Business context and reporting period
This Form 10-Q covers the quarter and nine months ended September 30, 2017. The registrant is identified in the filing as Integrity Applications, Inc., a medical-device company developing and commercializing the GlucoTrack non-invasive glucose monitor. The filing reports U.S. dollars and is unaudited.
Financial performance and position
| Metric | Three months ended September 30, 2017 | Nine months ended September 30, 2017 |
|---|---|---|
| Revenue | $20,900 | $125,881 |
| Operating expenses | $2.67 million | $8.02 million |
| Operating loss | $2.65 million | $7.90 million |
| Net loss | $2.58 million | $7.67 million |
| Basic and diluted loss per share | $0.44 | $1.40 |
| Net cash used in operating activities | Not separately reported for the quarter | $5.11 million |
Revenue was negligible relative to operating costs; the filing does not provide a meaningful gross-margin measure. At September 30, cash and cash equivalents were $461,708. Current assets were $2.20 million and current liabilities were $2.94 million, a derived working-capital deficit of approximately $747,000. Total liabilities were $4.07 million, including $176,870 of long-term stockholder loans and a $767,887 warrant liability. Convertible preferred stock of $13.42 million was classified as temporary equity, not as a liability. Stockholders’ deficit was $14.84 million.
Investing activities used approximately $19,500 in cash, while financing activities provided $5.37 million. Cash increased by $312,872 over the nine months, to $461,708 at period-end.
Material changes versus the prior comparable period
- Nine-month revenue fell to $125,881 from $482,177 in 2016. Third-quarter revenue increased to $20,900 from $11,299.
- Nine-month net loss widened to $7.67 million from $4.27 million; third-quarter net loss widened to $2.58 million from $1.45 million.
- Nine-month general and administrative expense rose to $5.12 million from $1.65 million, primarily due to executive transition compensation, stock-based compensation, recruiting, and professional fees. Total stock-based compensation was approximately $2.07 million for the nine months.
- Research and development expense declined to $1.83 million from $2.23 million for the nine months; selling and marketing expense increased to $1.06 million from $939,264.
- Operating cash use increased to $5.11 million from $4.35 million. The company raised approximately $5.4 million net from Series C issuances during the first nine months.
Outlook, commentary, and risks
- Going concern and funding: Management reported substantial doubt about the company’s ability to continue as a going concern. It stated that period-end cash was expected to fund operations for less than three months from the report date, and that additional capital was needed. Management did not expect operating income to sustain operations over the next 12 months.
- Product and regulatory: GlucoTrack had CE Mark clearance and South Korean approval, but was not approved for commercial sale in the United States. Subject to financing and finalizing site agreements, the company expected to begin U.S. clinical trials in the second half of 2018. China approval depended on renegotiating a distribution agreement; the company cited the first half of 2018 as an expected timing only if negotiations succeeded.
- Commercialization: The company reported more than 15 exclusive distribution agreements, many dependent on local regulatory approvals. It relied on third-party manufacturers and continued product development and clinical work, all subject to available financing.
- Financing and dilution: A July 2017 Series C closing raised $1.0 million gross and included preferred shares convertible into common stock and warrants. Series C securities carried potential conversion and exercise dilution; other preferred shares, options, and warrants were excluded from diluted loss per share as anti-dilutive. Down-round protections also affected warrant valuation and financing terms.
- Unusual items and contingencies: Net financing income reflected warrant fair-value changes, a non-cash valuation item. The company disclosed unpaid preferred dividends accrued during the third quarter, including interest at 9% per year, and approximately $52,453 of contingent royalties on future sales, excluding interest.
- Management expected research, development, and selling and administrative spending to increase if financing became available. The filing provides no formal revenue or earnings guidance.
Most important facts for investors to verify
- Whether the company secured sufficient financing after the filing and how actual cash runway compared with management’s estimate of less than three months.
- The precise amount and terms of outstanding preferred stock, warrants, anti-dilution provisions, and potential common-share dilution.
- Progress and costs of U.S. clinical trials, regulatory approvals in target markets, and any changes to the stated timelines.
- Whether distribution agreements translated into recurring sales and cash collections, given the very low reported revenue.
- The accounting and payment status of accrued preferred dividends, warrant liabilities, and contingent royalty obligations.