Business context and reporting period
This is Integrity Applications, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The request identifies Glucotrack, Inc.; however, the filing itself names Integrity Applications, Inc. as the registrant. The company develops and commercializes GlucoTrack, a non-invasive glucose-monitoring device. It had CE Mark approval for European markets but no U.S. commercial approval at the time of filing.
Financial results and liquidity
| Metric (US$) | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | 11,299 | 0 | 482,177 | 143,167 |
| Operating expenses | 1,497,632 | 1,123,481 | 4,816,337 | 3,243,548 |
| Operating loss | 1,486,333 | 1,123,481 | 4,334,160 | 3,100,381 |
| Net loss | 1,454,744 | 1,095,970 | 4,270,506 | 4,297,307 |
| Net cash used in operations | Not provided quarterly | 4,346,289 | 3,107,214 |
- Nine-month revenue increased about 237% year over year, but remained small relative to expenses. Q3 revenue was only $11,299. Gross margin is not separately presented in the filing.
- Nine-month R&D expense was $2.23 million, up from $1.60 million; selling, marketing and G&A was $2.59 million, up from $1.65 million. Management attributed increases chiefly to additional personnel, development and regulatory work, and a $211,077 one-time warrant-modification charge in G&A.
- At September 30, cash and equivalents were $696,159 (versus $608,701 at year-end 2015); current assets were $1.56 million and current liabilities $1.02 million. Working capital was approximately $543,000. Total liabilities were $2.20 million, including $166,457 in long-term stockholder loans and $835,080 of warrant liabilities. Stockholders’ deficit was $9.94 million.
- Management reported approximately $123,000 of cash as of November 14, 2016, estimating that it would fund less than 30 days of operations. The unused bank credit line was approximately $26,000 as of that date. Management stated that additional capital is necessary and substantial doubt exists about the company’s ability to continue as a going concern.
Material changes versus the prior comparable period
- Nine-month net loss was nearly unchanged, despite higher operating expenses, primarily because the prior-year period included a $1.28 million non-cash loss on partial extinguishment of Series A preferred stock and warrants. Q3 net loss increased about 33% year over year as operating expenses rose.
- Operating cash use increased to $4.35 million from $3.11 million. Financing provided $4.50 million, principally from Series C unit sales; cash at period-end rose modestly from the beginning of 2016.
- During the nine months, the company raised approximately $4.52 million net through Series C preferred-stock-and-warrant units. Series C shares were convertible into approximately 1.186 million common shares and associated warrants exercisable for approximately 2.372 million shares, subject to adjustments. The financing also triggered reductions in conversion/exercise prices for certain Series A and B securities, creating potential dilution.
Outlook, commentary and risks
- The company expected U.S. clinical trials to begin in Q4 2016 or Q1 2017, subject to finalizing site agreements and raising sufficient funds. FDA feedback indicated the proposed trials were non-significant-risk studies that could proceed without an IDE application.
- South Korea’s final approval was reported in October 2016; a distributor placed an order for 100 units, paid for and delivered in Q4, with revenue expected in that quarter. The company also reported approximately $210,000 of early-2016 orders, of which $146,000 had been shipped and recognized through September 30.
- Approximately $1.75 million of additional orders depended on local regulatory approvals. The filing says $300,000 of devices were delivered in Q2, with $200,000 paid and the balance expected in Q4; fulfillment of the remaining approximately $1.45 million was uncertain and no prepayments had been received.
- China and Japan regulators required additional in-country clinical trials; management consequently estimated the approval process would take a further 17–23 months or longer. The company also planned a wireless module and smartphone application, targeted for completion as soon as Q1 2017 if funding allowed.
- Management expected R&D and commercial expenses to increase, subject to financing. Key risks include continued funding dependence, product performance and market acceptance, competition, regulatory delays, and the ability to execute commercialization. Series C preferred stock carries a 5.5% cumulative dividend and certain redemption rights; warrants include down-round protection. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer identity and corporate-name relationship between Integrity Applications, Inc. and Glucotrack, Inc.
- Verify current cash, cash burn, financing availability, and the company’s ability to continue as a going concern.
- Track actual recognized sales and collections against distributor orders, especially orders contingent on regulatory approval.
- Assess the timing and outcome of U.S., China, Japan, and other regulatory and clinical-trial requirements.
- Review the full potential dilution, dividend, anti-dilution, and redemption terms of preferred stock and warrants.