Glucotrack, Inc. quarterly report, Q1 FY2013

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Glucotrack, Inc. (filing registrant: Integrity Applications, Inc.) — Q1 2013 Form 10-Q

Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013, compared with December 31, 2012. The filing identifies the company as a development-stage medical-device business developing the GlucoTrack DF-F non-invasive glucose monitor.

Financial results and liquidity

  • Revenue: None in Q1 2013 or Q1 2012; the product had not been commercialized. Gross margin and operating margin are therefore not meaningful.
  • Operating expenses and loss: R&D expense was $504,245, up from $445,066; general and administrative expense was $183,579 in the financial statements, versus $202,935 a year earlier. Operating loss was $687,824, compared with $648,001. Net loss was $1,343,595, versus $634,953; basic and diluted loss per share was $0.25 versus $0.12. The filing attributes much of the higher loss to financing items related to the 2013 securities issuance.
  • Cash flow: Operating cash use was $645,377, compared with $475,805 in Q1 2012. Investing cash use was $786. Financing provided $5,399,183, principally from the March private placement. Cash increased by $4,781,929 to $5,325,340.
  • Liquidity and debt: Current assets were $5,397,849 and current liabilities $504,588. No bank credit was outstanding at quarter-end; long-term stockholder loans were $642,041. The company reported $4.8 million of cash as of May 20, 2013 and estimated its cash would fund operations for approximately 20 months from the report date, based on its then-current plan and burn rate.
  • Capital structure: The balance sheet reported $2,871,075 of warrant liabilities and $3,608,597 of convertible preferred stock as temporary equity. Stockholders’ deficit was $2,281,524. The filing reported 5,297,693 common shares outstanding as of May 20, 2013.

Material changes and unusual items

  • On March 13, 2013, the company issued 6,300 units of Series A 5% convertible preferred stock and warrants, receiving approximately $5.4 million net proceeds. Preferred shares were initially convertible at $5.80 per common share; warrants had a $6.96 exercise price and five-year term. Both instruments include adjustment provisions, including down-round protection.
  • The warrants’ down-round terms resulted in derivative-liability accounting and mark-to-market exposure. Q1 financing expense was $655,771, compared with financing income of $13,048 in Q1 2012. The filing cites warrant-related costs/fair-value effects, preferred dividends, foreign exchange and loan indexation among the drivers. The allocation and valuation of the issuance were provisional at quarter-end.
  • Preferred shares carry cumulative 5% dividends, with cash payment required through September 13, 2013. Certain events can trigger cash redemption or other holder rights. The placement agent received fees totaling 13% of gross proceeds and warrants as additional compensation.
  • After quarter-end, on May 13, 2013, the company exchanged most shares from the November 2012 first closing for additional units, and issued related placement-agent warrants. These subsequent transactions may affect dilution and capitalization beyond the March 31 balance sheet.

Outlook, risks and contingencies

  • The company said it had not generated revenue and had accumulated losses of $17,008,009 and cumulative negative operating cash flow of $12,219,437 since inception. Management and the independent auditor cited substantial doubt about the company’s ability to continue as a going concern; additional financing may be needed, and there is no assurance it can be obtained.
  • The GlucoTrack DF-F had not been approved for sale in any jurisdiction. The company had submitted its CE Mark technical file in December 2012 and clinical evaluation data in March 2013, and anticipated possible approval in certain EU countries as early as Q2 2013 if the notified body found the submissions satisfactory. U.S. clinical trials were expected to begin in late 2013 or early 2014, subject to FDA protocol approval.
  • Management expected R&D and G&A spending to rise as it pursued regulatory approval, clinical follow-up, product development and, if approved, commercialization. Key risks include regulatory approval, product performance and acceptance, competition, continued development costs and dependence on external capital.
  • Other exposures include contingent royalties to Israel’s Office of the Chief Scientist on qualifying product sales, up to the grant amount plus interest, and stockholder loans whose repayment is generally deferred until the company records annual accounting profits, subject to working-capital protections.

Important facts for investors to verify

  • Whether regulatory milestones were achieved, and the subsequent status of CE Mark and U.S. clinical-trial plans.
  • Actual cash burn and financing needs versus the stated approximately 20-month runway; the company’s going-concern status remains a central risk.
  • Final valuation and accounting allocations for preferred stock, warrants and issuance costs, including the warrant-liability remeasurement.
  • Fully diluted share count and potential dilution from preferred conversion, warrants, placement-agent compensation and subsequent transactions.
  • The filing contains apparent MD&A-versus-financial-statement inconsistencies: Q1 2013 G&A is $183,579 in the statements but $183,759 in MD&A; Q1 2012 investing cash use is $15,505 in the cash-flow statement but $15,105 in MD&A. Confirm against the filed financial statements.