Glucotrack, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our General Manager and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. 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 SEC’s rules and forms. 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 December 31, 2020, our President and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — the 2013 Integrated Framework. Management has concluded that, as of December 31, 2020, its internal control over financial reporting was effective based on these criteria. 45 Our management, including our General Manager and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As the Company has historically had personnel both in the U.S. and Israel, there has been no change in working status due to working remotely as a result of COVID-19. Attestation Report of the Registered Public Accounting Firm This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the SEC. Item 9B. Other Information. None. PART III Item 10. Directors, Executive Officers, and Corporate Governance. Except for the information about our Code of Ethics below, the information required by this Item 10 is incorporated by reference from our definitive proxy statement for our 2021 Annual Meeting of Stockholders (the “Proxy Statement”). The definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report on Form 10-K. We maintain a Code of Business Conduct and Ethics (Code) that applies to all employees, including our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions, and including our independent directors, who are not employees of the Company, with regard to their Integrity-related activities. The Code incorporates guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws, rules and regulations. The Code also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the SEC and other public communications. In addition, the Code incorporates guidelines pertaining to topics such as complying with applicable laws, rules, and regulations; insider trading; reporting Code violations; and maintaining accountability for adherence to the Code. The full text of our Code is published on our web site at http://www.integrity-app.com/investor-relations/corporate-governance/ and is incorporated by reference herein. We intend to disclose future amendments to certain provisions of our Code, or waivers of such provisions granted to our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions on our web site. Except as expressly stated herein, the information contained on our website does not constitute a part of this Annual Report on Form 10-K and is not incorporated by reference herein. Item 11. Executive Compensation. The information required for this Item is incorporated by reference from our Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required for this Item is incorporated by reference from our Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required for this Item is incorporated by reference from our Proxy Statement. Item 14. Principal Accountant Fees and Services. The information required for this Item is incorporated by reference from our Proxy Statement. 46 PART IV Item 15. Exhibits, Financial Statement Schedules. (a) Document List (1) Financial Statements: The financial statements of the Company filed herewith are set forth in Part II, Item 8 of this report. (2) Financial Statement Schedules: None. (3) Exhibits: Exhibit Number 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) 47 3.2 Certificate of Amendment to Certificate of Incorporation of Integrity Applications, Inc. (1) 3.3 Bylaws of Integrity Applications, Inc. (1) 3.4 Certificate of Designation of Preferences and Rights of Series A 5% Convertible Preferred Stock (2) 3.5 Certificate of Designation of Preferences and Rights of Series B 5.5% Convertible Preferred Stock (3) 3.6 Certificate of Designation of Preferences and Rights of Series C 5.5% Convertible Preferred Stock (8) 4.1 Specimen Certificate Evidencing Shares of Common Stock (1) 4.2 Form of Common Stock Purchase Warrant (1) 4.3 Form of Series A Securities Purchase Agreement (2) 4.4 Form of Series A Common Stock Purchase Warrant (2) 4.5 Form of Series A Registration Rights Agreement (2) 4.6 Form of Series B Securities Purchase Agreement (3) 4.7 Form of Series B-1 Common Stock Purchase Warrant (3) 4.8 Form of Series B-2 Common Stock Purchase Warrant (3) 4.9 Form of Series B Registration Rights Agreement (3) 4.10 Form of Series C Securities Purchase Agreement (8) 4.11 Form of Series C-1 Common Stock Purchase Warrant (8) 4.12 Form of Series C-2 Common Stock Purchase Warrant (8) 4.13 Form of Series C Registration Rights Agreement (8) 4.14 Form of Series D Securities Purchase Agreement (12) 4.15 Form of Series D-1 Common Stock Purchase Warrant (12) 4.16 Form of Series D-2 Common Stock Purchase Warrant (12) 4.17 Form of Series D-3 Common Stock Purchase Warrant (12) 4.18 Form of Series D Registration Rights Agreement (12) 10.1* Integrity Applications, Inc. 2010 Incentive Compensation Plan (1) 10.2* Amendment No. 1 to Integrity Applications, Inc. 2010 Incentive Compensation Plan (13) 10.3* Amendment No. 2 to Integrity Applications, Inc. 2010 Incentive Compensation Plan (11) 10.4* Form of Director and Officer Indemnification Agreement (1) 10.5* Personal Employment Agreement, dated as of October 19, 2010, between A.D. Integrity Applications Ltd. and Avner Gal (1) 10.6* Letter Agreement, effective as of April 7, 2017, among Integrity Applications, Inc., A.D. Integrity Applications Ltd., and Avner Gal (11) 10.7* Amended and Restated Personal Employment Agreement, effective as of April 7, 2017, between A.D. Integrity Applications Ltd. and David Malka (11) 10.8 Irrevocable Undertaking of Indemnification, dated as of July 26, 2010, by and among Integrity Applications, Inc., Avner Gal, Zvi Cohen, Ilana Freger, David Malka and Alexander Raykhman (1) 10.9 Investment Agreement, dated February 18, 2003, between A.D. Integrity Applications Ltd., Avner Gal, Zvi Cohen, David Freger and David Malka and Yigal Dimri (1) 10.10* Form of Stock Option Agreement (1) 10.11* Form of Stock Option Agreement (ESOP) (1) 10.12 Letter of Approval, addressed to Integrity Applications Ltd. from the Ministry of Industry, Trade and Employment of the State of Israel (6) 10.13 Letter of Undertaking, addressed to the Ministry of Industry, Trade and Employment of the State of Israel – Office of the Chief Scientist from Integrity Applications Ltd. (4) 10.14 Investment Agreement, dated March 16, 2004, by and among A.D. Integrity Applications Ltd., Yitzhak Fisher, Asher Kugler and Nir Tarlovsky. (4) 10.15* Personal Employment Agreement, dated as of October 22, 2013, between A.D. Integrity Applications Ltd. and Eran Hertz. (7) 48 10.16 Personal Employment Agreement, dated as of February 1, 2017, between A.D. Integrity Applications Ltd. and Sami Sassoun (9) 10.17 Amended and Restated Consulting Agreement, dated as of February 6, 2017, between Integrity Applications, Inc. and Strand Strategy (9) 10.18 Personal Employment Agreement, dated as of March 20, 2017, between Integrity Applications, Inc. and John Graham (9) 10.19* First Amendment to Employment Agreement, effective as of April 7, 2017, between Integrity Applications, Inc. and John Graham (11) 10.20* Employment Agreement, effective as of June 26, 2017, between Integrity Applications, Inc. and David Podwalski (5) 14.1 Code of Ethics (9) 21.1 Subsidiaries of Integrity Applications, Inc. (10) 31.1 Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ** 31.2 Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ** 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 ** 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 ** 101.INS XBRL Instance Document ** 101.SCH XBRL Schema Document ** 101.CAL XBRL Calculation Linkbase Document ** 101.DEF XBRL Taxonomy Extension Calculation Linkbase ** 101.LAB XBRL Label Linkbase Document ** 101.PRE PRE XBRL Presentation Linkbase Document ** (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. (2) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on March 18, 2013. (3) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on September 5, 2014. (4) Previously filed as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-1, as filed with the SEC on October 7, 2011. (5) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2017, as filed with the SEC on August 18, 2017. (6) Previously filed as an exhibit to Amendment No. 3 to the Company’s Registration Statement on Form S-1, as filed with the SEC on November 10, 2011. (7) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC on March 27, 2014. (8) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 15, 2016. (9) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the SEC on March 31, 2017. (10) Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, as filed with the SEC on November 7, 2017. (11) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 15, 2017 (12) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on March 7, 2018. (13) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on March 23, 2016. * Compensation Plan or Arrangement or Management Contract. ** Filed herewith. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 as of April 13, 2021. INTEGRITY APPLICATIONS, INC. By: /s/ Jolie Kahn Name: Jolie Kahn Title: Chief Financial Officer (Principal Executive and Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Jolie Kahn Chief Financial Officer April 13, 2021 Jolie Kahn (Principal Executive and Financial Officer and Principal Accounting Officer) /s/ Robert Fischell Director April 13, 2021 Dr. Robert Fischell /s/ Allen Danzig Director April 13, 2021 Allen Danzig /s/ Shimon Rapps Director April 13, 2021 Shimon Rapps /s/ Andrew Sycoff Director April 13, 2021 Andrew Sycoff /s/ Paul V.Goode Director April 13, 2021 Paul V.Good e 50 INTEGRITY APPLICATIONS, INC. Consolidated Financial Statements as of December 31, 2020 Table of Contents Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Financial Statements Balance Sheets F-3 Statements of Operations and Comprehensive Loss F-4 Statements of Changes in Stockholders’ Equity (Deficit) F-5 Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 – F-27 F- 1 Fahn Kanne & Co. Head Office 32 Hamasger Street Tel-Aviv 6721118, ISRAEL PO Box 36172, 6136101 T +972 3 7106666 F +972 3 7106660 www.gtfk.co.il Report of Independent Registered Public Accounting Firm Board of Directors and the Stockholders of INTEGRITY APPLICATIONS, INC. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Integrity Applications, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ FAHN KANNE & CO. GRANT THORNTON ISRAEL Certified Public Accountants (Isr.) We have served as the Company’s auditor since 2010. Tel-Aviv, Israel April 13, 2021 F- 2 INTEGRITY APPLICATIONS, INC. CONSOLIDATED BALANCE SHEETS In thousand of US dollars (except share data) December 31, 2020 December 31, 2019 Current Assets Cash and cash equivalents 9,823 419 Accounts receivable, net 66 70 Inventory (Note 3) 284 184 Other current assets 56 45 Total current assets 10,229 718 Operating lease right-of-use assets, net (Note 4) 166 187 Property and equipment, net (Note 5) 149 134 Non-current Restricted Cash 62 57 TOTAL ASSETS 10,606 1,096 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current Liabilities Accounts payable 869 1,534 Operating lease liabilities, current (Note 4) 84 142 Other current liabilities (Note 6) 392 596 Total Current Liabilities 1,345 2,272 Non-current Liabilities Long-Term Loans from Stockholders (Note 8) 197 191 Operating lease liabilities, non-current (Note 4) 82 45 Total Non-current liabilities 279 236 Total Liabilities 1,624 2,508 Stockholders’ Equity (Deficit) Common Stock of $ 0.001 par value (“Common Stock”): 500,000,000 shares authorized; 200,781,064 and 161,858,436 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively 201 162 Additional paid-in capital 102,165 89,005 Accumulated other comprehensive income 15 124 Accumulated deficit (93,399 ) (90,703 ) Total Stockholders’ equity (deficit) 8,982 (1,412 ) TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) 10,606 1,096 The accompanying notes are an integral part of these condensed consolidated financial statements F- 3 INTEGRITY APPLICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS In thousand of US dollars 2020 2019 Revenues - 208 Research and development expenses (Note 11) 1,532 1,606 Selling and Marketing (Note 12) 415 573 General and administrative expenses (Note 13) 1,185 1,535 Total operating expenses 3,132 3,714 Operating loss 3,132 3,506 Other Income 338 - Financing income (expense), net 98 (10 ) Loss for the period 2,696 3,516 Other comprehensive income: Foreign currency translation adjustment (109 ) (40 ) Comprehensive Loss for the period 2,805 3,556 Loss per share (Basic) (Note 15) (0.02 ) (0.02 ) Loss per share (Diluted) (Note 15) (0.02 ) (0.02 ) Common shares used in computing Basic and Diluted Loss per share (Note 15) 196,029,360 154,929,064 The accompanying notes are an integral part of the consolidated financial statements. F- 4 INTEGRITY APPLICATIONS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) In thousand of US dollars (except share data) Common Stock Additional Accumulated other Total Stockholders’ Number of shares Amount paid in capital comprehensive loss Accumulated deficit (deficit) surplus Balance as of January 1, 2019 141,634,700 142 84,008 164 (87,187 ) (2,873 ) Loss for the period - - - - (3,516 ) (3,516 ) Other comprehensive loss - - - (40 ) - (40 ) Amounts allocated to Series D-1, D-2 and Series D-3 Warrants, net - - 32 - - 32 Amounts allocated to issuance of Common Stock from Series D offering 17,913,179 19 3,898 - - 3,917 Issuance of shares as settlement of financial liabilities 1,190,141 1 306 - - 307 Warrants issued as consideration for placement services - - 249 - - 249 Stock-based compensation 515,120 (*)- 356 - - 356 Issuance of restricted shares as compensation to the board of directors 605,296 (*)- 156 - - 156 Balance as of December 31, 2019 161,858,436 162 89,005 124 (90,703 ) (1,412 ) Balance as of January 1, 2020 161,858,436 162 89,005 124 (90,703 ) (1,412 ) Loss for the period - - - - (2,696 ) (2,696 ) Other comprehensive loss - - - (109 ) - (109 ) Stock-based compensation - - 22 - - 22 Issuance of Common Stock, net 37,500,000 38 12,215 - - 12,253 Warrants issued as consideration for placement services - - 756 - - 756 Issuance of restricted shares as compensation to the board of directors 1,422,628 1 167 - - 168 Balance as of December 31, 2020 200,781,064 201 102,165 15 (93,399 ) 8,982 (*) Less than 1 thousand The accompanying notes are an integral part of the consolidated financial statements. F- 5 Integrity Application, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS 2020 2019 Cash flows from operating activities: Income (loss) for the year (2,696 ) (3,516 ) Adjustments to reconcile income (loss) for the year to net cash used in operating activities: Depreciation 47 51 Stock-based compensation 22 356 Issuance of restricted shares as compensation to the board of directors 168 156 Linkage difference on principal of loans from stockholders (8 ) 7 Changes in assets and liabilities: Decrease (increase) in accounts receivable 10 (44 ) Decrease (increase) in inventory (85 ) 1 Increase in other current assets (9 ) (19 ) Decrease in accounts payable (714 ) (600 ) Decrease in other current liabilities (236 ) (291 ) Net cash used in operating activities (3,501 ) (3,899 ) Cash flows from investment activities: Purchase of property and equipment (53 ) (23 ) Net cash used in investment activities (53 ) (23 ) Cash flows from financing activities Proceeds allocated to Series D Warrants, net of cash issuance expenses - 33 Proceeds from issuance of Common Stock, net of cash issuance expenses 13,009 4,165 Net cash provided by financing activities 13,009 4,198 Effect of exchange rate changes on cash and cash equivalents (46 ) 50 Increase in cash, cash equivalents, and restricted cash 9,409 326 cash, cash equivalents, and restricted cash at beginning of the year 476 150 cash, cash equivalents, and restricted cash at end of the year 9,885 476 Supplementary information on financing activities not involving cash flows: During the year ending December 31, 2019, the Company settled a portion of the outstanding board fees and management payroll obligations in the amount of $463 thousand through the issuance of 1,795,437 shares of common stock in total to seven board members and three members of the senior management team. During the years ending December 31, 2020 and 2019, $756 and $249 thousand, respectively, 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 accompanying notes are an integral part of the consolidated financial statements. F- 6 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 remained 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. Since its incorporation, the Company did not conduct 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 December 31, 2020, the Group has incurred accumulated deficit of $93,399 thousand, and negative operating cash flows. As of December 31, 2020, the Company had $9,823 in cash, which is sufficient to meet its capital needs for fiscal 2021 and for at least 12 months from the date of issuance of these financial statements, thus it is expected that the company will be able to operate as a going concern for at least 12 months from the date hereof. F- 7 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 1 – GENERAL (cont.) B. Risk factors The Group has a limited operating history and faces a number of risks and uncertainties, including risks and uncertainties regarding continuation of the development process, demand and market acceptance of the Group’s products, the effects of technological changes, competition and the development of products by competitors. Additionally, other risk factors also exist, such as the ability to manage growth and the effect of planned expansion of operations on the Group’s future results and the availability of necessary financing. In addition, the Group expects to continue incurring significant operating costs and losses in connection with the development of its products and marketing efforts. The Group has not yet generated material revenues from its operations to fund its activities and therefore is dependent on the receipt of additional funding from its stockholders and/or new investors in order to continue its operations. C. Effect of the spread of the Coronavirus on the Company In December 2019, the Covid-19 epidemic erupted in China (hereinafter - the “Corona Virus”, the “Event” or the “Crisis”) and at the beginning of 2020, it spread to additional countries across the globe. In January 2020, the World Health Organization declared the outbreak of Corona as a global health emergency and in March 2020, it declared the Corona virus to be a global pandemic. The spreading of the Corona Virus is an extraordinary macroeconomic event in many countries worldwide. As a result of the event, many countries, including Israel, have taken significant steps in an attempt to stem the spreading of the virus. These steps include, inter alia, restriction of civilian movement and employment, closure of businesses and malls, restrictions of gatherings and events, restriction of the transportation of people and goods, closure of international border crossings, reduction in the number of employees permitted to come to their workplaces, etc. The event and the steps being taken by the various countries, as mentioned above, have had a significant impact on many global and local economies as well as on global capital markets, characterized by sharp decreases and extreme volatility in the prices of many securities. In addition, there is an ever-increasing risk of a market recession. As a result of the COVID-19 pandemic, as near-term measures, we have transitioned some of our employees to remote working arrangements. The transition has had little impact on our employee productivity. Due to the uncertainty of COVID-19, we will continue to assess the situation, including abiding by any government-imposed restrictions, market by market. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). A. 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. B. Functional currency The functional currency of the Company is the US dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, “Foreign Currency Matters” (ASC 830), balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions are carried as financing income or expenses. The functional currency of Integrity Israel is the New Israeli Shekel (“NIS”) and its financial statements are included in consolidation, based on translation into US dollars. Accordingly, assets and liabilities were translated from NIS to US dollars using year-end exchange rates, and income and expense items were translated at average exchange rates during the year. Gains or losses resulting from translation adjustments are reflected in stockholders’ deficit, under “accumulated other comprehensive income (loss)”. 2020 2019 Official exchange rate of NIS 1 to US dollar 0.311 0.290 Increase (decrease) of the Official exchange rate of NIS 1 to US dollar during the year: 2020 7.2 % 2019 8.4 % F- 8 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) C. Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiary. All intercompany balances and transactions have been eliminated in consolidation. D. Cash and cash equivalents The Group considers all short-term investments, which are highly liquid investments with original maturities of three months or less at the date of purchase, to be cash equivalents. E. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined as follows: With respect to raw materials, the Group calculates cost using the average cost method. With respect to work in process and finished products, the Group calculates the cost on the basis of the average direct manufacturing costs, including materials, labor, subcontracting costs and other direct manufacturing costs. Management evaluates whether inventory reserve for slow-moving or obsolete items is required. F. Property and equipment, net 1. Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. When an asset is retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition is reflected in the statements of operations. 2. Rates of depreciation: % Computers 33 Furniture and office equipment 7-15 Leasehold improvements Shorter of lease term and 10 years G. Impairment of long-lived assets The Group’s long-lived assets are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. To date the Group did not incur any material impairment losses related to long lived assets. F- 9 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) H. Long-term restricted cash Restricted cash is invested in certificates of deposit, which are used to secure Integrity Israel’s obligations in respect of its headquarters (See Note 9B) lease and credit card. For presentation of statement of cash flows purposes, restrict cash balances are included with cash and cash equivalents, when reconciling the reported period total amounts. December 31 December 31 2020 2019 Cash and cash equivalents $ 9,823 $ 419 Restricted cash 62 57 Total cash, cash equivalents, and restricted cash shown in the statement of cash flows $ 9,885 $ 476 I. Income tax The Group accounts for income taxes in accordance with ASC 740, “Income Taxes”. Accordingly, deferred income taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and the tax bases of assets and liabilities under the applicable tax law. Deferred tax balances are computed using the enacted tax rates expected to be in effect when these differences reverse. Valuation allowances in respect of deferred tax assets are provided for, if necessary, to reduce deferred tax assets to amounts more likely than not to be realized. The Group accounts for uncertain tax positions in accordance with ASC Topic 740-10, which prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. According to ASC Topic 740-10, tax positions must meet a more- likely-than-not recognition threshold. The Group’s accounting policy is to classify interest and penalties relating to uncertain tax positions under income taxes, however the Group did not recognize such items in its fiscal 2020 and 2019 financial statements and did not recognize any liability with respect to unrecognized tax position in its balance sheet. J. Liability for employee rights upon retirement Integrity Israel’s liability for employee rights upon retirement with respect to its Israeli employees is calculated pursuant to the Israeli Severance Pay Law, based on the most recent salary of each employee multiplied by the number of years of employment of each such employee as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment, or ratable portion thereof for periods less than one year. Integrity Israel makes monthly deposits to insurance policies and severance pay funds. The deposited funds may be withdrawn upon the fulfillment of Integrity Israel’s severance obligations pursuant to Israeli severance pay laws or labor agreements with its employees. The value of the deposited funds is based on the cash surrender value of these policies, and includes immaterial profits or losses. Commencing in 2011, Integrity Israel’s agreements with its Israeli employees are in accordance with Section 14 of the Severance Pay Law. Payments in accordance with Section 14 release the employer from any future severance payments in respect of those employees. Related obligations and liabilities under Section 14 are not recorded as an asset or as a liability in the Company’s balance sheet. Severance expenses for the year ended December 31, 2020, and 2019 amounted to $24 and $79 thousand respectively. K. Revenue recognition The Company derives most of its revenues from sales of its GlucoTrack® glucose monitoring device to distributors. The Company’s products sold through agreements with distributors are generally non-exchangeable, non-refundable and non-returnable and, to date, the Company has not granted to any of its distributors any rights of price protection or stock rotation. Accordingly, the Company considers its distributors as end-users for revenue recognition purposes. On January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). In accordance with ASC 606, The Company determines revenue recognition through the following five steps: ● Identification of the contract, or contracts, with a customer; ● Identification of the performance obligations in the contract; ● Determination of the transaction price; ● Allocation of the transaction price to the performance obligations in the contract; and ● Recognition of revenue when, or as, the Company satisfies a performance obligation. A contract with a customer exists when all of the following criteria are met: the parties to the contract have approved it (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations, the Company can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”), the Company can determine the transaction price for the goods or services to be transferred, the contract has commercial substance and it is probable that the Company will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. Revenues are recognized when, or as, control of services or products is transferred to the customers at a point in time or over time, as applicable to each performance obligation. Revenues are recorded in the amount of consideration to which the Company expects to be entitled in exchange for performance obligations upon transfer of control to the customer, excluding amounts collected on behalf of other third parties and sales taxes. Revenues from sales of GlucoTrack devices are recognized when the control of the product passed to the customer (usually upon delivery). F- 10 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) L. Research and development expenses Research and development expenses are charged to operations as incurred. M. Royalty-bearing grants Royalty-bearing grants from the OCS to fund approved research and development projects are recognized at the time Integrity Israel is entitled to such grants, on the basis of the costs incurred and reduce research and development costs. The cumulative research and development grants received by Integrity Israel from inception through December 2004 amounted to $93 thousand. Integrity Israel has not received any research and development grants since December 2004. N. Warranty The Group provides a 24-month warranty for its products at no cost. The Group estimates the costs that may be incurred during the warranty period and records a liability for the amounts of such costs at the time revenues are recognized. For the year ended December 31, 2020 and 2019 warranty expenses were clearly insignificant. O. Basic and diluted income (loss) per share Basic income (loss) per share is computed by dividing the income (loss) for the period applicable for Common Stockholders by the weighted average number of shares of Common Stock outstanding during the period. Securities that may participate in dividends with the Common Stock are considered in the computation of basic income per share using the two-class method. However, in periods of net loss, such participating securities are not included since the holders of such securities do not have a contractual obligation to share the losses of the Company. During the reported period, there were no such participating securities. In computing, diluted loss per share, basic earnings per share are adjusted to reflect the potential dilution that could occur upon the exercise of options or warrants issued or granted using the “treasury stock method” and upon the conversion of Preferred Stock using the “if-converted method”, if the effect of each of such financial instruments is dilutive. P. Stock-based compensation The Group measures and recognizes the compensation expense for all equity-based payments to employees based on their estimated fair values in accordance with ASC 718, “Compensation-Stock Compensation”. Share-based payments including grants of stock options are recognized in the statement of operations as an operating expense based on the fair value of the award at the date of grant. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model. The Group has expensed compensation costs, net of estimated forfeitures, applying the accelerated vesting method, over the requisite service period or over the implicit service period when a performance condition affects the vesting, and it is considered probable that the performance condition will be achieved. Until December 31, 2018 the Company applied ASC 505-50, “ Equity-Based Payments to Non-Employees ” (“ASC 505”) with respect to options and warrants issued to non-employees, which required the use of option valuation models to measure the fair value of the options and warrants at the measurement date. Commencing January 1, 2019, following the adoption of ASU 2018-07, which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees (with certain exceptions), share-based payments to non-employees are accounted in accordance with ASC 718. F- 11 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) Q. Fair value of financial instruments ASC Topic 825-10, “Financial Instruments” defines financial instruments and requires disclosure of the fair value of financial instruments held by the Group. The Group considers the carrying amount of cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable and other current liabilities balances, to approximate their fair values due to the short-term maturities of such financial instruments. ASC Topic 825-10, establishes the following fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. Level 3 - Unobservable inputs are used when little or no market data is available. Level 3 inputs are considered as the lowest priority under the fair value hierarchy. The Group did not estimate the fair value of the long-term loans from stockholders since their repayment schedule has not yet been determined. R. Concentrations of credit risk Financial instruments that potentially subject the Group to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and restricted cash. Cash and cash equivalents and restricted cash are deposited with major banks in Israel and the United States of America. Management believes that such financial institutions are financially sound, accordingly, minimal credit risk exists with respect to these financial instruments. The Group does not have any significant off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements. As of December 31, 2020, the balances of accounts receivable was not material and accordingly such balances do not represent substantial concentration of credit risk. S. Contingencies The Group records accruals for loss contingencies arising from claims, litigation and other sources when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. Legal costs incurred in connection with loss contingencies are expensed as incurred. F- 12 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) T. Warrants with Down-Round Protection Commencing January 1, 2018 and following the early adoption of Accounting Standard Update (ASU) No. 2017-11, “Earnings Per Share” (ASU 2017-11), the Company disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Based on its evaluation, management has determined that such warrants with Down-Round Protection are eligible for equity classification. In accordance with the provisions of ASU 2017-11, upon the occurrence of an event that triggers a down round protection (i.e., when the exercise price of the warrants is adjusted downward because of the down round feature), the effect is accounted for as a deemed dividend and as a reduction of income available to common shareholders for purposes of basic earnings per share (EPS) calculation. U. Modification of equity-classified contracts The modification or exchange of equity-classified contracts, such as warrants that were classified as equity before the modification or exchange and remained eligible for equity classification after the modification, is accounted for in a similar manner to a modification of stock-based compensation. Accordingly, the incremental fair value from the modification or exchange (the change in the fair value of the instrument before and after the modification or exchange) is recognized as a reduction of, retained earnings (accumulated deficit) as a deemed dividend. Modifications or exchanges that result in a decrease in the fair value of an equity-classified share-based payment awards are not recognized. In addition, the amount of the deemed dividend is also recognized as an adjustment to earnings available to common shareholders for purposes of calculating earnings per share. V. Operating Lease The Company entered into several non-cancelable lease agreements for real estate, and vehicles for use in its operations, which are classified as operating leases. Commencing January 1, 2019, the Company adopted ASC Update 2016-02, Leases (Topic 842). The Company used the effective date as the date of initial application. Consequently, the effect of the adoption was reflected through a cumulative-effect adjustment. However, the adoption did not affect the financial statements. The Company determines if an arrangement is a lease at inception. Under the new guidance, arrangements meeting the definition of a lease are classified as operating or financing leases. A classification of a lease is determined based on the following criteria: 1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. 2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. 3. The lease term is for the major part of the remaining economic life of the underlying asset (Generally, 75% or more of the remaining economic life of the underlying assets). 4. The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset (Generally, 90% or more of the fair value of the underlying asset). 5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. If any of these five criteria is met, the lease is classified as a finance lease. Otherwise, the lease is classified as an operating lease. Leases are recorded on the consolidated balance sheet as both a right of use asset and a lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset results in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred. The Company also elected the short-term lease recognition exemption for all leases that qualify (leases with a term shorter than 12 months). For those leases, right-of-use assets or lease liabilities are not recognized and rent expense is recognized on a straight-line basis over the lease term. The Company had no material capital leases throughout the reporting periods. See note 4 for further discussion. F- 13 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) W. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications did not have significant effect on the reported results of operations, shareholder’s deficit or cash flows. X. Recently issued accounting pronouncements not yet adopted Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” In June 2016, The FASB has issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today are still permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. On November 2019, the FASB issued ASC Update Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) – Effective dates, which, among other provisions the effective date of ASU 2016-13 was amended as follows 3. Public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies (SRCs) as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. 4. All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As the company is eligible to considered as smaller reporting company ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The adoption of this standard is not expected to result in a material impact to the Company’s financial statements. F- 14 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 3 – INVENTORIES Inventory In thousand of US dollars December 31, 2020 December 31, 2019 2020 2019 Raw materials 95 18 Work in process 155 86 Finished products 34 80 284 184 NOTE 4 – LEASES The Company has entered into several non-cancellable operating lease agreements for the Company’s offices and three vehicles. the Company’s leases have original lease periods expiring between 2020 and 2023. Payments due under such lease contracts include primarily fixed payments. the Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. the company’s 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: In thousand of US dollars December 31, 2020 Operating lease cost: Office space 101 Vehicles 71 172 Remaining Lease Term Office space 0.67 years Vehicles 2.33 years Weighted Average Discount Rate Office space 10 % Vehicles 10 % F- 15 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 4 – LEASES (cont.) The following is a schedule, by years, of maturities of operating lease liabilities as of December 31, 2020: In thousand of US dollars December 31, 2020 Period: 2021 136 2022 28 2023 12 Total operating lease payments 176 Less: imputed interest 10 Present value of lease liabilities 166 NOTE 5 – PROPERTY AND EQUIPMENT, NET Property and Equipment In thousand of US dollars December 31, 2020 December 31, 2019 Computers 380 349 Furniture and office equipment 312 270 Leasehold improvements 82 50 774 669 Less – accumulated depreciation (625 ) (535 ) 149 134 During the years ended December 31, 2020 and 2019, depreciation expenses amounted to $47 and $51 thousand respectively, and new equipment purchases amounted to $53 and $23 thousand, respectively. NOTE 6 – OTHER CURRENT LIABILITIES Other Current Liabilities In thousand of US dollars December 31, 2020 December 31, 2019 Employees and related institutions 244 195 Accrued expenses and other 148 401 392 596 F- 16 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 7 – LINE OF CREDIT As of December 31, 2020, the Group did not have a credit line with any institution. NOTE 8 – LONG-TERM LOANS FROM STOCKHOLDERS During the years 2003-2004, Integrity Israel received loans from stockholders (four separate lenders) in a total amount of approximately $400 thousand. However, following the repayment of the entire balance to creatio1n lender in 2015, the remaining balance as of December 31,2020 is approximately $197 thousand. The loans are indexed to the Israeli consumer price index from their origination date and near no insert. The Group will be required to pay the loans, in quarterly installments, commencing on the first quarter following the first fiscal year in which the Group reports net profit in its annual report. At such time, the Group will be required to make quarterly payments equal to 10% of its total sales for each quarter until the loans have been repaid in full. Notwithstanding the repayment mechanism, the Group will not be required to repay the loans during any period in which such payment would cause a deficit in the Group’s working capital. As of December 31, 2020, the Group does not expect to make any additional material repayments during the following 12-month period, if any, and accordingly the entire remaining balance of the loans from stockholders have been presented as long-term liabilities. F- 17 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 9 – COMMITMENTS AND CONTINGENT LIABILITIES A. On March 4, 2004, the OCS provided Integrity Israel with a grant of approximately $93 thousand (NIS 420 thousand), for its plan to develop a non-invasive blood glucose monitor (the “Development Plan”). Integrity Israel is required to pay royalties to the OCS at a rate ranging between 3-5% of the proceeds from the sale of the Group’s products arising from the Development Plan up to an amount equal to $93 thousand, plus interest at LIBOR from the date of grant. As of December 31, 2020, the remaining contingent liability with respect to royalty payment on future sales equals approximately $43 thousand, excluding interest. Such contingent obligation has no expiration date. As of December 31, 2020, and 2019, the Group accrued royalties to the OCS in insignificant amounts. B. Integrity Israel leases approximately 5,500 sq. ft. of office space in the city of Ashdod, Israel for its principal offices. The lease term began on December 1, 2015 for a period of 5 years which has been extended on august 2020 for an additional 1 year at the option of the Company. Monthly lease payments including maintenance approximate $10 thousand. The Company estimates that its minimal rent and maintenance payments for the remaining original lease term, will approximate $120 thousand Per year over each of the next 9 months. In connection with the lease agreement, Integrity Israel provided the landlord a bank guarantee in the amount of approximately $43 thousand. (NIS 137 thousand.) that can be exercised by the landlord in the case Integrity Israel fails to pay the monthly rent payments. The guarantee is renewed on an annual basis for a period of 4 years and is secured by funds on deposit with the bank, which generally must be sufficient to cover the principal amount guarantee. C. On August 1, 2017 the Company entered into an Advisory Agreement with AGI, pursuant to which the Company retained AGI on a non-exclusive basis to provide certain advisory services to the Company for a period of 9 months which was subsequently extended twice and was in effect to October 31, 2019. The Company paid the Placement Agent approximately $2 million for placement services. and $834 thousand for placement services and Advisory services (see above) in cash during 2020 and 2019. In addition, during the year ending December 31, 2020 and 2019, $756 and $249 thousand, respectively, representing the fair value of warrants issued as consideration for placement agent services to AGI. 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. F- 18 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 10 – COMMON STOCK, AND WARRANTS WITH-DOWN ROUND PROTECTION A. 1. Description of the rights attached to the Common Stock Each share of Common Stock entitles the holder to one vote, either in person or by proxy, on each matter submitted to the approval of the Company’s stockholders. The holders of Common Stock are not permitted to vote their shares cumulatively. A. 2. Description of the Series D units Holders of the Series D Units of the Company (each a “Unit” and, collectively, the “Units”), each consisted of (a) one share (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, at an exercise price of $4.50 per share, one share of Common Stock (collectively, the “Series D-1 Warrants”), (c) a five year warrant to purchase, at an exercise price of $5.75 per share, one share of Common Stock (collectively, the “Series D-2 Warrants”), and (d) a five year warrant to purchase, at an exercise price of $7.75 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”). F- 19 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 10 – COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) A. 2 . Description of the rights attached to the Series D Units (cont.) 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 7% of the aggregate sales price of the Units, plus 3% of the aggregate sales price as a management fee plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Units. In addition, pursuant to the placement agent agreement, the company is 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. B. Stock-based compensation 1. Grants to non-employees a. In connection with the 2017 Offering, the Company has issued to the Placement Agent (a) 5-year warrants to purchase up to 13,815,322 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 the Placement Agent warrants are substantially similar to the terms of the Series D Warrants except that the Placement Agent warrants may also be exercisable on a cashless basis at all times. In connection with February 2020 Offering, the Company has issued to the Placement Agent 5-year warrants to purchase up to 3,750,000 shares of Common Stock at an exercise price of $0.4 per share. During the year ending December 31, 2020 and 2019, $756 and $249 thousand, respectively, representing the fair value of warrants issued as consideration for placement agent services to AGI. 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 As of December 31, 2020, and 2019, the key inputs used in the fair value calculations of the warrant that were affected by the down-round protection were as follows: Fair value calculations – Warrant 31-Dec-20 31-Dec-19 Dividend yield (%) - - Expected volatility (%) 56.32 56.32 Risk free interest rate (%) 2.5 2.5 Expected term of options (years) 5 5 Exercise price (US dollars) 0.4 0.258-5.400 Share price (US dollars) 0.4 0.258 Fair value (US dollars) 0.2 0.003-0.134 2. Grants to employees In August 2007, Integrity Israel’s Board of Directors (“Integrity Israel’s Board”) approved a stock option plan (“Integrity Israel’s plan”) for the grant, without consideration of options exercisable into ordinary shares of NIS 0.01 par value of Integrity Israel to employees, officers and directors of Integrity Israel. The exercise price and vesting period for each grantee of options was determined by Integrity Israel’s Board and specified in such grantee’s option agreement. The options vested over a period of 1-12 quarters based on each grantee’s option agreements. Any option not exercised within 10 years after the date of grant thereof will expire. F- 20 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 10 – COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) B. Stock-based compensation (cont.) 2. Grants to employees (cont.) In July 2010, following the merger with Integrity Israel, the Company adopted the 2010 Share Incentive Plan (the “2010 Share Incentive Plan”), pursuant to which the Company’s Board of Directors is authorized to grant options exercisable into Common Stock of the Company. The purpose of the 2010 Share Incentive Plan is to offer an incentive to employees, directors, officers, consultants, advisors, suppliers and any other person or entity whose services are considered valuable to the Company, as well as to replace the Integrity Israel Plan and to replace all options granted in the past by Integrity Israel. On January 1, 2019, the company issued a ten-year non-qualified stock option to our former President, for the purchase of 75 thousand 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. Effective June, 2020, Erez Ben-Zvi has joined the Company as its Vice President of Product , Mr. Ben-Zvi will lead all sales and marketing activities for Integrity and will serve on the Company’s executive leadership team. The Company granted Mr. Ben-Zvi annual award of NIS 210 thousand worth (approximately $ 61 thousand) of restricted stock units (the “RSU”) effective as of the employee Start Date and on each one-year anniversary following the employee Start Date subject to the approval of the board of directors (the “additional RSU”). The RSU and each of the Additional RSU (if approved by the board of directors), as applicable, shall be based on the stock price at actual the date of grant (and not lower than US$ 0.40 per share). 1/12 of the RSUs shall vest and become nonforfeitable three months following the Start Date, and an additional 1/12 of the RSUs shall vest and become nonforfeitable at the end of every 3-months period thereafter, provided that the employee continues to be employed by the Company at the applicable date of vesting. The vesting schedule shall be also applied to each of the Additional RSUs granted, mutatis mutandis, such that the vesting period of each of the respective Additional RSU shall commence from its actual date of grant Effective November, 2020, Mr. Shalom Shushan has joined the Company as its Chief Technology Officer, Mr. Shushan will lead all technology and research and development activities for Integrity and will serve on the Company’s executive leadership team. The Company granted Mr. Shushan annual award of NIS 90 thousand worth (approximately $27 thousand) of restricted stock units (the “RSU”) effective as of the employee Start Date. Furthermore, on each one-year anniversary following the employee Start Date subject to the approval of the board of directors, Company shall grant the Employee with NIS 60 thousand worth of restricted stock units (the “Additional RSU’’). Both the RSU and each of the Additional RSU (if approved by the board of directors), as applicable, shall be based on the stock price at actual the date of grant (and not lower than US$ 0.40 per share). 1/12 of the RSUs shall vest and become nonforfeitable three months following the Start Date, and an additional 1/12 of the RSUs shall vest and become nonforfeitable at the end of every 3-months period thereafter, provided that the Employee continues to be employed by the Company at the applicable date of vesting. The vesting schedule shall be also applied to each of the Additional RSUs granted to the Employee, mutatis mutandis, such that the vesting period of each of the respective Additional RSU shall commence from its actual date of grant Grants to Employees Number Weighted average exercise price (US$) Balance outstanding of December 31,2018 3,992,610 4.7 Balance exercisable of December 31,2018 2,721,587 $ 4.63 Granted during 2019 75,000 $ 4.5 Forfeited during 2019 (2,039,525 ) $ 4.51 Balance outstanding as of December 31,2019 2,028,085 $ 4.88 Balance exercisable of December 31,2019 1,724,194 $ 4.63 Granted during 2020 - $ - Forfeited during 2020 (335,014 ) $ 4.51 Balance outstanding as of December 31,2020 1,693,071 $ 4.95 Balance exercisable of December 31,2020 1,667,853 4.96 The following tables summarize information about options outstanding at December 31, 2020: Exercise price (US$) Outstanding at December 31, 2020 Exercisable at December 31, 2020 Weighted average remaining contractual life (years) 4.50 1,298,859 1,273,651 6.54 6.25 344,212 344,212 1.19 7.75 50,000 50,000 6.26 1,693,071 1,667,863 F- 21 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 10 – COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.) C. Stock-based compensation (cont.) 2. Grants to employees (cont.) The fair value of options granted to employees during the years ended on December 31, 2019 was estimated at the dates of grant using the Black-Scholes option model. The following are the data and assumptions used: Fair value calculations - Warrant December 31, 2019 Dividend yield (%) - Expected volatility (%) (*) 56.32 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) 0.004-0.134 (*) Due to the low trading volume of the Company’s Common Stock, the expected volatility for 2019 grants was based on a sample of 248 companies operating in the Healthcare Products industry, respectively. (**) The Common Stock price, per share for the year ended December 31, 2019 reflects the Company’s management’s estimation of the fair value per share of Common Stock. In reaching its estimation for December 31, 2019, management considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series D Units. NOTE 11 – RESEARCH AND DEVELOPMENT EXPENSES In thousand of US dollars R&D Salaries December 31, 2020 December 31, 2019 Salaries and related expenses 754 1,268 Professional fees 462 32 Regulations related 96 28 Patents 68 80 Materials 73 97 Depreciation 32 32 Vehicle maintenance 47 58 Other - 11 1,532 1,606 F- 22 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 12 – SELLING AND MARKETING EXPENSES Selling and Marketing December 31, 2020 December 31, 2019 Salaries and related expenses 404 473 Professional fees 11 65 Travel & expenses - 9 Exhibitions and Shows - 26 415 573 NOTE 13 – GENERAL AND ADMINISTRATIVE EXPENSES In thousand of US dollars General and Administrative December 31, 2020 December 31, 2019 Salaries and related expenses 368 904 Professional fees 694 497 Travel & expenses 7 31 Depreciation 15 18 Insurance 73 59 Vehicle maintenance 28 26 1,185 1,535 F- 23 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 14 – INCOME TAX A. Measurement of results for tax purposes under the Israeli Income Tax (Inflationary Adjustments) Law, 1985 (the “Inflationary Adjustment Law”) Commencing January 1, 2008, the results of operations of Integrity Israel for tax purposes have been measured on a nominal basis. B. Tax assessments For federal, state and local income tax purposes the Company remains open for examination by the tax authorities for the tax years from 2017 through 2020 under the general statute of limitations. Notwithstanding, pursuant and subject to the provisions of article 145 of the Income Tax Ordinance, Integrity Israel’s tax returns that were filed with the tax authority up to and including 2016 are considered final. C. Carryforward tax losses As of December 31, 2020, the Company had cumulative net operating losses (NOL) for US federal purposes of approximately $9.3 million. $2.5 million of the federal net operating loss can be carried forward indefinitely and $6.8 million of the federal net operating loss can be offset against taxable income for 20 years that will expire between the years 2030-2037. Integrity Israel has losses carry forward balances for Israeli income tax purposes of approximately $38.9 million to offset against future taxable income for an indefinite period of time. D. The following is a reconciliation between the theoretical tax on pre-tax income, at the tax rate applicable to the Company (federal tax rate) and the tax expense reported in the financial statements: 2020 2019 Pretax income (loss) (2,696 ) (3,516 ) Federal tax rate 21 % 21 % Income tax expenses (benefit) computed at the ordinary tax rate (566 ) (738 ) Non-deductible expenses 10 3 Stock-based compensation 40 33 Tax in respect of differences in corporate tax rates (42 ) (51 ) Return to Provision - (149 ) Losses and timing differences in respect of which no deferred taxes assets were recognized 558 902 - - F- 24 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 14 – INCOME TAX (cont.) E. Deferred taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and income tax reporting purposes. Significant components of the Group’s future tax assets are as follows: 2020 2019 Composition of deferred tax assets: Provision for employee-related obligation 22 25 Non-capital loss carry forwards 10,889 9,826 Valuation allowance (10,912 ) (9,851 ) - - NOTE 15 – LOSS PER SHARE The loss and the weighted average number of shares used in computing basic and diluted loss per share for the years ended December 31, 2020 and 2019 are as follows: 2020 2019 Income (loss) for the period attributable to common stockholders (2,696 ) (3,516 ) 2020 2019 Common shares used in computing Basic loss per share 196,029,360 154,929,064 Common shares used in computing Diluted loss per share (*) 196,029,360 154,929,064 Total weighted average number of Common shares related to outstanding convertible Preferred Stock, options and warrants excluded from the calculations of diluted loss per share (**) 83,809,954 79,562,675 (*) In applying the treasury method, the average market price of Common Stock was based on management estimate For December 31, 2020. management considered, among other things, the price per share in February 2020 offering ($0.4) (**) Shares that will be issued upon exercise of all stock options and warrants, have been excluded from the calculation of the diluted net loss per share for all the reported periods for which net loss was reported because the effect of the common shares issuable as a result of the exercise or conversion of these instruments was anti-dilutive. F- 25 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 16 – SEGMENT INFORMATION The Company operates in one operating segment with negligible income in 2020. All long-lived assets are owned by Integrity Israel and are located in Israel. NOTE 17 – RELATED PARTIES A. Andrew Garrett, Inc., which is controlled by one of our directors, Andrew Sycoff, received during the year ended December 31, 2020, cash approximately $2 million in placement agent fees and 3,750,000 warrants for Placement Agent fees in 2020 from us. During the year ending December 31, 2020 and 2019, $756 and $249 thousand, respectively, representing the fair value of warrants issued as consideration for placement agent services to AGI. 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 F- 26 INTEGRITY APPLICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.) NOTE 18 – SUBSEQUENT EVENTS On February 8, 2021, the Company announced that it has promoted Erez Ben-Zvi to General Manager in addition to his current role as Vice President of Product, effective immediately, with a one-time bonus of $18,000 and an increase in annual compensation of $36,000. Mr. Ben-Zvi will assume the day-to-day responsibilities of David Malka who will be stepping down as President effective April 6, 2021. F- 27