Glucotrack, Inc. quarterly report, Q3 FY2015

Business context and reporting period

The registrant in this Form 10-Q is Integrity Applications, Inc. (the company later identified in the request as Glucotrack, Inc.). The filing covers the quarter and nine months ended September 30, 2015; financial statements are unaudited and amounts are in U.S. dollars. The company develops and commercializes GlucoTrack, a non-invasive glucose monitor.

Financial performance and position

• Cash flow: Nine-month operating cash use was $3,107,214; investing cash use was $118,993; financing cash use was $492,300. Cash fell $3,722,702 to $2,104,858.
• Liquidity: Current assets were $2,633,448 and current liabilities $834,506 at September 30. Management reported approximately $1.2 million of cash as of November 12 and estimated available cash would fund operations for about three months from the filing date.
• Debt and equity: Long-term stockholder loans were $160,581, with no current portion reported at quarter-end. Total liabilities were $1,555,600; temporary preferred equity was $7,115,716; stockholders’ deficit was $5,652,403. Common shares outstanding were 5,549,452 at September 30.
• Margins: The filing does not provide a clear gross-profit or gross-margin value.

Material changes versus prior comparable periods

• Nine-month revenue rose to $143,167 from $27,309 in 2014, while third-quarter revenue fell to zero from $27,309. Management attributed the quarter’s pause to work on device improvements and expected orders for the improved device in Q4 2015.
• Nine-month R&D expense increased to $1,596,494 from $1,327,577; selling, marketing and G&A expense increased to $1,647,054 from $1,299,935. The company cited additional personnel, salaries, materials, travel and marketing fees.
• The nine-month result shifted from $3,755,438 net income in 2014 to a $4,297,307 net loss in 2015. The prior-year result included a $6,344,340 non-cash gain from the change in fair value of warrants; the 2015 period included a $1,284,354 non-cash loss associated with exchanging Series A securities for Series B securities.
• Cash declined from $5,827,560 at December 31, 2014 to $2,104,858 at September 30, 2015. Inventory rose to $260,269 from $83,653, partly reflecting a build-up in anticipation of distributor orders.

Outlook, risks and unusual items

• The company disclosed substantial doubt about its ability to continue as a going concern, citing accumulated losses, negative operating cash flows and dependence on external financing. It stated that additional capital, increased revenue, or both would be needed; there is no assurance financing will be available.
• GlucoTrack had CE Mark approval in Europe, and the notified body approved a shorter initial calibration process and expanded intended use to include people with pre-diabetes on August 31, 2015. The device was not approved for U.S. commercial sale. Following an October 2015 FDA meeting, the company was revising its proposed clinical protocol and expected U.S. trials to begin in early 2016 if the protocol were approved.
• The company had exclusive distribution agreements in more than 10 countries, but sales in many territories depended on local regulatory approval. Management estimated approval-review timelines of about six to nine months in China, up to three months in South Korea and 12 to 15 months in Japan.
• Management expected R&D spending to remain at similar levels through at least the rest of 2015 and selling, marketing and G&A expenses to increase, subject to available resources and commercial needs. It expected the Wistron production line to be operational by the end of Q1 2016, subject to completion.
• Other notable items included repayment of $439,939 of a stockholder loan and $52,361 in preferred-stock cash dividends during the nine months. The company reported no off-balance-sheet arrangements. A contingent royalty obligation to Israel’s Office of the Chief Scientist was approximately $87,375, excluding interest, payable from future product sales.

Important facts for investors to verify

• Cash runway and financing plans, particularly given the reported three-month runway estimate and subsequent cash balance of approximately $1.2 million on November 12.
• Regulatory progress, clinical-trial timing and local approvals, as well as whether distributor agreements convert into actual orders and revenue.
• Manufacturing readiness, product accuracy and calibration improvements, and the costs and timing of commercial scale-up.
• The potential dilution and accounting effects of preferred stock and warrants, including the Series A-to-Series B exchange and warrant valuation assumptions.