Company Quick10K Filing
Integrity Applications
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 162 $57
10-Q 2019-11-13 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-15 Quarter: 2019-03-31
10-K 2019-04-15 Annual: 2018-12-31
10-Q 2018-11-14 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-15 Quarter: 2018-03-31
10-K 2018-03-30 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-14 Quarter: 2017-06-30
10-Q 2017-05-15 Quarter: 2017-03-31
10-K 2017-03-31 Annual: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-Q 2016-05-16 Quarter: 2016-03-31
10-K 2016-03-30 Annual: 2015-12-31
10-Q 2015-11-16 Quarter: 2015-09-30
10-Q 2015-08-14 Quarter: 2015-06-30
10-Q 2015-05-15 Quarter: 2015-03-31
10-K 2015-03-31 Annual: 2014-12-31
10-Q 2014-11-14 Quarter: 2014-09-30
10-Q 2014-08-19 Quarter: 2014-06-30
10-Q 2014-05-13 Quarter: 2014-03-31
10-K 2014-03-28 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-19 Quarter: 2013-06-30
10-Q 2013-05-20 Quarter: 2013-03-31
10-K 2013-04-01 Annual: 2012-12-31
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2012-03-14 Annual: 2011-12-31
10-Q 2011-12-29 Quarter: 2011-09-30
8-K 2019-11-20 Officers
8-K 2019-10-31 Officers, Exhibits
8-K 2019-10-25 Sale of Shares, Officers, Exhibits
8-K 2019-09-04 Officers
8-K 2019-08-02 Officers, Exhibits
8-K 2019-07-30 Officers
8-K 2019-07-08 Officers
8-K 2019-06-14 Enter Agreement, Sale of Shares
8-K 2019-03-26 Enter Agreement
8-K 2018-12-31 Other Events
8-K 2018-12-21 Shareholder Vote
8-K 2018-10-02 Officers
8-K 2018-07-25 Regulation FD, Exhibits
8-K 2018-03-23 Officers, Shareholder Vote, Exhibits
8-K 2018-03-07 Enter Agreement, Sale of Shares, Exhibits
IGAP 2019-09-30
Part I - Financial Information
Item 1. Financial Statements.
Note 1 - General
Note 2 - Summary of Significant Accounting Policies
Note 3 - Recent Events
Note 4 - Inventories
Note 5 - Leases
Note 6 - Other Current Liabilities
Note 7 - Financing Income (Expense), Net
Note 8 - Loss per Share
Note 9 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 6. Exhibits.
EX-31.1 ex31-1.htm
EX-32.1 ex32-1.htm

Integrity Applications Earnings 2019-09-30

IGAP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
INSUU 58 152 7 0 0 0 1 57 86.5 0%
IVOB 58 3 7 1 1 -2 -1 55 89% -49.4 -52%
PROM 58 40 67 90 61 10 40 103 68% 2.6 24%
GSRX 57 22 3 7 4 -10 -10 56 55% -5.9 -44%
PKTX 57 1 0 0 0 -2 -2 57 -33.1 -231%
MCIG 57 10 3 2 0 -2 -1 56 13% -48.9 -17%
IGAP 57 3 3 0 0 11 11 54 0% 5.1 349%
GRBX 57 1 1 1 0 0 0 57 83% 392.4 3%
HBKA 56 612 552 0 0 4 8 8 1.0 1%
ARTH 56 4 4 0 0 -5 -5 52 -10.2 -136%

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended September 30, 2019

 

or

 

[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from ________________ to ________________

 

Commission File Number: 000-54785

 

INTEGRITY APPLICATIONS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   98-0668934

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

19 Ha’Yahalomim Street

P.O. Box 12163

Ashdod, Israel

  L3 7760049
(Address of principal executive offices)   (Zip Code)

 

972 (8) 675-7878

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None.        

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ] Accelerated filer [  ]
  Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]
  Emerging growth company [  ]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of November 13, 2019, 162,063,299 shares of the Company’s common stock, par value $0.001 per share, were outstanding.

 

 

 

  
 

 

INTEGRITY APPLICATIONS, INC.

 

TABLE OF CONTENTS

 

 

 2 
 

 

INTEGRITY APPLICATIONS, INC.

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   US dollars (except share data) 
   September 30, 2019   December 31, 2018 
   (unaudited)     
ASSETS          
Current Assets          
Cash and cash equivalents   1,222,280    97,079 
Accounts receivable, net   30,369    22,779 
Inventories   139,129    170,999 
Other current assets   48,514    23,288 
Total current assets   1,440,292    314,145 
           
Operating lease right-of-use assets, net   147,042    - 
           
Property and Equipment, Net   144,912    149,779 
           
Long-Term Restricted Cash   56,624    52,605 
           
Funds in Respect of Employee Rights Upon Retirement   184,771    171,657 
Total assets   1,973,641    688,186 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current Liabilities          
Accounts payable   1,553,955    2,064,259 
Operating lease liabilities, current   122,507    - 
Other current liabilities   763,760    1,157,350 
Total current liabilities   2,440,222    3,221,609 
           
Long-Term Liabilities          
Long-Term Loans from Stockholders   186,929    168,221 
Operating lease liabilities, non-current   24,535    - 
Liability for Employee Rights Upon Retirement   184,771    171,657 
Total long-term liabilities   396,235    339,878 
           
Total liabilities   2,836,457    3,561,487 
           
Stockholders’ Deficit          
Common Stock of $ 0.001 par value (“Common Stock”):          
200,000,000 and 200,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 162,063,299 and 141,634,700 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively   162,071    141,638 
Additional paid in capital   88,944,576    84,007,612 
Accumulated other comprehensive income   134,607    164,232 
Accumulated deficit   (90,104,070)   (87,186,783)
Total stockholders’ (deficit) surplus   (862,816)   (2,873,301)
Total liabilities and stockholders’ deficit   1,973,641    688,186 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 3 
 

 

INTEGRITY APPLICATIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

   US dollars (except share data) 
   Nine-month period ended   Three-month period ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
   (unaudited)  (unaudited) 
Revenues   140,255    43,488    4,175    - 
Research and development expenses   1,203,616    1,818,108    377,377    534,129 
Selling and marketing expenses   444,555    857,386    168,259    265,282 
General and administrative expenses   1,391,916    2,894,553    439,012    811,695 
Total operating expenses   3,040,087    5,570,847    984,648    1,611,106 
Operating loss   (2,899,832)   (5,527,171)   (980,473)   (1,611,106)
                     
Financing income (expenses), net   (17,455)   144,016    (16,304)   38,228 
Loss for the period   (2,917,287)   (5,383,155)   (996,777)   (1,572,878)
Other comprehensive income:                    
Foreign currency translation adjustment   (29,625)   40,370    (2,987)   4,740 
                     
Comprehensive loss for the period   (2,946,912)   (5,342,785)   (999,764)   (1,568,138)
                     
Loss per share (Basic)   (0.01)   (0.96)   (0.01)   (0.31)
                     
Loss per share (Diluted)   (0.01)   (0.96)   (0.01)   (0.31)
                     
Common shares used in computing Basic loss per share   152,240,776    7,745,275    162,012,688    8,249,442 
Common shares used in computing Diluted loss per share   152,240,776    7,745,275    162,012,688    8,249,442 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 4 
 

 

INTEGRITY APPLICATIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

 

   US dollars (except share data) 
  

(unaudited)

 
               Accumulated       Total 
   Common Stock   Additional   other       stockholders’ 
   Number       paid   comprehensive   Accumulated   equity 
   of shares   Amount   in capital   income   Deficit   (deficit) 
Balance as of January 1, 2018   6,821,792    6,824    30,676,180    110,675    (47,368,612)   (16,574,933)
Loss for the period   -    -    -    -    (5,383,155)   (5,383,155)
Other comprehensive income   -    -    -    40,370    -    40,370 
Amounts allocated to Series D-1, D-2 and Series D-3 Warrants, net   -    -    1,983,502    -    -    1,983,502 
Stock dividend on Series C Preferred Stock   364,451    364    892,905    -    (893,269)   - 
Stock dividend on Series B Preferred Stock   456,365    456    1,118,094    -    (1,118,550)   - 
Cash dividend on Series A Preferred Stock   -    -    -    -    (13,141)   (13,141)
Amounts allocated to issuance of Common Stock from Series D offering   1,206,444    1,206    2,373,230    -    -    2,374,436 
Stock-based compensation   15,560    16    1,577,000    -    1,577,016      
Balance as of September 30, 2018   8,864,612    8,866    38,620,911    151,045    (54,776,727)   (15,995,905)
                               
Balance as of July 1, 2018   7,886,207    8,009    35,104,538    146,305    (52,240,613)   (16,984,761)
Loss for the period   -    -    -    -    (1,572,878)   (1,572,878)
Other comprehensive income   -    -    -    4,740    -    4,740 
Amounts allocated to Series D-1, D-2 and Series D-3 Warrants, net   -    -    965,007    -    -    965,007 
Stock dividend on Series C Preferred Stock   173,739    174    425,662    -    (425,835)   - 
Stock dividend on Series B Preferred Stock   217,556    217    533,012    -    (533,230)   - 
Cash dividend on Series A Preferred Stock   -    -    -    -    (4,172)   (4,172)
Amounts allocated to issuance of Common Stock from Series D offering   584,888    584    1,153,089    -    -    1,153,673 
Stock-based compensation   2,222    (118)   442,603    -    -    442,485 
Balance as of September 30, 2018   8,864,612    8,866    38,620,911    151,045    54,776,728    (15,995,905)

 

   US dollars (except share data) 
  

(unaudited)

 
               Accumulated       Total 
   Common Stock   Additional   other       stockholders’ 
   Number       paid   comprehensive   Accumulated   (deficit) 
   of shares   Amount   in capital   loss   Deficit   surplus 
Balance as of January 1, 2019   141,634,700    141,638    84,007,612    164,232    (87,186,783)   (2,873,301)
Loss for the period   -    -    -    -    (2,917,287)   (2,917,287)
Other comprehensive (loss)   -    -    -    (29,625)   -    (29,625)
Amounts allocated to Series D-1, D-2 and Series D-3 Warrants, net   -    -    31,915    -    -    31,915 
Amounts allocated to issuance of Common Stock from Series D offering   18,889,618    18,892    3,898,155    -    -    3,917,047 
Issuance of shares as settlement of financial liabilities   1,190,141    1,190    305,866    -    -    307,056 
Warrants issued as consideration for placement services   -    -    249,612    -    -    249,612 
Stock-based compensation   348,840    351    451,416    -    -    451,767 
Balance as of September 30, 2019   162,063,299    162,071    88,944,576    134,607    (90,104,070)   (862,816)
                               
Balance as of July 1, 2019   161,947,019    161,955    88,823,095    137,594    (89,107,293)   15,351 
Loss for the period   -    -    -    -    (996,777)   (996,777)
Other comprehensive income   -    -    -    (2,987)   -    (2,987)
Stock-based compensation   116,280    116    121,481    -    -    121,597 
Balance as of September 30, 2019   162,063,299    162,071    88,944,576    134,607    (90,104,070)   (862,816)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 5 
 

 

INTEGRITY APPLICATIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   US dollars 
   Nine-month period ended September 30, 
   2019   2018 
   (unaudited) 
Cash flows from operating activities:          
Loss for the period   (2,917,287)   (5,383,155)
Adjustments to reconcile (loss) for the period to net cash used in operating activities:          
Depreciation   38,253    58,789 
Stock-based compensation   451,767    1,577,016 
Change in the fair value of warrants with down-round protection   -    (251,790)
Linkage difference on principal of loans from stockholders   5,708    (1,266)
Changes in assets and liabilities:          
Decrease in accounts receivable   (5,777)   (5,590)
Increase in inventory   43,140    20,979 
(Decrease) increase in other current assets   (23,566)   (31,717)
Operating Lease right-of-use assets   77,695    - 
(Decrease) increase in accounts payable   (573,014)   (165,580)
Increase in other current liabilities   (121,732)   379,854 
Operating lease liabilities   (77,695)   - 
Net cash used in operating activities   (3,102,508)   (3,802,460)
           
Cash flows from investing activities:          
Purchase of property and equipment   (22,554)   (3,505)
Increase in long-term restricted cash   -    (10,164)
Net cash used in investing activities   (22,554)   (13,669)
           
Cash flows from financing activities          
Proceeds allocated to Common Stock from Series D offering, net of cash issuance expenses   4,165,079    2,563,839 
Proceeds allocated to Series D Warrants, net of cash issuance expenses   33,495    2,141,989 
Net cash provided by financing activities   4,198,574    4,705,828 
Effect of exchange rate changes on cash and cash equivalents, and restricted cash   55,708    (1,612)
Increase (decrease) in cash, cash equivalents, and restricted cash   1,129,220    888,087 
Cash, cash equivalents, and restricted cash at beginning of the period   149,684    53,782 
Cash, cash equivalents, and restricted cash at end of the period   1,278,904    941,869 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 6 
 

 

INTEGRITY APPLICATIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)

 

Supplementary information on financing activities not involving cash flows (unaudited):

 

During the nine months ending September 30, 2019, the Company settled a portion of the outstanding board fees and management payroll obligations in the amount of $307,056 through the issuance of 1,190,141 shares of common stock in total to five board members and three members of the senior management team.

 

During the nine months ending September 30, 2019, $249,612 representing the fair value of warrants issued as consideration for placement agent services. This amount was accounted for as Warrants with down-round protection. Upon issuance, the fair value was recognized as an increase in additional paid in capital.

 

The company calculate the Placement Agent Warrants fair value by using the Black and Scholes model, the key inputs used in the fair value calculations were as follows:

 

   September 30, 2019 
     
Dividend yield (%)   - 
Expected volatility (%) (*)   56.21 
Risk free interest rate (%)   2.5 
Expected term of options (years)   5 
Exercise price (US dollars)   0.258 – 5.400 
Share price (US dollars) (**)   0.258 
Fair value (US dollars)   0.004 – 0.130 

 

(*) Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on a sample of 248 companies operating in the Healthcare Products industry.
(**) The Common Stock price, per share reflects the Company’s management’s estimation of the fair value per share of Common Stock as of June 2019. In reaching its estimation for such periods, management considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series D Units at December 31, 2018.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 7 
 

 

INTEGRITY APPLICATIONS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 1 – GENERAL

 

  A. Integrity Applications, Inc. (the “Company”) was incorporated on May 18, 2010 under the laws of the State of Delaware. On July 15, 2010, Integrity Acquisition Corp. Ltd. (hereinafter: “Integrity Acquisition”), a wholly owned Israeli subsidiary of the Company, which was established on May 23, 2010, completed a merger with A.D. Integrity Applications Ltd. (hereinafter: “Integrity Israel”), an Israeli corporation that was previously held by the stockholders of the Company. Pursuant to the merger, all equity holders of Integrity Israel received the same proportional ownership in the Company as they had in Integrity Israel prior to the merger. Following the merger, Integrity Israel became a wholly-owned subsidiary of the Company. As the merger transaction constituted a structural reorganization, the merger has been accounted for at historical cost in a manner similar to a pooling of interests. Integrity Israel was incorporated in 2001 and commenced its operations in 2002. Integrity Israel, a medical device company, focuses on the design, development and commercialization of non-invasive glucose monitoring devices for use by people with diabetes.
     
  B. Going concern uncertainty
     
    Since its incorporation, the Company has not conducted any material operations other than those carried out by Integrity Israel. The development and commercialization of Integrity Israel’s product is expected to require substantial expenditures. Integrity Israel and the Company (collectively, the “Group”) have not yet generated significant revenues from operations, and therefore they are dependent upon external sources for financing their operations. As of September 30, 2019, the Group has incurred accumulated deficit of $90,104,070, negative operating cash flows and negative working capital. Management considered the significance of such conditions in relation to the Group’s ability to meet its current and future obligations and determined that these conditions raise substantial doubt about the Group’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
     
    During the nine months ended September 30, 2019, the Company raised funds in an aggregate amount of approximately $4,198,574 (net of related cash expenses) through the issuance of 1,083,004 units (the “Series D Units”) consisting of (a) 18,889,618 shares (collectively, the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), (b) a five year warrant to purchase up to 1,083,004 shares of Common Stock, at an exercise price of $1.80 per share (c) a five year warrant to purchase up to 1,083,004 shares of Common Stock, at an exercise price of $3.60 per share, and (d) a five year warrant to purchase up to 1,083,004 shares of Common Stock, at an exercise price of $5.40 per share.

 

 8 
 

 

INTEGRITY APPLICATIONS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 1 – GENERAL (cont.)

 

  C. Use of estimates in the preparation of financial statements
     
    The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to (i) the going concern assumptions, and (ii) measurement of stock based compensation.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

  A. Basis of presentation
     
    Accounting Principles
     
    The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with our consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on April 15, 2019. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC related to interim financial statements. As permitted under those rules, certain information and footnote disclosures normally required or included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are considered necessary to present fairly the results of the Company’s financial position and operating results for the interim periods. All such adjustments are of a normal recurring nature
     
    The results for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any future period.
     
    Principles of Consolidation
     
    The consolidated financial statements include the accounts of the Company and its subsidiary. Significant intercompany balances and transactions have been eliminated in consolidation.

 

 9 
 

 

INTEGRITY APPLICATIONS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

 

  B. Recently issued accounting pronouncements

 

  1. Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

 

  In June 2018, the FASB issued Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). ASU 2018-07 aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions.
   
  Consistent with the accounting requirement for employee share-based payment awards, awards within the scope of Topic 718 will be measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. Equity-classified nonemployee share-based payment awards will be measured at the grant date.
   
  With respect to awards with performance conditions ASU 2018-07 concludes that, consistent with the accounting for employee share-based payment awards, an entity will consider the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions.

 

  ASU 2018-07 also requires that the classification of equity classified nonemployee share-based payment awards will continue to be subject to the requirements of Topic 718 unless the award was modified after the good has been delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing goods or services. This eliminates the requirement to reassess classification of such awards upon vesting.

 

  In addition, ASU 2018-07 includes certain Non-public Entity-Specific Amendments
   
  ASU 2018-07 is effective for Public entities in annual periods beginning after December 15, 2018, and interim periods within those years (first quarter of 2019 for the company). Early adoption is permitted, including in an interim period, but not before an entity adopts the new revenue guidance (which was adopted by the Company in its interim financial statements for 2018).
   
  An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date.
   
  The adoption of ASU 2018-07 did not have a significant impact on its consolidated financial statements.

 

 10 
 

 

INTEGRITY APPLICATIONS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

 

Recently issued accounting pronouncements

 

  2. Accounting Standards Update 2016-02, “Leases”

 

  In February 2016, the FASB issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).
   
  Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1. A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and, 2. A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
   
  Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.
   
  Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year company). Early application is permitted for all public business entities upon issuance.
   
  The company applied the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach do not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
   
  The new standard also provides practical expedients for an entity’s ongoing accounting. The company elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means, for those leases, the company does not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.
   
  Upon adoption, the company recognized total right of use (“ROU”) assets of $225 thousand, with corresponding liabilities of $225 thousand on the condensed consolidated balance sheets. The adoption did not impact our beginning retained earnings, or our prior year condensed consolidated statements of income and statements of cash flows.
   
  Under Topic 842, we determine if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremented borrowing rate is the expected interest rate that the company would have to pay to borrow on a collateralized basis on similar terms and amounts equal to the lease payment and under similar economic environment. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
   
  Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current and operating lease liabilities, non-current on our condensed consolidated balance sheets.
  See also Note 5.

 

 11 
 

 

INTEGRITY APPLICATIONS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 3 – RECENT EVENTS

 

During the first nine months of 2019, we received aggregate net proceeds of approximately $4.2 million (net of related cash expenses), from the issuance and sale in a private placement transaction of 1,083,004 Series D Units consisting of (a) 18,889,618 shares (collectively, the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), (b) a five year warrant to purchase up to 1,083,004 shares of Common Stock, at an exercise price of $1.80 per share, (c) a five year warrant to purchase up to 1,083,004 shares of Common Stock, at an exercise price of $3.60 per share, and (d) a five year warrant to purchase up to 1,083,004 shares of Common Stock, at an exercise price of $5.40 per share. As of September 30, 2019, the Series D Warrants (issued on December 1, 2017, during 2018 and during the first six months of 2019) are exercisable for an aggregate of 7,351,680 shares of Common Stock, in each case subject to adjustment in certain circumstances.

 

Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with the placement agent, the Company paid the placement agent, as a commission, an amount equal to 10% of the aggregate sales price of the Series D Units sold in each closing, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Series D Units sold in such closing. In addition, pursuant to the Placement Agent Agreement, in connection with the closings in the first half of 2019, the Company is required to issue to the placement agent: (a) 5-year warrants to purchase up to 1,888,966 shares of Common Stock at an exercise price of $0.258 per share, (b) 5-year warrants to purchase up to 108,305 shares of Common Stock at an exercise price of $1.80 per share.(c) 5-year warrants to purchase up to 108,305 shares of Common Stock at an exercise price of $3.60 per share, and (d) 5-year warrants to purchase up to 108,305 shares of Common Stock at an exercise price of $5.40 per share The terms of such warrants are substantially similar to the Series D Warrants except that the warrants issued to the placement agent are exercisable on a cashless basis and include full ratchet anti-dilution protection.

 

On January 1, 2019, we issued a ten-year non-qualified stock option to our President, for the purchase of 75,000 shares of Common Stock at an exercise price of $4.50 per share, with three-year quarterly vesting commencing on the first quarter after the effective date.

 

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INTEGRITY APPLICATIONS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)

 

NOTE 4 – INVENTORIES

 

   US dollars 
   September 30,   December 31, 
   2019   2018 
   (unaudited)     
Raw materials   23,195    13,522 
Work in process   1,489,646    1,546,764 
Finished products   82,885    67,310 
    1,595,726    1,627,596 
Less – provision for slow moving inventory (*)   (1,456,597)   (1,456,597)
    139,129    170,999 

 

NOTE 5 – LEASES

 

We have entered into several non-cancelable operating lease agreements for our offices and one vehicle. Our leases have original lease periods expiring between 2019 and 2021. Payments due under such lease contracts include primarily fix payments. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

The components of lease costs, lease term and discount rate are as follows:

 

   US dollars 
   Nine Months Ended 
   September 30, 2019 
   (unaudited) 
Operating lease cost:     
Office space   90,000 
Vehicle   5,799 
    95,799 
Remaining Lease Term     
Office space   1.17 years 
vehicle   1.67 years 
      
Weighted Average Discount Rate     
Office space   10%
Vehicle   10%

 

 13 
 

 

INTEGRITY APPLICATIONS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)

 

The following is a schedule, by years, of maturities of operating lease liabilities as of September 30, 2019:

 

   US dollars 
   September 30, 2019 
   (unaudited) 
Period:     
The remainder of 2019   31,939 
2020   117,758 
2021   6,774 
Total operating lease payments   156,471 
Less: imputed interest   9,429 
Present value of lease liabilities   147,042 

 

NOTE 6 – OTHER CURRENT LIABILITIES

 

   US dollars 
   September 30, 2019   December 31, 2018 
   (unaudited)     
         
Employees and related institutions   211,709    239,964 
Accrued expenses and other   552,051    917,386 
    763,760    1,157,350 

 

NOTE 7 – FINANCING INCOME (EXPENSE), NET

 

   US dollars   US dollars 
   Nine-month period
ended September 30,
   Three-month period
ended September 30,
 
   2019   2018   2019   2018 
   (unaudited)   (unaudited) 
Israeli CPI linkage difference on principal of loans from stockholders   (5,708)   1,266    (1,843)   (697)
Exchange rate differences   1,808    (14,410)   (8,761)   (8,789)
Change in fair value of warrants with down round protection   -    251,790    -    91,762 
Interest expenses on credit from banks and other   (13,555)   (11,853)   (5,700)   (5,551)
Late fee penalty of dividend payments   -    (82,777)   -    (38,497)
    (17,455)   144,016    (16,304)   38,228 

 

 14 
 

 

INTEGRITY APPLICATIONS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (cont.)

 

NOTE 8 – LOSS PER SHARE

 

In periods of net loss, basic loss per share is computed by dividing net loss for the period after consideration of the effect of dividends on preferred stock by the weighted average number of shares outstanding during the period.

 

The loss and the weighted average number of shares used in computing basic and diluted loss per share for the nine and three month periods ended September 30, 2019 and 2018 are as follows:

 

   US dollars   US dollars 
   Nine-month period
ended September 30,
   Three-month period
ended September 30,
 
   2019   2018   2019   2018 
   (unaudited)   (unaudited) 
Loss for the period   (2,917,287)    (5,383,155)   (996,777)   (1,572,878)
Cash dividend on Series A Preferred Stock   -    (13,141)   -    (4,171)
Stock dividend on Series B Preferred Stock   -    (1,118,550)   -    (533,229)
Stock dividend on Series C Preferred Stock   -    (893,269)   -    (425,836)
Loss for the period attributable to common stockholders   (2,917,287)   (7,408,115)   (996,777)   (2,536,114)

 

   Number of shares   Number of shares 
   Nine-month period
ended September 30,
   Three-month period
ended September 30,
 
   2019   2018   2019   2018 
                 
Number of shares:                    
Weighted average number of shares used in the computation of basic and diluted earnings per share   152,240,776    7,745,275    162,012,688    8,249,442 
Total weighted average number of common shares related to outstanding options and warrants excluded from the calculations of diluted loss per share (*)   78,900,534    26,938,336    81,527,505    28,470,324 

 

  (*) All outstanding stock options and warrants have been excluded from the calculation of the diluted net loss per share for all the reported periods, because the effect of the common shares issuable as a result of the exercise or conversion of these instruments was determined to be anti-dilutive

 

NOTE 9 – SUBSEQUENT EVENTS

 

On October 25, 2019, David Podwalski resigned as an officer and director of Integrity Applications, Inc., retroactive to September 17, 2019, in order to pursue other business interests. In conjunction with this separation, he has been issued $25,000 of the Company’s common stock, at the closing price on September 17, 2019, which was $0.50 per share, in a transaction exempt from registration under Section 4(a)(2) under the Securities Act of 1933, as amended, and will receive a cash payment of $25,000 at the time the Company raises an additional $2,000,000 in net proceeds from sale of its securities. He has also agreed to not sell any shares of common stock owned by him for one year and thereafter can only sell shares subject to volume limitations set forth in the Separation Agreement between the Company and him, of even date.

 

Effective October 31, 2019, the Company appointed Allen E. Danzig to the Company’s Board of Directors and as Chair of the Nominating, Governance and Compensation Committee.  Mr. Danzig has been qualified as an independent director, as defined under Nasdaq rules, and he will be compensated for his service consistent with the Company’s compensation structure for non-employee directors. Mr. Danzig most recently served as Vice President, Assistant General Counsel and Assistant Secretary of L3Harris Technologies, Inc., a global aerospace and defense technology contractor, with $17 billion in annual revenue. Prior to its merger with Harris Corporation in June 2019, Mr. Danzig served as Vice President, Assistant General Counsel and Assistant Secretary at L3 Technologies, Inc. where he had been employed since 2006. Prior to his employment at L3, Mr. Danzig served in management positions with Celanese Corporation, a global chemical and specialty materials company, and The Hertz Corporation, one of the world’s largest vehicle and equipment rental companies. He received his undergraduate degree from Adelphi University and law degree from Pace University School of Law and is a member of the New York State Bar. 

 

 15 
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies and prospects. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including statements regarding our future activities, events or developments, including such things as future revenues, capital raising and financing, product development, clinical trials, regulatory approval, market acceptance, responses from competitors, capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of our business and operations, plans, references to future success, projected performance and trends, and other such matters, are forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “may,” “will,” “could,” “would,” “should” and other similar words and phrases, are intended to identify forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q are based on certain historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. These statements relate only to events as of the date on which the statements are made and we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. All of the forward-looking statements made in this Quarterly Report on Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to or effects on us or our business or operations. Whether actual results will conform to our expectations and predictions is subject to a number of risks and uncertainties that may cause actual results to differ materially. Risks and uncertainties, the occurrence of which could adversely affect our business, include the risks identified under the caption “Risk Factors” included in our annual report on Form 10-K for the year ended December 31, 2018. The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

 

Overview

 

We are a medical device company which, since 2001, has focused on the design, development and commercialization of non-invasive glucose monitoring devices for use by people with diabetes. Integrity Israel was founded with a mission to develop, produce and market non-invasive glucose monitors for home use by Type II diabetics. We have developed a non-invasive blood glucose monitor, the GlucoTrack® model DF-F glucose monitoring device, which is designed to help people obtain blood glucose level readings without the pain, inconvenience, cost and difficulty of conventional (invasive) spot finger stick devices. The GlucoTrack® model DF-F utilizes a patented combination of ultrasound, electromagnetic and thermal technologies to obtain blood glucose measurements in less than one minute via a small sensor that is clipped onto one’s earlobe and connected to a small, handheld control and display unit, all without drawing blood.

 

Recently, we have taken measures to restructure our management and Board of Directors in order to properly align our company for success in the upcoming fiscal year and as we grow into a commercial entity. To that end, we have added three new directors with strong expertise in public companies, capital markets and corporate governance.

 

We have been actively taking measures to reduce costs and align our business structure in order to streamline expenses and deploy available capital to the development of our business. We have capitalized on the wealth of expertise and experience of our Board of Directors who have taken a more active role in our business, supporting our teams in Israel and Europe, in an effort to bring our product fully to market as quickly as possible, to the completion of development of our “next generation” device, and to drive shareholder value.

 

On June 4, 2013, we received initial CE Mark approval for the GlucoTrack® model DF-F non-invasive glucose monitoring device from DEKRA Certification B.V., our European notified body (the “Notified Body”). In March 2014, we received CE Mark approval for six months’ calibration validity of the same device. Receipt of the CE Mark allows us to market and sell the GlucoTrack® model DF-F glucose monitoring device in European Union (“EU”) member countries that have adopted the European Medical Device Directive (the “MDD”) without being subject to additional national regulations with regard to demonstration of performance and safety. The CE Mark also permits the sale in countries that have an MDD Mutual Recognition Agreement with the EU.

 

 16 
 

 

On August 31, 2015, we received approval from the Notified Body for improvements to the GlucoTrack® model DF-F which simplify and shorten (from approximately 2.5 hours to approximately half an hour) the initial calibration process for the device. These improvements are intended to reduce the backlog created as purchasers of the device await calibration. In addition, we received approval from the Notified Body on the updated intended use for the device, which expands the intended user population to include not only Type 2 diabetics, but persons suffering from pre-diabetes conditions as well, which we believe represents a material expansion of the potential market for the device. In December 2015, we received approval from the Notified Body for further improvements to the GlucoTrack® model DF-F that increase the accuracy and efficacy of the device. On February 19, 2016, we received an extension of our ISO 13485:2003 certificate and Annex II certification from the EU. The ISO 13485:2003 certification signifies that we have met the standards required for company-wide implementation of device quality management system(s). The scope of the certification is design, development, manufacture and service of non-invasive glucose monitoring systems for home use. Annex II also addresses quality control systems. The certification allows us to self-certify certain modifications and changes and simplifies some of the reporting to and review by the relevant Notified Body. This can shorten the CE-mark review process of future GlucoTrack® model DF-F enhancements or revisions. Without an Annex II certification, each new device enhancement or modified version would be subject to the full EU CE-mark review process. The ISO 13485:2003 and Annex II certifications enable us to potentially improve the time to market for product sales on new, enhanced or modified GlucoTrack® model DF-F devices.

 

We have developed a wireless module (“GlucoTrack Link”) with embedded Bluetooth Low-Energy (BLE), which enables the transmission of measurement data captured by GlucoTrack® model DF-F to a cloud-based server or a smart device. This module and the related applications currently under development will facilitate the sharing, viewing and analysis of GlucoTrack® measurements. This information can then be utilized in a cost-effective manner by third parties, such as family members, health care service providers, clinicians, payers and employers. We expect that this will open additional revenue streams for us.

 

We are developing an online platform and related smart device applications (“Apps”) to facilitate the interaction of users with Glucotrack® DF-F and the glucose data collected. The Apps will be compatible with both IOS and Android operating systems. The Apps are intended to support the management of Type 2 diabetes and pre-diabetic patients by providing real-time feedback and insights that can be derived from glucose measurements. Enhanced capabilities within the Apps and platform are expected to include goal setting, real time alerts and reminders, trend analysis and diabetes management tips and tools. The goal is to provide users relevant information leading to improved management of their condition and better disease outcomes.

 

 17 
 

 

The current version of Glucotrack® DF-F requires each patient to be calibrated in a face-to-face session with a certified trained calibrator. The calibration requires patients to participate in a one-hour session when first using their new device and again every six months when the personal ear clip is replaced. We have recently completed the development of, and have submitted for regulatory approval of, a self-calibration module for Glucotrack® DF-F. If approved, this enhancement will allow patients to set up Glucotrack® DF-F themselves easier and faster without support from a calibrator. We expect the ability for a user to self-calibrate their Glucotrack® DF-F to lower patient initiation and support costs and provide a substantial opportunity to open additional sales channels including pharmacies, clinics and online.

 

The current version of Glucotrack® DF-F consists of an ear clip attached to a handheld control and display unit. We have undergone the development of transforming the existing device into a simple, easy to use wireless ear-clip. This stand-alone clip will measure glucose and communicate the results seamlessly and wirelessly to a smart device such as a smartphone, smartwatch, tablet or computer, eliminating the current handheld display. The result would be a user-friendly, inconspicuous measuring device for the management of diabetes and pre-diabetes. We expect this new device to have much greater user adoption and acceptance. We also expect that this new device will have a significantly lower cost to manufacture than our current device.

 

We continue to invest in our research and development efforts, including efforts to increase the accuracy of our current device, as well as efforts in developing future devices, including determining the feasibility for developing a continuous glucose monitor suitable for people with Type 1 diabetes, utilizing the existing technology platform. We also continue to invest in our intellectual property portfolio including additional patents and trademarks.

 

Significant Accounting Policies

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

 

Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements appearing in our annual report on Form 10-K for the year ended December 31, 2018. Our management believes that, as for the financial statements for the periods included in this report, the going concern assessment and the assumptions relate to measurement of stock based compensation is a critical accounting policy. However, due to the early stage of operations of the Company, there are no other accounting policies that are considered to be critical accounting policies by management.

 

 18 
 

 

Going Concern Uncertainty

 

The development and commercialization of our product will require substantial expenditures. We have not yet generated any material revenues and have incurred a substantial accumulated deficit and negative operating cash flows. We currently have no sources of recurring revenue and are therefore dependent upon external sources for financing our operations. There can be no assurance that we will succeed in obtaining the necessary financing to continue our operations. Management’s plans concerning these matters are described in Note 1B to our annual report on Form 10-K for the year ended December 31, 2018. (see also Note 1B to our interim financial statements for the period ended September 30, 2019). As a result, our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern in their audit report included in our annual report for year ended December 31, 2018. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Recently Issued Accounting Pronouncements

 

  1. Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

 

  In June 2018, the FASB issued Accounting Standard Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). ASU 2018-07 aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions.
   
  Consistent with the accounting requirement for employee share-based payment awards, awards within the scope of Topic 718 will be measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. Equity-classified nonemployee share-based payment awards will be measured at the grant date.
   
  With respect to awards with performance conditions ASU 2018-07 concludes that, consistent with the accounting for employee share-based payment awards, an entity will consider the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions.
   
  ASU 2018-07 also requires that the classification of equity classified nonemployee share-based payment awards will continue to be subject to the requirements of Topic 718 unless the award was modified after the good has been delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing goods or services. This eliminates the requirement to reassess classification of such awards upon vesting.
   
  In addition, ASU 2018-07 includes certain Non-public Entity-Specific Amendments

 

  ASU 2018-07 is effective for Public entities in annual periods beginning after December 15, 2018, and interim periods within those years (first quarter of 2019 for the company). Early adoption is permitted, including in an interim period, but not before an entity adopts the new revenue guidance (which was adopted by the Company in its interim financial statements for 2018).

 

 19 
 

 

 

  An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date.
   
  The adoption of ASU 2018-07 did not have a significant impact on its consolidated financial statements.

 

  2. Accounting Standards Update 2016-02, “Leases”

 

  In February 2016, the FASB issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).
   
  Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1. A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and, 2. A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
   
  Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.
   
  Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year Company). Early application is permitted for all public business entities upon issuance.
   
  The company applied the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach do not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
   
  The new standard also provides practical expedients for an entity’s ongoing accounting. The company elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means, for those leases, the company does not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.

 

  Upon adoption, the company recognized total right of use (“ROU”) assets of $225 thousand, with corresponding liabilities of $225 thousand on the condensed consolidated balance sheets. The adoption did not impact our beginning retained earnings, or our prior year condensed consolidated statements of income and statements of cash flows.

 

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  Under Topic 842, we determine if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremented borrowing rate is the expected interest rate that the company would have to pay to borrow on a collateralized basis on a similar term and amounts equal to the lease payment and under similar economic environment. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
   
  Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current and operating lease liabilities, non-current on our condensed consolidated balance sheets.

 

Results of Operations

 

The following discussion of our operating results explains material changes in our results of operations for the nine-month period ended September 30, 2019 compared with the same period ended September 30, 2018. The discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report.

 

Nine Months ended September 30, 2019 compared to Nine Months ended September 30, 2018

 

Revenues

 

During the nine-month period ended September 30, 2019, we had revenues of $140,255 from orders for our GlucoTrack® model DF-F glucose monitoring device and personal ear-clip (“PEC”) that are replaced every six months, as compared with $43,488 for the prior-year period. The increase in revenues is a result of orders shipped to two new markets during the second quarter of 2019.

 

We recognize revenues from sales of the GlucoTrack® model DF-F and PECs when control is transferred to the customer and collectability is probable.

 

Research and development expenses

 

Research and development expenses were $1,203,616 for the nine-month period ended September 30, 2019, as compared to $1,818,108 for the prior-year period. The decrease is mainly attributable to the completion of our clinical trials for the current version of the DF-F during 2018 and the decrease in salary and other personnel-related expenses, including stock-based compensation expenses during 2019.

 

Research and development expenses consist primarily of salaries and other personnel-related expenses, including materials, travel expenses, clinical trials and other expenses. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect research and development expenses to increase during the remainder of 2019 and beyond, primarily due to hiring additional personnel and developing our product line, as well as improvement of the GlucoTrack® model DF-F; however, we may adjust or allocate the level of our research and development expenses based on available financial resources and based on our commercial needs including the FDA registration process, specific requirements from customers, development of new GlucoTrack® models and others.

 

Selling and marketing expenses

 

Selling and marketing expenses were $444,555 for the nine-month period ended September 30, 2019, as compared to $857,386 for the prior-year period. The decrease is primarily attributable to the Company’s decision to reduce its business development personnel in the European market until such a time when the proof of concept of obtaining reimbursement for the product in test markets is realized. In addition during the fourth quarter of 2018, our Chief Commercialization Officer was appointed as our President and Chief Operating Officer and as a result his salary and related benefits expenses were allocated to our general and administrative expenses.

 

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Selling and marketing expenses consist primarily of salaries, travel expenses and other related expenses. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect selling and marketing expenses to increase during the remainder of 2019 and beyond as we continue our focus on marketing and sales of the GlucoTrack® model DF-F; however, we may adjust or allocate the level of our marketing based on available financial resources and based on our commercial needs including specific requirements from customers, development of new GlucoTrack® models and others.

 

General and administrative expenses

 

General and administrative expenses were $1,391,916 for the nine-month period ended September 30, 2019, as compared to $2,894,553 for the prior-year period. The decrease is primarily attributable to the departure of our former CEO, a reduction in professional fees and the reduction of stock based compensation during 2019.

 

General and administrative expenses consist primarily of professional services, salaries, travel expenses and other related expenses for executive, finance and administrative personnel, including stock-based compensation expenses. Other general and administrative costs and expenses include facility-related costs not otherwise included in research and development costs and expenses, and professional fees for legal and accounting services. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect selling, general and administrative expenses to decrease during the remainder of 2019 and beyond due to continued reduction in staffing and consolidation of functions as possible.

 

Financing income (expense), net

 

Financing expenses, net were $17,455 for the nine-month period ended September 30, 2019, as compared to $144,016 of financing income for the prior-year period. The change is primarily attributable to the adoption of ASU 2017-11. Until the adoption of ASU 2017-11 we marked the warrants with down round protection to market on a quarterly basis based on the fair value estimate derived by using Black and Scholes model, with the changes in fair value recognized as finance expense or income, as applicable, in our consolidated statement of operations. As a result of the early adoption of ASU 2017-11 we reclassified the warrants with down round protection from long term liabilities to stockholders deficit and stopped marking them to market on a quarterly basis. The decrease in the estimated fair value of our Warrants with down-round protection during the nine-month period ended September 30, 2018 amounted to $251,790, resulting primarily from the decrease in the expected term of Warrants and the changes in the estimated expected volatility offset by expenses in the amount of $82,777 related to the late fee penalty resulting from the non-issuance of dividend payments at the required time during the first nine months of 2018.

 

Net Loss

 

Net loss was $2,917,287 for the nine-month period ended September 30, 2019, as compared to $5,383,155 for the prior-year period. The decrease in net loss is attributable primarily to the increase in revenues, decrease in our operating expenses and offset by the increase in financing expenses, as described above,

 

Three Months ended September 30, 2019 compared to Three Months ended September 30, 2018

 

Revenues

 

During the three-month period ended September 30, 2019, we had revenues of $4,175 from orders for our GlucoTrack® model DF-F glucose monitoring device and PEC that are replaced every six months, as compared with no revenue for the prior-year period.

 

We recognize revenues from sales of the GlucoTrack® model DF-F and PECs when control is transferred to the customer and collectability is probable

 

Research and development expenses

 

Research and development expenses were $377,377 for the three-month period ended September 30, 2019, as compared to $534,129 for the prior-year period. The decrease is attributable to a decrease in salary and other personnel-related expenses, including stock-based compensation expenses during 2019.

 

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Research and development expenses consist primarily of salaries and other personnel-related expenses, including materials, travel expenses, clinical trials and other expenses. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect research and development expenses to increase during the remainder of 2019 and beyond, primarily due to hiring additional personnel and developing our product line, as well as improvement of the GlucoTrack® model DF-F; however, we may adjust or allocate the level of our research and development expenses based on available financial resources and based on our commercial needs including the development of new GlucoTrack® models and others.

 

Selling and marketing expenses

 

Selling and marketing expenses were $168,259 for the three-month period ended September 30, 2019, as compared to $265,282 for the prior-year period. The decrease is primarily attributable to the Company’s decision to reduce its business development personnel in the European market until such a time when the proof of concept of obtaining reimbursement for the product in test markets is realized. In addition, during the fourth quarter of 2018, our Chief Commercialization Officer was appointed as our President and Chief Operating Officer and as a result his salary and related benefits expenses were allocated to our General and administrative expenses.

 

Selling and marketing expenses consist primarily of salaries, travel expenses and other related expenses. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect selling and marketing expenses to increase during the remainder of 2019 and beyond as we continue our focus on marketing and sales of the GlucoTrack® model DF-F; however, we may adjust or allocate the level of our marketing based on available financial resources and based on our commercial needs including specific requirements from customers and the development of new GlucoTrack® models and others.

 

General and administrative expenses

 

General and administrative expenses were $439,012 for the three-month period ended September 30, 2019, as compared to $811,695 for the prior-year period. The decrease is primarily attributable to the departure of our former CEO, a reduction in professional fees and the reduction of stock based compensation during 2019.

 

General and administrative expenses consist primarily of professional services, salaries, travel expenses and other related expenses for executive, finance and administrative personnel, including stock-based compensation expenses. Other general and administrative costs and expenses include facility-related costs not otherwise included in research and development costs and expenses, and professional fees for legal and accounting services. Subject to the receipt of additional funds to finance our operations (of which there can be no assurance), we expect selling, general and administrative expenses to increase during the remainder of 2019 and beyond.

 

Financing income (expense), net

 

Financing expenses, net were $16,304 for the three-month period ended September 30, 2019, as compared to financing income of $38,228 for the prior-year period. The change is primarily attributable to the adoption of ASU 2017-11. Until the adoption of ASU 2017-11 we marked the warrants with down round protection to market on a quarterly basis based on the fair value estimate derived by using Black and Scholes model, with the changes in fair value recognized as finance expense or income, as applicable, in our consolidated statement of operations. As a result of the early adoption of ASU 2017-11 we reclassified the warrants with down round protection from long term liabilities to stockholders deficit and stopped marking them to market on a quarterly basis. The decrease in the estimated fair value of our Warrants with down-round protection during the three-month period ended September 30, 2018 amounted to $91,762, resulting primarily from the decrease in the expected term of Warrants and the changes in the estimated expected volatility. offset by expenses in the amount of $38,497 related to the late fee penalty resulting from the non-issuance of dividend payments at the required time during the first nine months of 2018.

 

Net Loss

 

Net loss was $996,777 for the three-month period ended September 30, 2019, as compared to $1,572,878 for the prior-year period. The decrease in net loss is attributable primarily to the increase in revenues and decrease in our operating expenses, as described above.

 

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Liquidity and Capital Resources

 

As of September 30, 2019, cash on hand was approximately $1,222,280. During 2019, we received aggregate net proceeds of approximately $4.2 million (net of related cash expenses) from the issuance and sale of Series D Units. During the first nine months of 2019, we did not collect a material amount in cash proceeds from the fulfillment of orders for our improved GlucoTrack® model DF-F. While we expect to generate additional cash from sales, we do not anticipate that our income from operations will be sufficient to sustain our operations in the next 12 months. Based on our current cash burn rate, strategy and operating plan, we believe that our cash and cash equivalents will enable us to operate for a period of five months from the date of this report. In order to fund our anticipated liquidity needs beyond such period (or possibly earlier if our current cash burn rate, strategy or operating plan change in a way that accelerates or increases our liquidity needs), we will need to raise additional capital.

 

Messrs. Avner Gal and Zvi Cohen collectively loaned Integrity Israel NIS 176,000 ($49,355 based on the exchange rate of 3.482 NIS/dollar as of September 30, 2019) on May 15, 2002 pursuant to a board approval. Messrs. Nir Tarlovsky, Yitzhak Fisher and Asher Kugler loaned Integrity Israel NIS 336,300 ($94,307 based on the same exchange rate) on March 16, 2004. These loans are not required to be repaid until the first year in which we realize profits in our annual statement of operations (accounting profit). At such time, the loans are to be repaid on a quarterly basis in an amount equal to 10% of our total sales in the relevant quarter, beginning on the quarter following the first year in which we realize profits in our annual statement of operations. The total amount to be repaid by us to each lender shall be an amount equal to the aggregate principal amount loaned by such lender to us, plus an amount equal to the product of the amount of each payment made by us in respect of such loan multiplied by the percentage difference between the Israeli Consumer Price Index on the date on which the loan was made and the Israeli Consumer Price Index on the date of such payment. However, notwithstanding the above-mentioned mechanism, we will not be required to repay the loans during any time when such repayment would cause a deficit in our working capital. Our Board of Directors is entitled to modify the repayment terms of these loans, so long as such modification does not discriminate against any particular lender, and provided that all payments must be allocated among the lenders on a pro-rata basis.

 

Integrity Israel is required to pay royalties to the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the State of Israel at a rate ranging between 3-5% of the proceeds from the sale of the Company’s products arising from the development plan up to an amount equal to $93,300, plus interest at LIBOR from the date of grant. As of September 30, 2019, the contingent liability with respect to royalty payment on future sales equaled approximately $45,450, excluding interest.

 

Net Cash Used in Operating Activities for the Nine-Month Periods Ended September 30, 2019 and September 30, 2018

 

Net cash used in operating activities was $3,102,508 and $3,802,460 for the nine-month periods ended September 30, 2019 and 2018, respectively. Net cash used in operating activities primarily reflects the net loss for those periods of $2,917,287 and $5,383,155, respectively, largely offset in part by stock based compensation in 2018 of $1,577,016. Otherwise, the differential between net cash sued and net loss was relatively flat.

 

Net Cash Used in Investing Activities for the Nine-Month Periods Ended September 30, 2019 and September 30, 2018

 

Net cash used in investing activities was $22,554 and $13,669 for the nine-month periods ended September 30, 2019 and 2018, respectively, and was used to purchase equipment (such as computers, research and development, and office equipment).

 

Net Cash Provided by Financing Activities for the Nine-Month Periods Ended September 30, 2019 and September 30, 2018

 

Net cash provided by financing activities was $4,198,574 and $4,705,828 for the nine-month periods ended, September 30 2019 and 2018, respectively. Cash provided by financing activities for the nine-month period ended September 30, 2019 and September 30, 2018 reflected net capital raised from the issuance of Series D Units.

 

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Off-Balance Sheet Arrangements

 

As of September 30, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required for smaller reporting companies.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our President and Chief Operating Officer and our Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2019, our President and Interim Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Offering of Series D Units

 

During the nine-month period ending on September 30, 2019, the Company received aggregate gross proceeds of $4,873,520 from the private placement of its securities to accredited investors in a transaction exempt from registration under Section 4(a)(2) the Securities Act of 1933, as amended.

 

On June 14, 2019, Integrity Applications, Inc. (the “Company”) conducted a final closing of the private placement of its securities pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Purchasers”). Pursuant to the Purchase Agreements, on each of such closing dates, the Company issued to the respective Purchasers an aggregate of 13,972,100 units at a purchase price of $0.258 per unit of the Company (each a “Unit” and, collectively, the “Units”), each consisting of (a) one share (collectively, the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), (b) .05734 of a five year warrant to purchase, at an exercise price of $1.80 per share, one share of Common Stock (collectively, the “Series D-1 Warrants”), (c) .05734 of a five year warrant to purchase, at an exercise price of $3.60 per share, one share of Common Stock (collectively, the “Series D-2 Warrants”), and (d) .05734 of a five year warrant to purchase, at an exercise price of $5.40 per share, one share of Common Stock (collectively, the “Series D-3 Warrants”, and together with the Series D-1 Warrants and Series D-2 Warrants, the “Warrants”).

 

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In the final closing, the Company received aggregate gross proceeds of $3,604,800 from the sale of the Units pursuant to the Purchase Agreements.

 

The terms of the instruments are otherwise the same as in the previous closings of the Company’s “D Round” as described and pursuant to the terms of the agreements attached to the Company’s Current Report on 8-K filed with the Commission on March 7, 2018.

 

Placement Agent Compensation

 

Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with the placement agent for the Offering (the “Placement Agent”), at the closing of the sale of the Units the Company paid the Placement Agent, as a commission, a cash amount equal to 10% of the aggregate sales price of the Series D Units sold in each closing, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Series D Units sold in such closing. In addition, pursuant to the placement agent agreement, we are required to issue to the Placement Agent warrants to purchase up to such number of shares of Common Stock equal to 10% of the aggregate Shares sold in the Offering plus warrants equal to 10% of the total number of the Warrants issued to the Purchasers in the Offering (collectively, the “Placement Agent Warrants”). The terms of the Placement Agent Warrants will be substantially similar to the Warrants except that the Placement Agent Warrants will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection.

 

Issuance of Non-Qualified Stock Options to Employees

 

On January 1, 2019, we issued a ten-year non-qualified stock option to our President and Chief Operating Officer, for the purchase of 75,000 shares of Common Stock at an exercise price of $4.50 per share, with three-year quarterly vesting commencing on the first quarter after the effective date

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 6. Exhibits.

 

Exhibit No.   Description
2.1   Merger Agreement and Plan of Reorganization, dated as of May 25, 2010, by and among Integrity Applications, Inc., Integrity Acquisition Ltd. and A.D. Integrity Applications Ltd. (1)
3.1   Certificate of Incorporation of Integrity Applications, Inc. (1)
3.2   Certificate of Amendment to Certificate of Incorporation of Integrity Applications, Inc. (1)
3.3   Bylaws of Integrity Applications, Inc. (1)
31.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document (2)
101.SCH   XBRL Schema Document (2)
101.CAL   XBRL Calculation Linkbase Document (2)
101.LAB   XBRL Label Linkbase Document (2)
101.PRE   XBRL Presentation Linkbase Document (2)
101.DEF   XBRL Definition Linkbase Document (2)

 

(1) Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, as filed with the SEC on August 22, 2011, which exhibit is incorporated herein by reference.
   
(2) Pursuant to Rule 402 of Regulation S-T, the interactive files on Exhibit 101 hereto are deemed not filed for purposes of Section 11 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections, and are not part of any registration statement to which they relate.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: November 13, 2019

 

  INTEGRITY APPLICATIONS, INC.
     
  By: /s/ Jolie Kahn
  Name: Jolie Kahn
  Title

Interim Chief Financial Officer

(Principal Executive Officer and Principal Financial Officer)

 

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