimbursement, pricing, manufacturing, and distribution can support commercialization.