10-Q

UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2016
	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)

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 ☒          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 ☒          No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes ☐          No ☒

As of November 14, 2016, 5,912,702shares of the Company’s common stock, par value $0.001 per share, were outstanding.

INTEGRITY APPLICATIONS, INC.

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION		3
Item 1.	Financial Statements.	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss	4
	Condensed Consolidated Statement of Changes in Stockholders’ Deficit	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	34
Item 4.	Controls and Procedures.	35
PART II - OTHER INFORMATION		36
Item 6.	Exhibits.	36
SIGNATURES		37
EXHIBIT INDEX		38

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INTEGRITY APPLICATIONS, INC.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS

	US dollars (except share data)
	September 30,			December 31,
	2016			2015
	(unaudited)
A S S E T S
Current Assets
Cash and cash equivalents		696,159			608,701
Accounts receivable, net		71,601			18,446
Inventories		674,099			816,223
Other current assets		116,668			268,792
Total current assets		1,558,527			1,712,162
Property and Equipment, Net		262,843			220,463
Long-Term Restricted Cash		36,499			35,152
Funds in Respect of Employee Rights Upon Retirement		171,200			164,883
Total assets		2,029,069			2,132,660
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable		297,034			1,082,546
Other current liabilities		718,284			427,886
Total current liabilities		1,015,318			1,510,432
Long-Term Liabilities
Long-Term Loans from Stockholders		166,457			160,314
Liability for Employee Rights Upon Retirement		180,810			174,137
Warrants with down-round protection		835,080			321,695
Total long-term liabilities		1,182,347			656,146
Total liabilities		2,197,665			2,166,578
Commitments and Contingent Liabilities
Temporary Equity
Convertible Preferred Stock of $ 0.001 par value ("Preferred Stock"):
10,000,000 shares of Preferred Stock authorized as of September 30, 2016 and December 31, 2015
376 shares of Series A Preferred Stock issued and outstanding as of September 30, 2016 and December 31, 2015		221,152			221,152
15,031 shares of Series B Preferred Stock issued and outstanding as of September 30, 2016 and December 31, 2015		6,715,844			6,715,844
5,323 and 0 shares of Series C Preferred Stock issued and outstanding as of September 30, 2016 and December 31, 2015, respectively		2,832,314			-
Total temporary equity		9,769,310			6,936,996
Stockholders' Deficit
Common Stock of $ 0.001 par value ("Common Stock"):
40,000,000 shares authorized as of September 30, 2016 and December 31, 2015; 5,912,702 and 5,690,097 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively		5,914			5,691
Additional paid in capital		24,166,078			22,309,742
Accumulated other comprehensive income		79,785			90,168
Accumulated deficit		(34,189,683	)		(29,376,515	)
Total stockholders' deficit		(9,937,906	)		(6,970,914	)
Total liabilities, temporary equity and stockholders’ deficit		2,029,069			2,132,660

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

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INTEGRITY APPLICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	US dollars (except share data)
	Nine month period ended September 30,						Three month period ended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Revenues		482,177			143,167			11,299			-
Research and development expenses		2,226,833			1,596,494			695,437			560,189
Selling, marketing and general and administrative expenses		2,589,504			1,647,054			802,195			563,292
Total operating expenses		4,816,337			3,243,548			1,497,632			1,123,481
Operating loss		4,334,160			3,100,381			1,486,333			1,123,481
Financing (income) expenses, net		(63,654	)		1,196,926			(31,589	)		(27,511	)
Loss for the period		4,270,506			4,297, 307			1,454,744			1,095,970
Other comprehensive (income) loss:
Foreign currency translation adjustment		10,383			(9,639	)		(19,656	)		46,081
Comprehensive loss for the period		4,280,889			4,287,668			1,435,088			1,142,051
Loss per share (Basic)		(0.84	)		(0.85	)		(0.30	)		(0.22	)
Loss per share (Diluted)		(0.84	)		(0.85	)		(0.30	)		(0.22	)
Common shares used in computing Basic income (loss) per share		5,746,838			5,426,688			5,806,724			5,513,265
Common shares used in computing Diluted income (loss) per share		5,746,838			5,426,688			5,806,724			5,513,265

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

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INTEGRITY APPLICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

	US dollars (except share data)
	(unaudited)
	Common Stock							Accumulated other						Total
	Number of shares		Amount		Additional paid in capital			comprehensive  income			Accumulated deficit			Stockholders’ deficit
Balance as of January 1, 2016		5,690,097		5,691		22,309,742			90,168			(29,376,515	)		(6,970,914	)
Loss for the period of nine months		-		-		-			-			(4,270,506	)		(4,270,506	)
Other comprehensive loss		-		-		-			(10,383	)		-			(10,383	)
Amounts allocated to Series C-1 and Series C-2 Warrants, net		-		-		1,402,606			-			-			1,402,606
Amount classified out of stockholders deficit and presented as Warrants with Down-Round Protection within long-term liabilities		-		-		(341,662	)		-			-			(341,662	)
Incremental fair market value adjustments of modified warrants      issued to placement agent		-		-		211,077			-			-			211,077
Stock dividend on Series C Preferred Stock		33,690		34		80,048			-			(80,082	)		-
Stock dividend on Series B Preferred Stock		188,915		189		448,862			-			(449,051	)		-
Cash dividend on Series A Preferred Stock		-		-		-			-			(13,529	)		(13,529	)
Stock-based compensation		-		-		55,405			-			-			55,405
Balance as of September 30, 2016		5,912,702		5,914		24,166,078			79,785			(34,189,683	)		(9,937,906	)

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

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INTEGRITY APPLICATIONS, INC.

   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	US dollars
	Nine month period ended September 30,
	2016			2015
	(unaudited)
Cash flows from operating activities:
Loss for the period		(4,270,506	)		(4,297,307	)
Adjustments to reconcile income (loss) for the period to net cash used in operating activities:
Depreciation		41,951			29,709
Stock-based compensation		55,405			15,675
Incremental fair market value adjustments of modified warrants issued to placement agent		211,077			-
Change in the fair value of Warrants with down-round protection		(110,498	)		(119,148	)
Linkage difference on principal of loans from stockholders		27			(1,384	)
Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants		-			1,284,354
Changes in assets and liabilities:
Decrease (increase) in accounts receivable		(51,356	)		1,251
Decrease (increase) in inventory		170,274			(180,144	)
Decrease (increase) in other current assets		157,149			(135,485	)
(Decrease) increase in accounts payable		(815,795	)		363,639
Increase (decrease) in other current liabilities		265,983			(68,374	)
Net cash used in operating activities		(4,346,289	)		(3,107,214	)
Cash flows from investing activities:
Increase in funds in respect of employee rights upon retirement		-			(24,279	)
Purchase of property and equipment		(75,269	)		(94,714	)
Net cash used in investing activities		(75,269	)		(118,993	)
Cash flows from financing activities
Cash dividend on Series A Preferred Stock		(13,529	)		(52,361	)
Proceeds allocated to Series C Preferred Stock, net of cash issuance expenses		3,021,063			-
Proceeds allocated to Series C Warrants, net of cash issuance expenses		1,496,077			-
Repayment of loan from stockholders		-			(439,939	)
Net cash provided by (used in) financing activities		4,503,611			(492,300	)
Effect of exchange rate changes on cash and cash equivalents		5,405			(4,195	)
Increase (decrease) in cash and cash equivalents		87,458			(3,722,702	)
Cash and cash equivalents at beginning of the period		608,701			5,827,560
Cash and cash equivalents at end of the period		696,159			2,104,858

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

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INTEGRITY APPLICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)

Supplementary information on financing activities not involving cash flows:

$282,221, representing the fair value of warrants issued as consideration for placement agent services, was accounted for as Warrants with Down-Round Protection within long-term liabilities. Of these direct  issuance expenses, $93,471 was allocated to the Series C-1 and Series C-2 Warrants and was recorded as a reduction of additional paid in capital, and $188,750 was allocated to the Series C Preferred Stock and recorded as a reduction of temporary equity.

$341,662, representing the amount classified out of stockholders deficit and presented as Warrants with Down-Round Protection within long-term liabilities (See Note 2B and Note 3).

$449,051 and  $80,082representing the fair value of the shares of Common Stock issued to owners of Series B Preferred Stock and owners of Series C Preferred Stock, respectively, was accounted for as a stock dividend in the statement of changes in stockholders’ deficit and was charged to accumulated deficit against additional paid in capital and Common Stock therein.

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

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED 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.

B. Going concern uncertainty

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 any material revenues from operations, and therefore they are dependent upon external sources for financing their operations. As of September 30, 2016, the Group has incurred an accumulated deficit of $34,189,683, stockholders’ deficit of $9,937,906and negative operating cash flows.  These factors 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 2012, the Company raised a total amount of approximately $1.0 million (net of related expenses) from the issuance of Common Stock. During 2013, the Company raised funds in an approximate amount of $5.3 million (net of related cash expenses) from the issuance of units (the “Series A Units”) consisting of shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) and detachable warrants to purchase shares of the Company’s Common Stock (the “Series A Warrants” or “Warrants with down round protection”).  During the period between August and December 2014, the Company raised funds in an aggregate amount of approximately $7.3 million (net of related cash expenses) from the issuance of units (the “Series B Units”), each consisting of (a) one share of the Company’s newly designated Series B 5.5% Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”), convertible into Common Stock at an initial conversion price of $5.80 per share, (b) a five year warrant to purchase, at an exercise price of $5.80 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series B Preferred Stock (each a “Series B-1 Warrant”) and (c) a five year warrant to purchase, at an exercise price of $10.00 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series B Preferred Stock (each a “Series B-2 Warrant” and, together with the Series B-1 Warrants, collectively, the “Series B Warrants”).  During the nine month period ended September 30, 2016, the Company raised funds in an aggregate amount of approximately $4.52 million (net of related cash expenses) through the issuance of 5,323 units (the “Series C Units”), each consisting of (a) one share of the Company’s newly designated Series C 5.5% Convertible Preferred Stock, par value $0.001 per share (the “Series C Preferred Stock”), convertible into Common Stock at an initial conversion price of $4.50 per share, (b) a five year warrant to purchase, at an exercise price of $4.50 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-1 Warrant”) and (c) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-2 Warrant” and, together with the Series C-1 Warrants, collectively, the “Series C Warrants”), as described in further detail in Note 3.

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –           GENERAL (cont.)

B. Going concern uncertainty (cont.)

Until such time as the Group generates sufficient revenue to fund its operations (if ever), the Group plans to finance its operations through the sale of equity or equity-linked securities and/or debt securities and, to the extent available, short term and long term loans. There can be no assurance that the Group will succeed in obtaining the necessary financing to continue its operations as a going concern.

C. Risk factors

As described in Note 1A and Note 1B above, 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.

D. 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 fair value estimate of the Warrants with down-round protection, (ii) the allocation of the proceeds and the related issuance costs of the Series C Units, and (iii) the going concern assumptions.

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

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, 2015. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“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, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 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. All intercompany balances and transactions have been eliminated in consolidation.

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

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

B. Warrants with down-round protection

The Company has determined its derivative warrant liability with respect to the Series A Warrants and warrants issued to Andrew Garrett, Inc., (“AGI”) as part of the Series A Unit offering, the Series B Unit offering and the Series C Unit offering to be a Level 3 fair value measurement and has used the Binomial pricing model to calculate its fair value. Because the warrants contain a down round protection feature, the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the valuation calculations.  The key inputs used in the fair value calculations were as follows:

The changes in the fair value of the Level 3 liability are as follows (in US dollars):

	Series A Warrants
	September 30,
	2016			2015
Balance, Beginning of the period		321,695			2,057,618
Warrants issued as consideration for placement services		282,221			-
Amount classified out of stockholders deficit and presented as Warrants with Down-Round Protection		341,662			-
Exchange of Series A Warrants pursuant to the “most favored nation” provision		-			(1,586,831	)
Change in fair value Warrants with Down-Round Protection		(110,498	)		(119,148	)
Balance, End of period		835,080			351,639

The key inputs used in the fair value calculations were as follows:

	September 30,
	2016		2015
Dividend yield (%)		-		-
Expected volatility (%) (*)		62.16		105.14
Risk free interest rate (%)		0.72-1.21		1.01
Expected term of options (years) (**)		1.45-5.00		2.45
Exercise price (US dollars)		4.50-7.75		5.80
Share price (US dollars) (***)		2.38		2.31
Fair value (US dollars)		0.26-0.60		0.92

(*) Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on the historical volatility of the share price of other public companies that operate in the same industry sector as the Company.

(**) Due to the fact that the Company does not have sufficient historical exercise data, the expected term was determined based on the "simplified method" in accordance with Staff Accounting Bulletin No. 110.

(***) The Common Stock price, per share reflects the Company’s management’s estimation of the fair value per share of Common Stock as of September 30, 2016 and 2015. 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 C Units and the Series B Units, as applicable to each reporting period (See Note 3).

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

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

C. Recently issued accounting pronouncements

1. Accounting Standards Update 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity”

Effective January 1, 2016, the Group adopted Accounting Standard Update 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity ("ASU 2014-16").

The amendments in ASU 2014-16 clarify how U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weigh those terms and features. The assessment of the substance of the relevant terms and features should incorporate a consideration of the characteristics of the terms and features themselves; the circumstances under which the hybrid financial instrument was issued or acquired; and the potential outcomes of the hybrid financial instrument, as well as the likelihood of those potential outcomes.

The amendments in ASU 2014-16 apply to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of shares.

The effects of initially adopting the amendments in ASU 2014-16 were required to be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of shares as of the beginning of the fiscal year for which the amendments are effective. However, retrospective application was permitted to all relevant prior periods.

Management analyzed the economic characteristics and risks of the Series A Preferred Stock and the Series B Preferred Stock (including the embedded conversion feature of each) in accordance with the provisions of ASU 2014-16 and determined that such instruments are considered as more akin to equity than debt. Accordingly, it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those of the Preferred Stock themselves (the 'host contract') are clearly and closely related and accordingly, the embedded conversion feature was not required to be bifurcated. As a result of the above determination, ASU 2014-16 did not impact the classification of the Series A Preferred Stock or the Series B Preferred Stock.

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

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

C. Recently issued accounting pronouncements (cont.)

2. Accounting Standards Update 2014-09, “Revenue from Contracts with Customers”

In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").

ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

An entity should apply the amendments in ASU 2014-09 using one of the following two methods: 1. Retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures.

During 2016, the FASB issued several Accounting Standard Updates (“ASUs”) that focus on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements and Practical Expedients, Principal versus Agent Considerations and Identifying Performance Obligations and Licensing.

In accordance with a recent amendment to ASU 2014-09, introduced by Accounting Standard 2015-14, “Revenue from contracts with Customers – Deferral of the Effective Date”, for a public entity, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

The Company is in the process of assessing the impact, if any, of ASU 2014-09 (including the amendments introduced through recent ASUs) on its consolidated financial statements.

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

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

C. Recently issued accounting pronouncements (cont.)

3. Accounting Standards Update 2014-15, “Presentation of Financial Statements—Going Concern”

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15").

ASU 2014-15 provides guidance on management’s responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued, when applicable).

ASU 2014-15 also provides guidance related to the required disclosures as a result of management’s evaluation. 

The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

Due to the current financial condition of the Company and the existing uncertainty regarding its ability to continue as a going concern, management does not believe that the provisions of ASU 2014-15 will have a significant effect on its evaluation of the Company’s ability to continue as a going concern. However, management is currently considering if additional disclosures will be required as a result of ASU 2014-15.

4. Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory”

In July, 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11").

ASU 2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and the retail inventory method (RIM) are not impacted by the new guidance. Prior to the issuance of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin).

For a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periods beginning after December 15, 2016, including interim periods within the first such annual reporting period (the first quarter of fiscal year 2017 for the Company). Early adoption is permitted as of the beginning of an interim or annual reporting period.

The Company is in the process of assessing the impact, if any, of ASU 2015-11 on its consolidated financial statements.

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 3 –       RECENT EVENTS

A. During February 2016, 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. As consideration for such services, the Company extended through December 31, 2019, the expiration date of 422,077 warrants issued to AGI and/or its designees in connection with the Company’s common stock offering completed in 2010 and the Series A Unit offering completed in 2012. The Advisory Agreement had an initial term of six months, subject to automatic renewal for additional 30 day terms unless terminated by either party with 30 days written notice.  In April 2016, the Company and AGI amended that Advisory Agreement to extend the term of the Advisory Agreement for an additional six months.  In consideration for such extension, the Company agreed to modify the terms of the 439,674 warrants issued to AGI and/or its designees in connection with the Series B Unit offering to include full-ratchet anti-dilution protection. As a result of the two agreements the Company recorded in its statement of operations for the nine month period ended September 30, 2016, a one-time charge in the amount of $211,077 representing the incremental fair market value adjustments in respect of the above modified warrants issued to the placement agent. Such incremental fair market value adjustments represent the increase in the fair value of the warrants resulting from the above modifications and were recorded against stockholders’ deficit. In addition, as a result of the inclusion of anti-dilution protection, the Company classified $341,662, representing the fair market value at April 2016 of the above 439,674 warrants issued to AGI out of stockholders deficit and presented them as Warrants with down round protection within long-term liabilities.

B. During the nine month period ended September 30, 2016, the Company raised funds in an aggregate amount of approximately $4.52 million (net of related cash expenses) from the issuance in six separate closings of 5,323 Series C Units. As of September 30, 2016, the shares of Preferred Stock comprising the Series C Units are convertible into an aggregate of 1,186,000 shares of Common Stock, and the Series C Warrants comprising the Series C Units are exercisable for an aggregate of 2,372,000 shares of Common Stock, in each case subject to adjustment as described below.

Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with AGI, at the initial closing of the sale of the Series C Units the Company paid AGI, as a commission, an amount equal to 6% of the aggregate sales price of the Series C Units, plus 4% 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 Series C Units. At the end of the second, third, fourth, fifth and sixth closings of the sale of the Series C Units, the Company paid AGI, as a commission, an amount equal to 10% of the aggregate sales price of the Series C Units sold in such closing, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Series C Units sold in such closing. In addition, pursuant to the Placement Agent Agreement, the Company is required to issue to AGI: (a) 5 year warrants to purchase up to 237,201 shares of Common Stock at an exercise price of $4.50 per share and (b) 5 year warrants to purchase up to 118,600 shares of Common Stock at an exercise price of $7.75 per share. The terms of such warrants will be substantially similar to the Series C Warrants except that the warrants issued to AGI will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection.

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 3 –       RECENT EVENTS (cont.)

Subject to certain ownership limitations described below, the Series C Preferred Stock is convertible at the option of the holder at any time and from time to time into shares of Common Stock at a conversion price of $4.50 per share (calculated by dividing the stated value per share of Preferred Stock, which is initially $1,000, by the conversion price per share). The conversion price of the Series C Preferred Stock is subject to adjustment for certain issuances of Common Stock or other securities of the Company at an effective price per share that is lower than the conversion price then in effect, as well as for stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders. In addition, the holders of Preferred Stock will be entitled to receive any securities or rights to acquire securities or property granted or issued by the Company pro rata to the holders of Common Stock to the same extent as if such holders had converted all of their shares of Series C Preferred Stock prior to such distribution. In the event of a fundamental transaction, such as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations of the Company, the holders of Series C Preferred Stock will be entitled to receive, upon conversion of their shares of Series C Preferred Stock, any securities or other consideration received by the holders of the Common Stock pursuant to the fundamental transaction.

Holders of Series C Preferred Stock are entitled to receive cumulative dividends at a rate of 5.5% per annum, based on the stated value per share of Series C Preferred Stock. Dividends on the Series C Preferred Stock are payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on June 30, 2016, and on each conversion date (with respect to the shares of Preferred Stock being converted). For so long as required under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock or Series B Preferred Stock, dividends will be payable only in shares of Common Stock. Thereafter, dividends on the Series C Preferred Stock will be payable, at the option of the Company, in cash and/or, if certain conditions are satisfied, shares of Common Stock or a combination of both. Shares of Common Stock issued as payment of dividends will be valued at the lower of (a) the then current conversion price of the Series C Preferred Stock or (b) the average of the volume weighted average price for the Common Stock on the principal trading market therefor for the 10 trading days immediately prior to the applicable dividend payment date. The Company will incur a late fee of 9% per annum, payable in cash, on dividends that are not paid within three trading days of the applicable dividend payment date.

Subject to any limitations under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock or Series B Preferred Stock, the Company may become obligated to redeem the Series C Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series C Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series C Preferred Stock will have the option to require the Company to redeem such holder’s shares of Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series C Preferred Stock.

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 3 –       RECENT EVENTS (cont.)

Subject to certain conditions contained in the Certificate of Designations, Preferences and Rights relating to the Series C Preferred Stock (the “Certificate of Designations”), the Company will have the option to force the conversion of the Series C Preferred Stock (in whole or in part) if (a) the volume weighted average price for the Common Stock on its principal trading market exceeds $7.00 for each of any 20 trading days during any 30 consecutive trading day period and the average daily dollar trading value for the Common Stock during such 30 day period exceeds $50,000 or (b) the Company receives approval to list the Common Stock on a national securities exchange.

Subject to certain exceptions contained in the Certificate of Designations, if the Company fails to timely deliver certificates for shares of Common Stock issuable upon conversion of the Series C Preferred Stock (the “Conversion Shares”) and, as a result, the holder is required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder of the Conversion Shares (a “Buy-In”), the Company will be required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by which such holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate number of Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Series C Preferred Stock equal to the number of shares of Series C Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements. In addition, the Company will be required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series C Preferred Stock which have been converted by a holder and in respect of which the Company fails to deliver Conversion Shares by the fifth trading day following the applicable conversion date and the Company will continue to pay such partial liquidated damages for each trading day after such eighth trading day until such certificates are delivered or the holder rescinds such conversion.

As long as at least 35% of the originally issued shares of Series C Preferred Stock are outstanding, without the written consent of the holders of a majority in stated value of the outstanding Series C Preferred Stock, the Company will not be permitted to, among other things, incur indebtedness or liens not permitted under the Certificate of Designations; repay, repurchase, pay dividends on or otherwise make distributions in respect of any shares of Common Stock or other securities junior to the Series C Preferred Stock; enter into certain transactions with affiliates of the Company; or enter into any agreement with respect to the foregoing.

Subject to the beneficial ownership limitation described below, holders of Series C Preferred Stock will vote together with the holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock on an as-converted basis. Holders will not be permitted to convert their Series C Preferred Stock if such conversion would cause such holder to beneficially own more than 4.99% of the outstanding Common Stock (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days prior written notice to the Company) (the “Beneficial Ownership Limitation”). In addition, no holder may vote any shares of Series C Preferred Stock (on an as-converted to Common Stock basis) in excess of the Beneficial Ownership Limitation.

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 3 –       RECENT EVENTS (cont.)

Subject to certain limitations, so long as any purchaser holds any shares of Series C Preferred Stock, if (a) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (b) a purchaser then holding Series C Preferred Stock, Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such purchaser after taking into account all of the terms and conditions of the terms granted to the purchasers under the purchase agreement and the terms granted in such subsequent issuance or sale, including all of the components of the Series C Units and of the securities or units involved in such subsequent issuance or sale, then the purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such purchaser).

The Series C Warrants have a five-year term commencing on their respective issuance dates. Until the end of the applicable term, each Series C Warrant will be exercisable at any time and from time to time at an exercise price of $4.50 per share (with respect to the Series C-1 Warrants) or $7.75 per share (with respect to the Series C-2 Warrants). The Series C Warrants contain adjustment provisions substantially similar to those to the adjustment provisions of the Series C Preferred Stock as described above, except that the Series C Warrants do not include dilution protection for issuances of securities at an effective price per share lower than the conversion price of such Series C Warrants. In addition, the Series C Warrants provide for protection for a Buy-In on substantially the same terms as described above with respect to the Series C Preferred Stock. No holder may exercise its Series C Warrants in excess of the Beneficial Ownership Limitation.

As a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the Series A Warrants, on April 8, 2016, the exercise price per share of the Series A Warrants decreased from $5.80 per share to $4.50 per share and the number of shares of Common Stock issuable upon exercise of each of the Series A Warrants, in the aggregate, increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, will be equal to the aggregate exercise price prior to such adjustment. Also as a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the certificates of designations for the Series A Preferred Stock and Series B Preferred Stock, on April 8, 2016, the conversion price per share of Series A Preferred Stock and Series B Preferred Stock decreased to $4.50 per share.

Based on the terms of the purchase agreements relating to the issuance and sale of the Series A Units and the Series B Units, respectively, so long as any initial purchaser of Series A Units or Series B Units, as applicable (each, a “Purchaser”) holds any shares of Series A Preferred Stock or Series B Preferred Stock, as applicable, if (1) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (2) a Purchaser then holding Series A or Series B Preferred Stock or Warrants reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such Purchaser, then the Purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such Purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such Purchaser).

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 3 –       RECENT EVENTS (cont.)

Pursuant to the purchase agreements relating to the issuance and sale of the Series A Units and the Series B Units, the Company was required to and did notify the holders of the Series A Preferred Stock and Series B Preferred Stock of the closing of the sale of the Series C Units,and following receipt thereof such holders of Series A Preferred Stock and Series B Preferred Stock will be entitled, pursuant to the “most favored nation” provisions contained in their respective purchase agreements (as described above), to elect to amend the terms of their purchase of Series A Units and Series B Units, respectively, to match the terms of the Series C Units. The Company is obligated to amend the terms of any of Series A Units or Series B Units who timely makes such election and tenders its Series A Units or Series B Units for exchange.

Upon initial recognition, the Series C Preferred Stock issued together with detachable Series C Warrants (classified as equity) were measured based on the relative fair value basis and were presented net of the direct issuance expenses that were allocated to them.

The Company has determined that due to the economic characteristics and risks of the Series C Preferred Stock, based on their stated or implied substantive terms and features, that such Preferred Stock, are considered as more akin to equity than debt. Accordingly, it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those of the Series C Preferred Stock themselves (the 'host contract') are clearly and closely related. As a result, the embedded conversion feature was not required to be bifurcated.

Since at the issuance dates of the Series C Preferred Stock, the exercise price of the conversion feature (based on the effective conversion rate of the Series C Preferred Stock into Common Stock) was higher than the estimated fair value of the Company’s Common Stock, it was determined that the conversion feature was not beneficial. Also, due to the liquidation preference and certain redemption rights for the benefit of the holders of the Series C Preferred Stock, upon the occurrence of the certain contingent events, which are not considered as solely within the Company's control management determined that the Series C Preferred Stock were to be presented as temporary equity. On each balance sheet date, the Company’s management assesses the probability of redemption of the outstanding Preferred Stock. In the event that management determines such redemption to be probable as of an applicable balance sheet date, the Company will recognize a liability in an amount equal to the aggregate redemption price of the Preferred Stock. In addition, upon such determination, the difference between the amount that was allocated to the Preferred Stock (after deduction of issuance expenses) and such redemption amount will be accreted over the period beginning on the date that it becomes probable that the instrument will become redeemable and ending on the earliest redemption date.

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 4 –       INVENTORIES

	US dollars
	September 30,		December 31,
	2016		2015
	(unaudited)
Raw materials		169,446		205,645
Work in process		408,600		551,111
Finished products		96,053		59,467
		674,099		816,223

NOTE 5 –       FINANCING (INCOME) EXPENSES, NET

	US dollars						US dollars
	Nine month period ended September 30,						Three month period ended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Israeli CPI linkage difference on principal of loans from stockholders		27			(1,384	)		666			488
Exchange rate differences		33,329			23,877			9,118			(14,392	)
Change in fair value of Warrants with down round protection		(110,498	)		(119,148	)		(46,286	)		(27,839	)
Interest expenses on credit from banks and other		13,488			9,227			4,913			849
Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants		-			1,284,354			-			13,383
		(63,654	)		1,196,926			(31,589	)		(27,511	)

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INTEGRITY APPLICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 6 –       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 dividend 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, 2016 and 2015 are as follows:

	US dollars						US dollars
	Nine month period ended September 30,						Three month period ended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Loss for the period		(4,270,506	)		(4,297, 307	)		(1,454,744	)		(1,095,970	)
Cash dividend on Series A Preferred Stock		(13,529	)		(52,361	)		(4,076	)		(5,325	)
Stock dividend on Series B Preferred Stock		(449,051	)		(270,307	)		(194,950	)		(84,512	)
Stock dividend on Series C Preferred Stock		(80,082	)		-			(59,727	)		-
Loss for the period attributable to common stockholders		(4,813,168	)		(4,619,975	)		(1,713,497	)		(1,185,807	)

	Number of shares				Number of shares
	Nine month period ended September 30,				Three month period ended September 30,
	2016		2015		2016		2015
Number of shares:
Common shares used in computing basic income (loss) per share		5,746,838		5,426,688		5,806,724		5,513,265
Common shares used in computing diluted income (loss) per share		5,746,838		5,426,688		5,806,724		5,513,265
Total weighted average number of common shares related to outstanding convertible Preferred Stock, options and warrants excluded from the calculations of diluted income (loss) per share (*)		12,125,368		9,425,407		13,915,740		9,539,832

 (*) All outstanding convertible Preferred Stock, 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 anti-dilutive.

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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 or 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 capital raising and financing, revenues, product development, 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, 2015. 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

Integrity is a medical device company focused on the design, development and commercialization of non-invasive glucose monitoring devices for use by people with diabetes and pre-diabetics. Integrity Israel was founded in 2001 with a mission to develop, produce and market non-invasive glucose monitors for home use by diabetics. We have developed a non-invasive glucose monitor, the GlucoTrack® model DF-F glucose monitoring device, which is designed to help people with diabetes and pre-diabetics obtain 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 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 or interstitial fluid.

In June 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”). This original approval required that the device be re-calibrated every 30 days, with each such re-calibration taking between 2.5 and 3 hours to complete. In March 2014 we received CE Mark approval for six months calibration validity of the same device. This approval eliminates the need for monthly re-calibrations, and enables the calibration process to be conducted only when the sensor is replaced, once every 6 months. We believe that this feature of the GlucoTrack® model DF-F is a significant feature of the 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. However, although the MDD is applicable throughout the EU, in practice it does not ensure uniform regulation throughout the EU.  Accordingly, member countries may apply and enforce the MDD’s terms differently, and certain EU member countries may request or require performance and/or safety data additional to the MDD’s requirements from time to time, on a case-by-case basis. The CE Mark also permits the sale in countries that have an MDD Mutual Recognition Agreement with the EU.

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On August 31, 2015, we received approval from the Notified Body for improvements to the GlucoTrack® model DF-F to 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 also people 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, including software updates and other improvements of the device that do not affect the intended use and/or safety performances. 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 reduce the time to market for product sales on new,  enhanced or modified GlucoTrack® model DF-F devices.

The GlucoTrack® model DF-F has not yet been approved for commercial sale in the United States. On August 10, 2015, we submitted pre-submission documents to the U.S. Food and Drug Administration (the “FDA”) in connection with our proposed future application for FDA approval of our U.S. clinical trial protocol.  The pre-submission documentation was submitted to the FDA in order to obtain the FDA’s guidance regarding the U.S. regulatory pathway for the GlucoTrack® model DF-F, the proper approach to refining the trial protocol, and preparing the pre-marketing application. On October 19, 2015, we met with the FDA to discuss the pre-submission documents, including the approach to and details of the clinical trial protocol for the GlucoTrack® model DF-F. On May 10, 2016 we submitted a pre-submission supplement (including clinical trial protocol) to the FDA which reflects the feedback received from the FDA at our October 2015 meeting. On July 18, 2016, we completed a teleconference with the FDA to further discuss our pre-submission supplement. At the end of this discussion, we received verbal confirmation from the FDA that clinical trials of the GlucoTrack® model DF-F constitute non-significant risk device studies, which allows the trials to proceed without an Investigational Device Exemption (IDE) application. Such trials are assessed by the FDA and not considered to present a potential for serious risk to the health, safety or the welfare of subjects. We have identified and are currently negotiating agreements with two US diabetes and endocrinology institutions in the United States, as well as prominent endocrinologists to conduct the clinical trials as Prime Investigators. Subject to finalization of these agreements and to raising sufficient funds to do so, we expect to begin clinical trials in the United States in the fourth quarter of 2016 or first quarter of 2017.

We are continuing to work on improvements of certain features of the GlucoTrack® model DF-F, such as further simplifying the calibration process and improving the accuracy of the device.  Clinical trials conducted recently in Germany by Pfutzner Science & Health Institute, GmbH, headed by Prof. Dr. Andreas Pfutzner, on subjects with Type 2 diabetes and pre-diabetics, as well as at Soroka University Medical Center, Beer-Sheva, Israel, demonstrated favorable results, which were presented by the Company in the 16th annual Diabetes Technology Meeting (DTM), Bethesda, MD in an invited presentation on November 10.  Most notably, the presentation included data supporting that GlucoTrack’s accuracy has been improved significantly. Results from the trials show 99.7% of the study data points within the clinically accepted A and B zones of the Consensus Error Grid (type 2), 99.3% of the study data points were within the clinically accepted A and B zones of the Clarke Error Grid, 17.0% Mean Absolute Relative Difference, and 12.9% Median Absolute Relative Difference. In addition, the German trial concluded that the data confirms the performance of the GlucoTrack® among its intended users, including pre-diabetic patients.

In addition, we are developing a wireless module (“WLM”) with embedded Bluetooth Low-Energy (BLE) and Wi-Fi technologies, which we expect will enable transmission of measurement data captured by the GlucoTrack® model DF-F to a cloud based server. We expect this module and the related applications, if successfully developed, to enable easy sharing, viewing and analysis of GlucoTrack® model DF-F glucose measurements and profile by clinicians and others. Subject to our raising sufficient funds to do so, we expect to complete the development of the WLM and related smartphone application as soon as the first quarter of 2017.

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Since receiving CE Mark approval for our GlucoTrack® model DF-F glucose monitoring device, we have expanded our primary focus to include, in addition to research and development activities, preparation for anticipated future mass-production and distribution of the GlucoTrack® model DF-F in EU member countries and other countries that have an MDD Mutual Recognition Agreement with the EU, as well as other countries which consider the CE Mark as a reference for their regulatory or registration requirements. We have entered into exclusive distribution agreements with more than 15 distributors, and we are continuing negotiations with distributors in additional territories. The effectiveness of these agreements, in many cases, is subject to the receipt of local regulatory approval or registration, if required, for the commencement of sales of the GlucoTrack® model DF-F in the subject territory.  We cannot provide any assurance that we will receive the required local regulatory approvals in any of the countries in which such approvals are required, and therefore we may never be permitted to commence commercial sales of our products in such territories. Further discussions with other potential distributors are in different stages. We recently signed a distribution agreement with a leading Taiwanese company and switched to a new Turkish distributor. Sales in Taiwan are subject to prior regulatory approval. Our new local distributor in Taiwan is negotiating with the regulatory authorities in accordance with contractual requirements and time frame. Among other jurisdictions, we are in the process of seeking regulatory approval for the GlucoTrack® model DF-F in China (where we have a distribution agreement in place) and Japan (where we do not yet have a distribution agreement in place), and are awaiting local regulatory approval in each of those countries.

On May 4, 2016 we received regulatory approval from the Korean Ministry of Food and Drug Safety (KMFDS, formerly KFDA) for the GlucoTrack® model DF-F.  In October this year we received the final approval from South Korea, which enables us to commence sales of the GlucoTrack® model DF-F in South Korea. Following the official approval, our local distributor placed an initial order for 100 units of GlucoTrack® model DF-F, which were fully paid for and delivered during the fourth quarter of 2016. We expect to recognize revenues from such order during the fourth quarter of 2016. In South Korea, the GlucoTrack® device is sold with 2 PECs, so the consumer does not need to incur further expenses to use the device in the first year. This marketing model may be adopted by other distributors as well.

Based on input from our local distributors and regulatory consultants, we estimated that we would complete the local regulatory approval review process in Japan and China by February 2017 and August 2016, respectively. However, we have been informed that the local regulatory bodies in Japan and China (PMDA and CFDA, respectively) have now required that we conduct additional clinical trials in their respective countries before they determine whether or not to approve the device to be marketed in such countries. Due to these developments, we now anticipate that the regulatory review process in Japan and China will take an additional 17 to 23 months, and potentially longer if the results of the additional clinical trials are not satisfactory to the local regulatory bodies or such regulatory bodies impose additional requirements for approval.

The territories covered by our signed distribution agreements currently represent a potential market opportunity of up to approximately 141 million diagnosed diabetics (inclusive of both type 1 and type 2 diabetes patients).  This represents approximately 34% of the potential worldwide market of approximately 414 million people, based on estimates included in the International Diabetes Federation’s (IDF) Diabetes Atlas, 7^th edition, 2015.  Of these territories, the territories in which the GlucoTrack® model DF-F has been approved for sale currently represent a potential market opportunity of up to approximately 23 million diagnosed diabetics (inclusive of both type 1 and type 2 diabetes patients), or 5.6% of the potential worldwide market. While we do not have reliable statistics that bifurcate the market opportunity among type 1 and type 2 diabetics, we believe that on average approximately 87% of all people suffering from diabetes have type 2 diabetes. Apart from the diagnosed patients, it is estimated that approximately 192 million people suffer from diabetes but have not yet been diagnosed.  Based on estimates included in the International Diabetes Federation’s (IDF) Diabetes Atlas, 7^th edition, 2015, the market opportunity for undiagnosed diabetics is 71 million people in the territories covered by our signed distribution agreements, of which 11 million people are in the territories in which the GlucoTrack® model DF-F has been approved for sale. Based on the IDF Diabetes Atlas, 6^th edition, 2013 the world prevalence of pre-diabetics was 6.92% of the worldwide population, while the prevalence of diagnosed people with diabetes was 8.35%.

On November 9, 2016, the Company added two additional independent directors, bringing the total number of directors serving on our board of directors to 7, 5 of whom are independent. Additionally, the Company has recently formed a Compensation Committee and already has a Nominating and Corporate Governance committee, both consisting solely of independent directors.  The Company continues to consider expansion of the Board and the establishment of additional appropriate Board committees to support the Company.

In support of our global commercialization, sales and distribution efforts, the Company is currently in an active and progressing search for a Chief Commercialization Officer, as well as additional executives with the expertise and experience necessary to fully execute on the commercial opportunity.

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We do not own commercial manufacturing facilities and do not intend to build commercial manufacturing facilities of our own in the foreseeable future. We currently utilize a third party manufacturer in Israel to manufacture the GlucoTrack® model DF-F.  In July 2014, we entered into a manufacturing agreement with Wistron Corp. (“Wistron”), a Taiwanese entity and the manufacturing arm of Acer Inc.  Pursuant to such agreement, Wistron has agreed to mass produce and service, on a non-exclusive basis, the GlucoTrack® model DF-F and any future products, if any, introduced by us. Pursuant to such agreement, Wistron has also agreed to provide full turn-key manufacturing services for the GlucoTrack® model DF-F, including components procurement, unit assembly, device integration, testing, packaging and delivery to customers (distributors).  In November 2015, we sent a delegation to Wistron’s main production facility in Taiwan to, among other things, inspect the readiness of Wistron’s production line for the GlucoTrack® model DF-F. Wistron has produced a small pilot batch and recently produced a second pilot batch of the GlucoTrack® model DF-F device. A GMP audit by the local regulatory authorities in Taiwan was conducted in September 2016 and successfully completed. The production line for the GlucoTrack® model DF-F is now ready and we expect to receive an official clearance from the Taiwanese authorities shortly.  We intend to utilize the services of both Wistron and the Israeli third-party manufacturer to produce the GlucoTrack® model DF-F.

We have expanded our Advisory board to include renowned key opinion leaders, in order to support the Company’s global clinical, regulatory and commercialization efforts. The advisory board now comprises six experts: Prof. Dr. Lutz Heinemann (Chairman): CEO, Science & Co, Düsseldorf, Germany; Prof. Irl B. Hirsch: University of Washington, School of Medicine, WA, USA; Prof. Dr. Michael Heise: University of Applied Science of South-Westphalia, Iserlohn, Germany; Prof. Jan Bolinder: Professor of Clinical Diabetes Research at the Department of Medicine, Huddinge, Sweden; Prof. Katharine Barnard: Health Psychologist, Bournemouth University, Faculty of Health and Social Science, England; and Dr. Barry H. Ginsberg: Diabetes Consultant, DMTC, NJ, USA.

In support of the commercialization effort, we intend to conduct further post-market clinical trials, as well as publish scientific and clinical studies, case studies, and white papers. To that end, we have engaged with a leading clinic in Germany, Pfutzner Science & Health Institute, GmbH, headed by Prof. Dr. Andreas Pfutzner, to conduct additional clinical trials on subjects with Type 2 diabetes and pre-diabetics. We are in negotiations with another site in Israel and anticipate adding additional sites in Europe.

As a result of the improvements to the device that were submitted for approval in the second half of 2015 and approved in August and December 2015, we deliberately postponed sales of the GlucoTrack® model DF-F in the second half of 2015.  We held an international distributors’ conference in October 2015 during which, we educated our international distributors about the improvements to the device and set the expectation to begin taking orders for the improved device in the first quarter of 2016.  In early 2016, after introducing the improved version of GlucoTrack® model DF-F, we received net orders totaling approximately $210,000, of which orders in the amount of $146,000 have been shipped and recognized as revenues during the nine months period ended September 30, 2016. We expect that the balance of such orders will be shipped and recognized as revenues during the fourth quarter of 2016.

We also received orders, totaling approximately $1.75 million that are contingent on the receipt of local regulatory approval to market the GlucoTrack® model DF-F in certain countries.  We delivered devices totaling $300,000 during the second quarter of 2016 for which we have received payments in the amount of $200,000 and the balance is expected to be paid during the fourth quarter of 2016. We cannot guarantee when the remaining orders in the amount of $1.45 million will be fulfilled (if at all), due to the pending local regulatory process, and we have not received any pre-payments for these orders.

As part of our commercialization activities, in September 2016, we had a booth at the EASD (European Association for Study of Diabetes) 52nd annual conference in Munich.  The Company received significant attention from endocrinologists, diabetologists and diabetes nurses and educators.

During the week of November 14, the Company will have a booth at Medica (in the Israeli pavilion). Medica is the largest exhibition for medical devices and equipment in the world, and takes place every November in Düsseldorf, Germany. Our main purpose is to look for additional distributors, mainly in Europe.

In December 2016, we expect to have a poster at the 9th Annual World Congress on Prevention of Diabetes and its Complications (WCPD, Atlanta, GA). This Congress provides the Company with an opportunity to showcase our device as a tool to fight diabetes and its complications, as well as using GlucoTrack® model DF-F as a tool to assist pre-diabetics.

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The Company is also seeking and in some discussions with potential strategic partners, to assist the Company in expanding its presence and penetration in various markets throughout the world. In connection with the foregoing, we have approached certain leading companies in the field of diabetes and glucose monitoring, as well as other relevant companies that may have an interest in expanding their fields of interest. We cannot guarantee that such activities will conclude in positive results to the Company, if any.

In addition to the improvements to the GlucoTrack® model DF-F described previously, we have also continued to work on additional incremental improvements to the device and the development of new devices and, subject to our raising sufficient funds to do so, intend to continue these efforts in 2016.  Specifically, we are developing a cloud-connected WLM.  We also initiated development of the next generation of GlucoTrack® model DF-F devices, as well as a simple model, DF-B, intended for use in developing countries.

We have not yet generated any material revenues from our operations and, as of September 30, 2016, have incurred an accumulated deficit of $34,189,683, stockholders’ deficit of $9,937,906 and negative operating cash flows. We currently have no material sources of recurring revenue and therefore are 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. As a result, substantial doubt exists regarding our ability to continue as a going concern.

Recent Developments

As previously disclosed, during nine month period ended September 30, 2016 we raised funds in an aggregate amount of approximately $4.52 million (net of related cash expenses) from the issuance in six separate closings of 5,323 units (the “Series C Units”), each consisting of (a) one share of our newly designated Series C 5.5% Convertible Preferred Stock, par value $0.001 per share (the “Series C Preferred Stock”), convertible into shares of our common stock, par value $0.001 per share (“Common Stock”), at an initial conversion price of $4.50 per share, (b) a five year warrant to purchase, at an exercise price of $4.50 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-1 Warrant”) and (c) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-2 Warrant” and, together with the Series C-1 Warrants, collectively, the “Series C Warrants”). As of September 30, 2016, the shares of Preferred Stock comprising the Series C Units are convertible into an aggregate of 1,186,000 shares of Common Stock, and the Series C Warrants comprising the Series C Units are exercisable for an aggregate of 2,372,000 shares of Common Stock, in each case subject to adjustments in certain circumstances.

Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with Andrew Garrett, Inc. (“AGI”), the placement agent for the offering of the Series C Units, at the initial closing of the sale of the Series C Units we paid AGI, as a commission, an amount equal to  6% of the aggregate sales price of the Series C Units, plus 4% 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 Series C Units.  At each of the second, third, fourth, fifth and sixth closing of the sale of the Series C Units, we paid AGI, as a commission, an amount equal to 10% of the aggregate sales price of the Series C Units sold in such closing, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Series C Units sold in such closing. In addition, pursuant to the Placement Agent Agreement, we are required to issue to AGI: (a) 5 year warrants to purchase up to 237,201 shares of Common Stock at an exercise price of $4.50 per share and (b) 5 year warrants to purchase up to 118,600 shares of Common Stock at an exercise price of $7.75 per share.

As a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the warrants issued by us to purchasers of units consisting of shares of its Series A 5% Convertible Preferred Stock (the “Series A Preferred Stock”) and warrants to purchase shares of Common Stock (the “Series A Warrants”), on April 8, 2016, the exercise price per share of the Series A Warrants decreased from $5.80 per share to $4.50 per share and the number of shares of Common Stock issuable upon exercise of each of the Series A Warrants, in the aggregate, increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, will be equal to the aggregate exercise price prior to such adjustment.   Also as a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the certificates of designations for our Series A Preferred Stock and Series B 5.5% Convertible Preferred Stock (the “Series B Preferred Stock”), on April 8, 2016, the conversion price per share of Series A Preferred Stock and Series B Preferred Stock decreased to $4.50 per share.

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Significant Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“US. 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, 2015. Our management believes that, as for the financial statements for the periods included in this report, the going concern assessment 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.

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, 2015. As a result, substantial doubt exists regarding our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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Recently Issued Accounting Pronouncements

1. Accounting Standards Update 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity”

Effective January 1, 2016, the Group adopted Accounting Standard Update 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity ("ASU 2014-16").

The amendments in ASU 2014-16 clarify how U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weigh those terms and features. The assessment of the substance of the relevant terms and features should incorporate a consideration of the characteristics of the terms and features themselves; the circumstances under which the hybrid financial instrument was issued or acquired; and the potential outcomes of the hybrid financial instrument, as well as the likelihood of those potential outcomes.

The amendments in ASU 2014-16 apply to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of shares.

The effects of initially adopting the amendments in ASU 2014-16 were required to be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of shares as of the beginning of the fiscal year for which the amendments are effective. However, retrospective application was permitted to all relevant prior periods.

Management analyzed the economic characteristics and risks of the Series A Preferred Stock and the Series B Preferred Stock (including the embedded conversion feature of each) in accordance with the provisions of ASU 2014-16 and determined that such instruments are considered as more akin to equity than debt. Accordingly, it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those of the Preferred Stock themselves (the 'host contract') are clearly and closely related and accordingly, the embedded conversion feature was not required to be bifurcated. As a result of the above determination, ASU 2014-16 did not impact the classification of the Series A Preferred Stock or the Series B Preferred Stock.

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2. Accounting Standards Update 2014-09, “Revenue from Contracts with Customers”

In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").

ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

An entity should apply the amendments in ASU 2014-09 using one of the following two methods: 1. Retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures.

During 2016, the FASB issued several Accounting Standard Updates (“ASUs”) that focus on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements and Practical Expedients, Principal versus Agent Considerations and Identifying Performance Obligations and Licensing.

In accordance with a recent amendment to ASU 2014-09, introduced by Accounting Standard 2015-14, “Revenue from contracts with Customers – Deferral of the Effective Date”, for a public entity, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

The Company is in the process of assessing the impact, if any, of ASU 2014-09 (including the amendments introduced through recent ASUs) on its consolidated financial statements.

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3. Accounting Standards Update 2014-15, “Presentation of Financial Statements—Going Concern”

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15").

ASU 2014-15 provides guidance on management’s responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).

ASU 2014-15 also provides guidance related to the required disclosures as a result of management’s evaluation. 

The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

Due to the current financial condition of the Company and the existing uncertainty regarding its ability to continue as a going concern, management does not believe that the provisions of ASU 2014-15 will have a significant effect on its evaluation of the Company’s ability to continue as a going concern. However, management is currently considering if additional disclosures will be required as a result of ASU 2014-15.

4. Accounting Standard Update 2015-11, “Simplifying the Measurement of Inventory”

In July, 2015, The FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11").

ASU 2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and the retail inventory method (RIM) are not impacted by the new guidance. Prior to the issuance of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin).

For a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periods beginning after December 15, 2016, including interim periods within the first such annual reporting period (the first quarter of fiscal year 2017 for the Company). Early adoption is permitted as of the beginning of an interim or annual reporting period.

The Company is in the process of assessing the impact, if any, of ASU 2015-11 on its consolidated financial statements.

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Results of Operations

The following discussion explains material changes in our results of operations for the nine and three month periods ended September 30, 2016, compared with the same periods ended September 30, 2015. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Revenues

During the nine month period ended September 30, 2016, we had revenues of $482,177 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 $143,167 for the prior-year period.  The increase in revenues resulted from increased orders from customers for our  improved GlucoTrack® model DF-F for which we received approval from the Notified Body on August 31, 2015 and December 2015.

We recognize revenues from sales of the GlucoTrack® model DF-F and PECs when delivery has occurred, persuasive evidence of an agreement exists, the fee is fixed and determinable, collectability is reasonably assured and no further obligations exist.

Research and Development Expenses

Research and development expenses were $2,226,833 for the nine month period ended September 30, 2016, as compared to $1,596,494 for the prior-year period. The increase is attributable primarily to higher salary costs and related expenses resulting from increased head-count and higher salaries, higher materials expenses primarily as a result of the engagement of research and development in the initial manufacturing of the GlucoTrack DF-F, and higher regulation related expenses relating primarily to our efforts in seeking regulatory approval for the GlucoTrack® model DF-F in China. Research and development expenses consist primarily of salaries and other personnel-related expenses, including stock-based compensation expenses, 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 2016 and beyond, primarily due to hiring additional personnel and developing our product line, as well as improvement of the GlucoTrack® model DF-F; but only if we are able to raise sufficient funds to do so. 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. Failure to raise sufficient funds both to commercialize our products and to complete desired research and development will delay improvements to our products.

Selling, Marketing and General and Administrative Expenses

Selling, marketing and general and administrative expenses were $2,589,504 for the nine month period ended September 30, 2016, as compared to $1,647,054 for the prior-year period. The increase is attributable primarily to higher salaries and related expenses relating to the hiring of our Chief Operating Officer on January 1, 2016 and the hiring of additional sales, marketing and business development personnel. The increase is also attributable to the one-time charges in the amount of $211,077 representing the incremental fair market value adjustments in respect of modified warrants issued to AGI (See Note 3). In addition, the increase is also attributable in part to higher professional fees primarily due to the engagement during the second quarter of 2015 of Ogilvy CommonHealth (Paris). Selling, marketing and 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, marketing and general and administrative expenses to increase in 2016 and beyond as we continue our focus on marketing and sales of the GlucoTrack® model DF-F.

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Financing (income) expenses, net

Financing (income) expenses, net was $(63,654) for the nine month period ended September 30, 2016, as compared to financing expense of $1,196,926 for the prior-year period. The change is primarily attributable to the non-cash loss on partial extinguishment of Series A Preferred Stock and Series A Warrants during the nine months period ended September 30, 2015 (see Note 10C to our annual report on Form 10-K for the year ended December 31, 2015).

Net loss

Net loss was $4,270,506 for the nine month period ended September 30, 2016, as compared to a net loss of $4,297,307 for the prior-year period. The decrease in net loss is attributable primarily to the change in financing (income) expenses, net and increase in revenues offset partially by the increase in operating expenses, as described above.

Three Months Ended September 30, 2016 Compared to three Months Ended September 30, 2015

Revenues

During the three month period ended September 30, 2016, we had revenues of $11,299 from orders for our GlucoTrack® model DF-F glucose monitoring device and PECs that are replaced every six months, as compared with $0for the prior-year period.  The increase in revenues resulted from increased orders from customers for our  improved GlucoTrack® model DF-F for which we received approval from the Notified Body on August 31, 2015 and December 2015.

We recognize revenues from GlucoTrack® model DF-F and PEC when delivery has occurred, persuasive evidence of an agreement exists, the fee is fixed and determinable, collectability is reasonably assured and no further obligations exist.

Research and development expenses

Research and development expenses were $695,437 for the three months ended September 30, 2016, as compared to $560,189 for the prior-year period. The increase is attributable primarily to higher salary costs and related expenses resulting from increased head-count and higher salaries and higher regulation related expenses relating primarily to our efforts in seeking regulatory approval for the GlucoTrack® model DF-F in China. Research and development expenses consist primarily of salaries and other personnel-related expenses, including stock-based compensation expenses, 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 will increase during the remainder of 2016 and beyond, primarily due to hiring additional personnel and developing our product line, as well as improvement of the GlucoTrack® model DF-F; but only if we are able to raise sufficient funds to do so. 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. Failure to raise sufficient funds both to commercialize our products and to complete desired research and development will delay improvements to our products.

Selling, marketing and general and administrative expenses

Selling, marketing and general and administrative expenses were $802,195 for the three month period ended September 30, 2016, as compared to $563,292 for the prior-year period. The increase is attributable primarily to higher salaries and related expenses relating to the hiring of our Chief Operating Officer on January 1, 2016 and the hiring of additional sales, marketing and business development personnel. The increase is also attributable in part to higher professional fees primarily due to the engagement during the second quarter of 2015 of Ogilvy CommonHealth (Paris). Selling, marketing and 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, marketing and general and administrative expenses to increase during the remainder of 2016 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 and general and administrative 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.

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Financing (income), net

Financing income, net were $(31,589) for the three month period ended September 30, 2016, as compared to income of $(27,511) for the prior-year period. The change is primarily attributable to the non-cash change in fair value of Warrants with down round protection offset partially by the non-cash loss on partial extinguishment of Series A Preferred Stock and Series A Warrants incurred during the three month period ended September 30, 2015 (see Note 10C to our annual report on Form 10-K for the year ended December 31, 2015).

Net Loss

Net loss was $1,454,744 for the three month period ended September 30, 2016, as compared to $1,095,970 for the prior-year period. The increase in net loss is attributable primarily to the increase in operating expenses, as described above.

Liquidity and Capital Resources

As of September 30, 2016, cash on hand was approximately $0.7 million. During 2016 we started fulfilling orders for our improved GlucoTrack® model DF-F, which resulted in cash collections from our customers as of November 14, 2016 of approximately $599,000.  While we expect to continue 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 on hand as of November 14, 2016 in the amount of approximately $123,000, will enable us to operate for a period of less than thirty days 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.

We have a credit line with Bank HaPoalim of NIS 150,000 (approximately $39,915 based on the exchange rate of 3.76 NIS/dollar as of September 30, 2016). Borrowings under the line of credit are secured by our funds on deposit with the bank at the time of borrowing, which generally must be sufficient to cover the principal amount of the borrowings in full. As of September 30, 2016 we did not utilize our credit line and as of November 14, 2016, our unutilized credit line amounted to approximately $26,000.

Messrs. Avner Gal and Zvi Cohen collectively loaned Integrity Israel NIS 176,000 ($46,833 based on the same exchange rate) in May 15, 2002 pursuant to a board approval. Messrs. Nir Tarlovsky, Yitzhak Fisher and Asher Kugler loaned Integrity Israel NIS 336,300 ($89,489 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, 2016, the contingent liability with respect to royalty payment on future sales equals to approximately $72,905, excluding interest.

- 33 -

Net Cash Used in Operating Activities for the Nine Month Periods Ended September 30, 2016 and September 30, 2015

Net cash used in operating activities was $4,346,289 and $3,107,214 for the nine month periods ending September 30, 2016 and 2015, respectively. Net cash used in operating activities primarily reflects the net loss of $4,270,506 and $4,297,307 for the nine month periods ending September 30, 2016 and 2015, respectively. Net cash used in operating activities was partially offset by the one-time charges in the amount of $211,077 representing the incremental fair market value adjustments in respect of modified warrants issued to AGI during the nine month period ended September 30, 2016 and loss on extinguishment of Series A Preferred Stock and Series A Warrants during the nine month period ended September 30, 2015 in the amount of $1,284,354. Changes in operating assets and liabilities during the nine month period ended September 30, 2016 decreased our net cash used in operating activities for the nine months period ended September 30, 2016 by $273,745, which resulted primarily from payment of deferred balances to suppliers. For the nine months period ended September 30, 2015 net cash used in operations decreased by $19,113 due to changes in operating assets and liabilities in the amount.

Net Cash Used in Investing Activities for the Nine Month Periods Ended September 30, 2016 and September 30, 2015

Net cash used in investing activities was $75,269 and $118,993 for the nine month periods ended September 30, 2016, and 2015, respectively. Net cash used to purchase equipment (such as computers, R&D and office equipment) was $75,269 and $94,714, respectively and cash used to fund deposits in respect of employees rights upon retirement amounted to $0 and $24,279, for the nine month periods ended September 30, 2016, and 2015, respectively.

Net Cash Provided by (Used in) Financing Activities for the Nine Month Periods Ended September 30, 2016 and September 30, 2015

Net cash provided by (used in) financing activities was $4,503,611 and $(492,300) for the nine month periods ended September 30, 2016 and 2015, respectively. Cash provided by financing activities for the nine months period ended September 30, 2016 reflects net capital raised from the issuance of Series C units in the amounts of $4,517,140, offset partially by dividends paid to the holders of our Preferred Stock in the amounts of $13,529. Cash used in financing activities for the nine month period ended September 30, 2015, reflects primarily the repayment of stockholders loan to Stockholders (see Note 9D to our annual report on Form 10-K for the year ended December 31, 2015) in the amount of $439,939 and cash dividends paid to the holders of our Series A Preferred Stock in the amounts of $52,361.

Off-Balance Sheet Arrangements

As of September 30, 2016, 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.

- 34 -

Item 4.          Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2016.  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, 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, 2016, our Chief Executive Officer and 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.

- 35 -

PART II - OTHER INFORMATION

Item 6.          Exhibits.

Exhibit No.	Description
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)
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 (4)
4.1	Form of Securities Purchase Agreement (4)
4.2	Form of Series C-1 Common Stock Purchase Warrant (4)
4.3	Form of Series C-2 Common Stock Purchase Warrant (4)
4.4	Form of Registration Rights Agreement (4)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document (5)
101.SCH	XBRL Schema Document (5)
101.CAL	XBRL Calculation Linkbase Document (5)
101.LAB	XBRL Label Linkbase Document (5)
101.PRE	XBRL Presentation Linkbase Document (5)
101.DEF	XBRL Definition Linkbase Document (5)

—————————————

(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) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on March 18, 2013, which exhibit is incorporated herein by reference.

(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, which exhibit is incorporated herein by reference.

(4) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 14, 2016, which exhibit is incorporated herein by reference.

(5) Pursuant to Rule 406T of Regulation S-T, the interactive files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 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, and otherwise are not subject to liability under those sections.

- 36 -

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 14, 2016

INTEGRITY APPLICATIONS, INC.
By:	/s/ Avner Gal
Name:	Avner Gal
Title	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

By:	/s/ Eran Hertz
Name:	Eran Hertz
Title	Chief Financial Officer (Principal Accounting Officer)

- 37 -

EXHIBIT INDEX

Exhibit No.	Description
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)
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 (4)
4.1	Form of Securities Purchase Agreement (4)
4.2	Form of Series C-1 Common Stock Purchase Warrant (4)
4.3	Form of Series C-2 Common Stock Purchase Warrant (4)
4.4	Form of Registration Rights Agreement (4)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document (5)
101.SCH	XBRL Schema Document (5)
101.CAL	XBRL Calculation Linkbase Document (5)
101.LAB	XBRL Label Linkbase Document (5)
101.PRE	XBRL Presentation Linkbase Document (5)
101.DEF	XBRL Definition Linkbase Document (5)

—————————————

(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) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on March 18, 2013, which exhibit is incorporated herein by reference.

(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, which exhibit is incorporated herein by reference.

(4) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 14, 2016, which exhibit is incorporated herein by reference.

(5) Pursuant to Rule 406T of Regulation S-T, the interactive files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 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, and otherwise are not subject to liability under those sections.

- 38 -

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Avner Gal, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2016 of Integrity Applications, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2016	By:	/s/ Avner Gal
		Avner Gal
		Chairman of the Board and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Eran Hertz, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2016 of Integrity Applications, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2016	By:	/s/ Eran Hertz
		Eran Hertz
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Integrity Applications, Inc. (the “Company”) for the nine month period ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Avner Gal, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ Avner Gal
	Avner Gal Chairman of the Board and Chief Executive Officer
Dated: November 14, 2016

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Integrity Applications, Inc. (the “Company”) for the nine month period ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eran Hertz, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ Eran Hertz
	Eran Hertz Chief Financial Officer
Dated: November 14, 2016

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 14, 2016
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2016
Entity Registrant Name	Integrity Applications, Inc.
Entity Central Index Key	0001506983
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		5,912,702

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Current Assets
Cash and cash equivalents	$ 696,159	$ 608,701
Accounts receivable, net	71,601	18,446
Inventories	674,099	816,223
Other current assets	116,668	268,792
Total current assets	1,558,527	1,712,162
Property and Equipment, Net	262,843	220,463
Long-Term Restricted Cash	36,499	35,152
Funds in Respect of Employee Rights Upon Retirement	171,200	164,883
Total assets	2,029,069	2,132,660
Current Liabilities
Accounts payable	297,034	1,082,546
Other current liabilities	718,284	427,886
Total current liabilities	1,015,318	1,510,432
Long-Term Liabilities
Long-Term Loans from Stockholders	166,457	160,314
Liability for Employee Rights Upon Retirement	180,810	174,137
Warrants with down-round protection	835,080	321,695
Total long-term liabilities	1,182,347	656,146
Total liabilities	2,197,665	2,166,578
Commitments and Contingent Liabilities
Temporary Equity
Total temporary equity	9,769,310	6,936,996
Stockholders' Deficit
Common Stock of $ 0.001 par value ("Common Stock"): 40,000,000 shares authorized as of September 30, 2016 and December 31, 2015; 5,912,702 and 5,690,097 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	5,914	5,691
Additional paid in capital	24,166,078	22,309,742
Accumulated other comprehensive income	79,785	90,168
Accumulated deficit	(34,189,683)	(29,376,515)
Total stockholders' deficit	(9,937,906)	(6,970,914)
Total liabilities, temporary equity and stockholders' deficit	2,029,069	2,132,660
Series A Preferred Stock [Member]
Temporary Equity
Total temporary equity	221,152	221,152
Series B Preferred Stock [Member]
Temporary Equity
Total temporary equity	6,715,844	6,715,844
Series C 5.5% Convertible Preferred Stock [Member]
Temporary Equity
Total temporary equity	$ 2,832,314

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2016	Dec. 31, 2015
Temporary Equity
Common Stock, par value per share	$ 0.001	$ 0.001
Common Stock, shares authorized	40,000,000	40,000,000
Common Stock, shares issued	5,912,702	5,690,097
Common Stock, shares outstanding	5,912,702	5,690,097
Preferred Stock [Member]
Temporary Equity
Convertible Preferred Stock, par value per share	$ 0.001	$ 0.001
Convertible Preferred Stock, shares authorized	10,000,000	10,000,000
Series A Preferred Stock [Member]
Temporary Equity
Convertible Preferred Stock, shares issued	376	376
Convertible Preferred Stock, shares outstanding	376	376
Series B Preferred Stock [Member]
Temporary Equity
Convertible Preferred Stock, shares issued	15,031	15,031
Convertible Preferred Stock, shares outstanding	15,031	15,031
Series C 5.5% Convertible Preferred Stock [Member]
Temporary Equity
Convertible Preferred Stock, shares issued	5,323	0
Convertible Preferred Stock, shares outstanding	5,323	0

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Income Statement [Abstract]
Revenues	$ 11,299		$ 482,177	$ 143,167
Research and development expenses	695,437	560,189	2,226,833	1,596,494
Selling, marketing and general and administrative expenses	802,195	563,292	2,589,504	1,647,054
Total operating expenses	1,497,632	1,123,481	4,816,337	3,243,548
Operating loss	1,486,333	1,123,481	4,334,160	3,100,381
Financing (income) expenses, net	(31,589)	(27,511)	(63,654)	1,196,926
Loss for the period	1,454,744	1,095,970	4,270,506	4,297,307
Other comprehensive (income) loss:
Foreign currency translation adjustment	(19,656)	46,081	10,383	(9,639)
Comprehensive loss for the period	$ 1,435,088	$ 1,142,051	$ 4,280,889	$ 4,287,668
Loss per share (Basic)	$ (0.30)	$ (0.22)	$ (0.84)	$ (0.85)
Loss per share (Diluted)	$ (0.30)	$ (0.22)	$ (0.84)	$ (0.85)
Common shares used in computing Basic income (loss) per share	5,806,724	5,513,265	5,746,838	5,426,688
Common shares used in computing Diluted income (loss) per share	5,806,724	5,513,265	5,746,838	5,426,688

XML

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT - 9 months ended Sep. 30, 2016 - USD ($)	Common Stock [Member]	Additional paid in capital [Member]	Accumulated other comprehensive income [Member]	Accumulated deficit [Member]	Total
Balance at Dec. 31, 2015	$ 5,691	$ 22,309,742	$ 90,168	$ (29,376,515)	$ (6,970,914)
Balance, shares at Dec. 31, 2015	5,690,097				5,690,097
Loss for the period of nine months				(4,270,506)	$ (4,270,506)
Other comprehensive loss			(10,383)		(10,383)
Amounts allocated to Series C-1 and Series C-2 Warrants, net		1,402,606			1,402,606
Amount classified out of stockholders deficit and presented as Warrants with Down-Round Protection within long-term liabilities		(341,662)			(341,662)
Incremental fair market value adjustments of modified warrants issued to placement agent		211,077			211,077
Stock dividend on Series C Preferred Stock	$ 34	80,048		(80,082)
Stock dividend on Series C Preferred Stock, shares	33,690
Stock dividend on Series B Preferred Stock	$ 189	448,862		(449,051)
Stock dividend on Series B Preferred Stock, shares	188,915
Cash dividend on Series A Preferred Stock				(13,529)	(13,529)
Stock-based compensation		55,405			55,405
Balance at Sep. 30, 2016	$ 5,914	$ 24,166,078	$ 79,785	$ (34,189,683)	$ (9,937,906)
Balance, shares at Sep. 30, 2016	5,912,702				5,912,702

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Cash flows from operating activities:
Loss for the period	$ (4,270,506)	$ (4,297,307)
Adjustments to reconcile income (loss) for the period to net cash used in operating activities:
Depreciation	41,951	29,709
Stock-based compensation	55,405	15,675
Incremental fair market value adjustments of modified warrants issued to placement agent	211,077
Change in the fair value of Warrants with down-round protection	(110,498)	(119,148)
Linkage difference on principal of loans from stockholders	27	(1,384)
Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants		1,284,354
Changes in assets and liabilities:
Decrease (increase) in accounts receivable	(51,356)	1,251
Decrease (increase) in inventory	170,274	(180,144)
Decrease (increase) in other current assets	157,149	(135,485)
(Decrease) increase in accounts payable	(815,795)	363,639
Increase (decrease) in other current liabilities	265,983	(68,374)
Net cash used in operating activities	(4,346,289)	(3,107,214)
Cash flows from investing activities:
Increase in funds in respect of employee rights upon retirement		(24,279)
Purchase of property and equipment	(75,269)	(94,714)
Net cash used in investing activities	(75,269)	(118,993)
Cash flows from financing activities
Cash dividend on Series A Preferred Stock	(13,529)	(52,361)
Proceeds allocated to Series C Preferred Stock, net of cash issuance expenses	3,021,063
Proceeds allocated to Series C Warrants, net of cash issuance expenses	1,496,077
Repayment of loan from stockholders		(439,939)
Net cash provided by (used in) financing activities	4,503,611	(492,300)
Effect of exchange rate changes on cash and cash equivalents	5,405	(4,195)
Increase (decrease) in cash and cash equivalents	87,458	(3,722,702)
Cash and cash equivalents at beginning of the period	608,701	5,827,560
Cash and cash equivalents at end of the period	$ 696,159	$ 2,104,858

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical)	9 Months Ended
	Sep. 30, 2016 USD ($)
Warrants issued as consideration for placement agent services	$ 282,221
Amount of direct issuance expense allocated to Series C-1 and Series C-2 Warrants and recorded as a reduction of additional paid in capita	93,471
Amount of direct issuance expense allocated to Series C Preferred Stock and recorded as a reduction of temporary equity	188,750
Amount classified out of stockholders deficit and presented as Warrants with Down-Round Protection within long-term liabilities	341,662
Stock dividend on Series C Preferred Stock
Stock dividend on Series B Preferred Stock
Accumulated deficit [Member]
Amount classified out of stockholders deficit and presented as Warrants with Down-Round Protection within long-term liabilities
Stock dividend on Series C Preferred Stock	80,082
Stock dividend on Series B Preferred Stock	$ 449,051

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GENERAL

9 Months Ended

Sep. 30, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

GENERAL

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.

B. Going concern uncertainty

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 any material revenues from operations, and therefore they are dependent upon external sources for financing their operations. As of September 30, 2016, the Group has incurred an accumulated deficit of $34,189,683, stockholders’ deficit of $9,937,906and negative operating cash flows.  These factors 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 2012, the Company raised a total amount of approximately $1.0 million (net of related expenses) from the issuance of Common Stock. During 2013, the Company raised funds in an approximate amount of $5.3 million (net of related cash expenses) from the issuance of units (the “Series A Units”) consisting of shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) and detachable warrants to purchase shares of the Company’s Common Stock (the “Series A Warrants” or “Warrants with down round protection”).  During the period between August and December 2014, the Company raised funds in an aggregate amount of approximately $7.3 million (net of related cash expenses) from the issuance of units (the “Series B Units”), each consisting of (a) one share of the Company’s newly designated Series B 5.5% Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”), convertible into Common Stock at an initial conversion price of $5.80 per share, (b) a five year warrant to purchase, at an exercise price of $5.80 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series B Preferred Stock (each a “Series B-1 Warrant”) and (c) a five year warrant to purchase, at an exercise price of $10.00 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series B Preferred Stock (each a “Series B-2 Warrant” and, together with the Series B-1 Warrants, collectively, the “Series B Warrants”).  During the nine month period ended September 30, 2016, the Company raised funds in an aggregate amount of approximately $4.52 million (net of related cash expenses) through the issuance of 5,323 units (the “Series C Units”), each consisting of (a) one share of the Company’s newly designated Series C 5.5% Convertible Preferred Stock, par value $0.001 per share (the “Series C Preferred Stock”), convertible into Common Stock at an initial conversion price of $4.50 per share, (b) a five year warrant to purchase, at an exercise price of $4.50 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-1 Warrant”) and (c) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-2 Warrant” and, together with the Series C-1 Warrants, collectively, the “Series C Warrants”), as described in further detail in Note 3.

Until such time as the Group generates sufficient revenue to fund its operations (if ever), the Group plans to finance its operations through the sale of equity or equity-linked securities and/or debt securities and, to the extent available, short term and long term loans. There can be no assurance that the Group will succeed in obtaining the necessary financing to continue its operations as a going concern.

C. Risk factors

As described in Note 1A and Note 1B above, 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.

D. 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 fair value estimate of the Warrants with down-round protection, (ii) the allocation of the proceeds and the related issuance costs of the Series C Units, and (iii) the going concern assumptions.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 2015. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“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, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 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. All intercompany balances and transactions have been eliminated in consolidation.

B. Warrants with down-round protection

The Company has determined its derivative warrant liability with respect to the Series A Warrants and warrants issued to Andrew Garrett, Inc., (“AGI”) as part of the Series A Unit offering, the Series B Unit offering and the Series C Unit offering to be a Level 3 fair value measurement and has used the Binomial pricing model to calculate its fair value. Because the warrants contain a down round protection feature, the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the valuation calculations.  The key inputs used in the fair value calculations were as follows:

The changes in the fair value of the Level 3 liability are as follows (in US dollars):

	Series A Warrants
	September 30,
	2016			2015
Balance, Beginning of the period		321,695			2,057,618
Warrants issued as consideration for placement services		282,221			-
Amount classified out of stockholders deficit and presented as Warrants with Down-Round Protection		341,662			-
Exchange of Series A Warrants pursuant to the “most favored nation” provision		-			(1,586,831	)
Change in fair value Warrants with Down-Round Protection		(110,498	)		(119,148	)
Balance, End of period		835,080			351,639

The key inputs used in the fair value calculations were as follows:

	September 30,
	2016		2015
Dividend yield (%)		-		-
Expected volatility (%) (*)		62.16		105.14
Risk free interest rate (%)		0.72-1.21		1.01
Expected term of options (years) (**)		1.45-5.00		2.45
Exercise price (US dollars)		4.50-7.75		5.80
Share price (US dollars) (***)		2.38		2.31
Fair value (US dollars)		0.26-0.60		0.92

(*) Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on the historical volatility of the share price of other public companies that operate in the same industry sector as the Company.

(**) Due to the fact that the Company does not have sufficient historical exercise data, the expected term was determined based on the "simplified method" in accordance with Staff Accounting Bulletin No. 110.

(***) The Common Stock price, per share reflects the Company’s management’s estimation of the fair value per share of Common Stock as of September 30, 2016 and 2015. 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 C Units and the Series B Units, as applicable to each reporting period (See Note 3).

C. Recently issued accounting pronouncements

1. Accounting Standards Update 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity”

Effective January 1, 2016, the Group adopted Accounting Standard Update 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity ("ASU 2014-16").

The amendments in ASU 2014-16 clarify how U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weigh those terms and features. The assessment of the substance of the relevant terms and features should incorporate a consideration of the characteristics of the terms and features themselves; the circumstances under which the hybrid financial instrument was issued or acquired; and the potential outcomes of the hybrid financial instrument, as well as the likelihood of those potential outcomes.

The amendments in ASU 2014-16 apply to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of shares.

The effects of initially adopting the amendments in ASU 2014-16 were required to be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of shares as of the beginning of the fiscal year for which the amendments are effective. However, retrospective application was permitted to all relevant prior periods.

Management analyzed the economic characteristics and risks of the Series A Preferred Stock and the Series B Preferred Stock (including the embedded conversion feature of each) in accordance with the provisions of ASU 2014-16 and determined that such instruments are considered as more akin to equity than debt. Accordingly, it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those of the Preferred Stock themselves (the 'host contract') are clearly and closely related and accordingly, the embedded conversion feature was not required to be bifurcated. As a result of the above determination, ASU 2014-16 did not impact the classification of the Series A Preferred Stock or the Series B Preferred Stock.

2. Accounting Standards Update 2014-09, “Revenue from Contracts with Customers”

In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").

ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

An entity should apply the amendments in ASU 2014-09 using one of the following two methods: 1. Retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures.

During 2016, the FASB issued several Accounting Standard Updates (“ASUs”) that focus on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements and Practical Expedients, Principal versus Agent Considerations and Identifying Performance Obligations and Licensing.

In accordance with a recent amendment to ASU 2014-09, introduced by Accounting Standard 2015-14, “Revenue from contracts with Customers – Deferral of the Effective Date”, for a public entity, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

The Company is in the process of assessing the impact, if any, of ASU 2014-09 (including the amendments introduced through recent ASUs) on its consolidated financial statements.

3. Accounting Standards Update 2014-15, “Presentation of Financial Statements—Going Concern”

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15").

ASU 2014-15 provides guidance on management’s responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued, when applicable).

ASU 2014-15 also provides guidance related to the required disclosures as a result of management’s evaluation. 

The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

Due to the current financial condition of the Company and the existing uncertainty regarding its ability to continue as a going concern, management does not believe that the provisions of ASU 2014-15 will have a significant effect on its evaluation of the Company’s ability to continue as a going concern. However, management is currently considering if additional disclosures will be required as a result of ASU 2014-15.

4. Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory”

In July, 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11").

ASU 2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and the retail inventory method (RIM) are not impacted by the new guidance. Prior to the issuance of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin).

For a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periods beginning after December 15, 2016, including interim periods within the first such annual reporting period (the first quarter of fiscal year 2017 for the Company). Early adoption is permitted as of the beginning of an interim or annual reporting period.

The Company is in the process of assessing the impact, if any, of ASU 2015-11 on its consolidated financial statements.

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RECENT EVENTS

9 Months Ended

Sep. 30, 2016

EVENTS DURING THE REPORTED PERIOD [Abstract]

RECENT EVENTS

NOTE 3 –       RECENT EVENTS

A. During February 2016, 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. As consideration for such services, the Company extended through December 31, 2019, the expiration date of 422,077 warrants issued to AGI and/or its designees in connection with the Company’s common stock offering completed in 2010 and the Series A Unit offering completed in 2012. The Advisory Agreement had an initial term of six months, subject to automatic renewal for additional 30 day terms unless terminated by either party with 30 days written notice.  In April 2016, the Company and AGI amended that Advisory Agreement to extend the term of the Advisory Agreement for an additional six months.  In consideration for such extension, the Company agreed to modify the terms of the 439,674 warrants issued to AGI and/or its designees in connection with the Series B Unit offering to include full-ratchet anti-dilution protection. As a result of the two agreements the Company recorded in its statement of operations for the nine month period ended September 30, 2016, a one-time charge in the amount of $211,077 representing the incremental fair market value adjustments in respect of the above modified warrants issued to the placement agent. Such incremental fair market value adjustments represent the increase in the fair value of the warrants resulting from the above modifications and were recorded against stockholders’ deficit. In addition, as a result of the inclusion of anti-dilution protection, the Company classified $341,662, representing the fair market value at April 2016 of the above 439,674 warrants issued to AGI out of stockholders deficit and presented them as Warrants with down round protection within long-term liabilities.

B. During the nine month period ended September 30, 2016, the Company raised funds in an aggregate amount of approximately $4.52 million (net of related cash expenses) from the issuance in six separate closings of 5,323 Series C Units. As of September 30, 2016, the shares of Preferred Stock comprising the Series C Units are convertible into an aggregate of 1,186,000 shares of Common Stock, and the Series C Warrants comprising the Series C Units are exercisable for an aggregate of 2,372,000 shares of Common Stock, in each case subject to adjustment as described below.

Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with AGI, at the initial closing of the sale of the Series C Units the Company paid AGI, as a commission, an amount equal to 6% of the aggregate sales price of the Series C Units, plus 4% 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 Series C Units. At the end of the second, third, fourth, fifth and sixth closings of the sale of the Series C Units, the Company paid AGI, as a commission, an amount equal to 10% of the aggregate sales price of the Series C Units sold in such closing, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Series C Units sold in such closing. In addition, pursuant to the Placement Agent Agreement, the Company is required to issue to AGI: (a) 5 year warrants to purchase up to 237,201 shares of Common Stock at an exercise price of $4.50 per share and (b) 5 year warrants to purchase up to 118,600 shares of Common Stock at an exercise price of $7.75 per share. The terms of such warrants will be substantially similar to the Series C Warrants except that the warrants issued to AGI will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection.

Subject to certain ownership limitations described below, the Series C Preferred Stock is convertible at the option of the holder at any time and from time to time into shares of Common Stock at a conversion price of $4.50 per share (calculated by dividing the stated value per share of Preferred Stock, which is initially $1,000, by the conversion price per share). The conversion price of the Series C Preferred Stock is subject to adjustment for certain issuances of Common Stock or other securities of the Company at an effective price per share that is lower than the conversion price then in effect, as well as for stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders. In addition, the holders of Preferred Stock will be entitled to receive any securities or rights to acquire securities or property granted or issued by the Company pro rata to the holders of Common Stock to the same extent as if such holders had converted all of their shares of Series C Preferred Stock prior to such distribution. In the event of a fundamental transaction, such as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations of the Company, the holders of Series C Preferred Stock will be entitled to receive, upon conversion of their shares of Series C Preferred Stock, any securities or other consideration received by the holders of the Common Stock pursuant to the fundamental transaction.

Holders of Series C Preferred Stock are entitled to receive cumulative dividends at a rate of 5.5% per annum, based on the stated value per share of Series C Preferred Stock. Dividends on the Series C Preferred Stock are payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on June 30, 2016, and on each conversion date (with respect to the shares of Preferred Stock being converted). For so long as required under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock or Series B Preferred Stock, dividends will be payable only in shares of Common Stock. Thereafter, dividends on the Series C Preferred Stock will be payable, at the option of the Company, in cash and/or, if certain conditions are satisfied, shares of Common Stock or a combination of both. Shares of Common Stock issued as payment of dividends will be valued at the lower of (a) the then current conversion price of the Series C Preferred Stock or (b) the average of the volume weighted average price for the Common Stock on the principal trading market therefor for the 10 trading days immediately prior to the applicable dividend payment date. The Company will incur a late fee of 9% per annum, payable in cash, on dividends that are not paid within three trading days of the applicable dividend payment date.

Subject to any limitations under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock or Series B Preferred Stock, the Company may become obligated to redeem the Series C Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series C Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series C Preferred Stock will have the option to require the Company to redeem such holder’s shares of Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series C Preferred Stock.

Subject to certain conditions contained in the Certificate of Designations, Preferences and Rights relating to the Series C Preferred Stock (the “Certificate of Designations”), the Company will have the option to force the conversion of the Series C Preferred Stock (in whole or in part) if (a) the volume weighted average price for the Common Stock on its principal trading market exceeds $7.00 for each of any 20 trading days during any 30 consecutive trading day period and the average daily dollar trading value for the Common Stock during such 30 day period exceeds $50,000 or (b) the Company receives approval to list the Common Stock on a national securities exchange.

Subject to certain exceptions contained in the Certificate of Designations, if the Company fails to timely deliver certificates for shares of Common Stock issuable upon conversion of the Series C Preferred Stock (the “Conversion Shares”) and, as a result, the holder is required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder of the Conversion Shares (a “Buy-In”), the Company will be required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by which such holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate number of Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Series C Preferred Stock equal to the number of shares of Series C Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements. In addition, the Company will be required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series C Preferred Stock which have been converted by a holder and in respect of which the Company fails to deliver Conversion Shares by the fifth trading day following the applicable conversion date and the Company will continue to pay such partial liquidated damages for each trading day after such eighth trading day until such certificates are delivered or the holder rescinds such conversion.

As long as at least 35% of the originally issued shares of Series C Preferred Stock are outstanding, without the written consent of the holders of a majority in stated value of the outstanding Series C Preferred Stock, the Company will not be permitted to, among other things, incur indebtedness or liens not permitted under the Certificate of Designations; repay, repurchase, pay dividends on or otherwise make distributions in respect of any shares of Common Stock or other securities junior to the Series C Preferred Stock; enter into certain transactions with affiliates of the Company; or enter into any agreement with respect to the foregoing.

Subject to the beneficial ownership limitation described below, holders of Series C Preferred Stock will vote together with the holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock on an as-converted basis. Holders will not be permitted to convert their Series C Preferred Stock if such conversion would cause such holder to beneficially own more than 4.99% of the outstanding Common Stock (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days prior written notice to the Company) (the “Beneficial Ownership Limitation”). In addition, no holder may vote any shares of Series C Preferred Stock (on an as-converted to Common Stock basis) in excess of the Beneficial Ownership Limitation.

Subject to certain limitations, so long as any purchaser holds any shares of Series C Preferred Stock, if (a) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (b) a purchaser then holding Series C Preferred Stock, Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such purchaser after taking into account all of the terms and conditions of the terms granted to the purchasers under the purchase agreement and the terms granted in such subsequent issuance or sale, including all of the components of the Series C Units and of the securities or units involved in such subsequent issuance or sale, then the purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such purchaser).

The Series C Warrants have a five-year term commencing on their respective issuance dates. Until the end of the applicable term, each Series C Warrant will be exercisable at any time and from time to time at an exercise price of $4.50 per share (with respect to the Series C-1 Warrants) or $7.75 per share (with respect to the Series C-2 Warrants). The Series C Warrants contain adjustment provisions substantially similar to those to the adjustment provisions of the Series C Preferred Stock as described above, except that the Series C Warrants do not include dilution protection for issuances of securities at an effective price per share lower than the conversion price of such Series C Warrants. In addition, the Series C Warrants provide for protection for a Buy-In on substantially the same terms as described above with respect to the Series C Preferred Stock. No holder may exercise its Series C Warrants in excess of the Beneficial Ownership Limitation.

As a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the Series A Warrants, on April 8, 2016, the exercise price per share of the Series A Warrants decreased from $5.80 per share to $4.50 per share and the number of shares of Common Stock issuable upon exercise of each of the Series A Warrants, in the aggregate, increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, will be equal to the aggregate exercise price prior to such adjustment. Also as a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the certificates of designations for the Series A Preferred Stock and Series B Preferred Stock, on April 8, 2016, the conversion price per share of Series A Preferred Stock and Series B Preferred Stock decreased to $4.50 per share.

Based on the terms of the purchase agreements relating to the issuance and sale of the Series A Units and the Series B Units, respectively, so long as any initial purchaser of Series A Units or Series B Units, as applicable (each, a “Purchaser”) holds any shares of Series A Preferred Stock or Series B Preferred Stock, as applicable, if (1) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (2) a Purchaser then holding Series A or Series B Preferred Stock or Warrants reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such Purchaser, then the Purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such Purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such Purchaser).

Pursuant to the purchase agreements relating to the issuance and sale of the Series A Units and the Series B Units, the Company was required to and did notify the holders of the Series A Preferred Stock and Series B Preferred Stock of the closing of the sale of the Series C Units,and following receipt thereof such holders of Series A Preferred Stock and Series B Preferred Stock will be entitled, pursuant to the “most favored nation” provisions contained in their respective purchase agreements (as described above), to elect to amend the terms of their purchase of Series A Units and Series B Units, respectively, to match the terms of the Series C Units. The Company is obligated to amend the terms of any of Series A Units or Series B Units who timely makes such election and tenders its Series A Units or Series B Units for exchange.

Upon initial recognition, the Series C Preferred Stock issued together with detachable Series C Warrants (classified as equity) were measured based on the relative fair value basis and were presented net of the direct issuance expenses that were allocated to them.

The Company has determined that due to the economic characteristics and risks of the Series C Preferred Stock, based on their stated or implied substantive terms and features, that such Preferred Stock, are considered as more akin to equity than debt. Accordingly, it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those of the Series C Preferred Stock themselves (the 'host contract') are clearly and closely related. As a result, the embedded conversion feature was not required to be bifurcated.

Since at the issuance dates of the Series C Preferred Stock, the exercise price of the conversion feature (based on the effective conversion rate of the Series C Preferred Stock into Common Stock) was higher than the estimated fair value of the Company’s Common Stock, it was determined that the conversion feature was not beneficial. Also, due to the liquidation preference and certain redemption rights for the benefit of the holders of the Series C Preferred Stock, upon the occurrence of the certain contingent events, which are not considered as solely within the Company's control management determined that the Series C Preferred Stock were to be presented as temporary equity. On each balance sheet date, the Company’s management assesses the probability of redemption of the outstanding Preferred Stock. In the event that management determines such redemption to be probable as of an applicable balance sheet date, the Company will recognize a liability in an amount equal to the aggregate redemption price of the Preferred Stock. In addition, upon such determination, the difference between the amount that was allocated to the Preferred Stock (after deduction of issuance expenses) and such redemption amount will be accreted over the period beginning on the date that it becomes probable that the instrument will become redeemable and ending on the earliest redemption date.

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INVENTORIES

9 Months Ended

Sep. 30, 2016

Inventory Disclosure [Abstract]

INVENTORIES

NOTE 4 –       INVENTORIES

	US dollars
	September 30,		December 31,
	2016		2015
	(unaudited)
Raw materials		169,446		205,645
Work in process		408,600		551,111
Finished products		96,053		59,467
		674,099		816,223

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FINANCING (INCOME) EXPENSES, NET

9 Months Ended

Sep. 30, 2016

Other Income and Expenses [Abstract]

FINANCING (INCOME) EXPENSES, NET

NOTE 5 –       FINANCING (INCOME) EXPENSES, NET

	US dollars						US dollars
	Nine month periodended September 30,						Three month periodended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Israeli CPI linkage difference on principal of loans from stockholders		27			(1,384	)		666			488
Exchange rate differences		33,329			23,877			9,118			(14,392	)
Change in fair value of Warrants with down round protection		(110,498	)		(119,148	)		(46,286	)		(27,839	)
Interest expenses on credit from banks and other		13,488			9,227			4,913			849
Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants		-			1,284,354			-			13,383
		(63,654	)		1,196,926			(31,589	)		(27,511	)

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LOSS PER SHARE

9 Months Ended

Sep. 30, 2016

Earnings Per Share [Abstract]

LOSS PER SHARE

NOTE 6 –       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 dividend 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, 2016 and 2015 are as follows:

	US dollars						US dollars
	Nine month periodended September 30,						Three month periodended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Loss for the period		(4,270,506	)		(4,297, 307	)		(1,454,744	)		(1,095,970	)
Cash dividend on Series A Preferred Stock		(13,529	)		(52,361	)		(4,076	)		(5,325	)
Stock dividend on Series B Preferred Stock		(449,051	)		(270,307	)		(194,950	)		(84,512	)
Stock dividend on Series C Preferred Stock		(80,082	)		-			(59,727	)		-
Loss for the period attributable to common stockholders		(4,813,168	)		(4,619,975	)		(1,713,497	)		(1,185,807	)

	Number of shares				Number of shares
	Nine month periodended September 30,				Three month periodended September 30,
	2016		2015		2016		2015
Number of shares:
Common shares used in computing basic income (loss) per share		5,746,838		5,426,688		5,806,724		5,513,265
Common shares used in computing diluted income (loss) per share		5,746,838		5,426,688		5,806,724		5,513,265
Total weighted average number of common shares related to outstanding convertible Preferred Stock, options and warrants excluded from the calculations of diluted income (loss) per share (*)		12,125,368		9,425,407		13,915,740		9,539,832

 (*) All outstanding convertible Preferred Stock, 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 anti-dilutive.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policy)

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

Accounting principles

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, 2015. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“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, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any other interim period or for any future period.

Principles of consolidation

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.

Warrants with down-round protection

Warrants with down-round protection

The Company has determined its derivative warrant liability with respect to the Series A Warrants and warrants issued to Andrew Garrett, Inc., (“AGI”) as part of the Series A Unit offering, the Series B Unit offering and the Series C Unit offering to be a Level 3 fair value measurement and has used the Binomial pricing model to calculate its fair value. Because the warrants contain a down round protection feature, the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the valuation calculations.  The key inputs used in the fair value calculations were as follows:

The changes in the fair value of the Level 3 liability are as follows (in US dollars):

	Series A Warrants
	September 30,
	2016			2015
Balance, Beginning of the period		321,695			2,057,618
Warrants issued as consideration for placement services		282,221			-
Amount classified out of stockholders deficit and presented as Warrants with Down-Round Protection		341,662			-
Exchange of Series A Warrants pursuant to the “most favored nation” provision		-			(1,586,831	)
Change in fair value Warrants with Down-Round Protection		(110,498	)		(119,148	)
Balance, End of period		835,080			351,639

The key inputs used in the fair value calculations were as follows:

	September 30,
	2016		2015
Dividend yield (%)		-		-
Expected volatility (%) (*)		62.16		105.14
Risk free interest rate (%)		0.72-1.21		1.01
Expected term of options (years) (**)		1.45-5.00		2.45
Exercise price (US dollars)		4.50-7.75		5.80
Share price (US dollars) (***)		2.38		2.31
Fair value (US dollars)		0.26-0.60		0.92

(*) Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on the historical volatility of the share price of other public companies that operate in the same industry sector as the Company.

(**) Due to the fact that the Company does not have sufficient historical exercise data, the expected term was determined based on the "simplified method" in accordance with Staff Accounting Bulletin No. 110.

(***) The Common Stock price, per share reflects the Company’s management’s estimation of the fair value per share of Common Stock as of September 30, 2016 and 2015. 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 C Units and the Series B Units, as applicable to each reporting period (See Note 3).

Recently issued accounting pronouncements

Recently issued accounting pronouncements

1. Accounting Standards Update 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity”

Effective January 1, 2016, the Group adopted Accounting Standard Update 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity ("ASU 2014-16").

The amendments in ASU 2014-16 clarify how U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weigh those terms and features. The assessment of the substance of the relevant terms and features should incorporate a consideration of the characteristics of the terms and features themselves; the circumstances under which the hybrid financial instrument was issued or acquired; and the potential outcomes of the hybrid financial instrument, as well as the likelihood of those potential outcomes.

The amendments in ASU 2014-16 apply to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of shares.

The effects of initially adopting the amendments in ASU 2014-16 were required to be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of shares as of the beginning of the fiscal year for which the amendments are effective. However, retrospective application was permitted to all relevant prior periods.

Management analyzed the economic characteristics and risks of the Series A Preferred Stock and the Series B Preferred Stock (including the embedded conversion feature of each) in accordance with the provisions of ASU 2014-16 and determined that such instruments are considered as more akin to equity than debt. Accordingly, it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those of the Preferred Stock themselves (the 'host contract') are clearly and closely related and accordingly, the embedded conversion feature was not required to be bifurcated. As a result of the above determination, ASU 2014-16 did not impact the classification of the Series A Preferred Stock or the Series B Preferred Stock.

2. Accounting Standards Update 2014-09, “Revenue from Contracts with Customers”

In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").

ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

An entity should apply the amendments in ASU 2014-09 using one of the following two methods: 1. Retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures.

During 2016, the FASB issued several Accounting Standard Updates (“ASUs”) that focus on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements and Practical Expedients, Principal versus Agent Considerations and Identifying Performance Obligations and Licensing.

In accordance with a recent amendment to ASU 2014-09, introduced by Accounting Standard 2015-14, “Revenue from contracts with Customers – Deferral of the Effective Date”, for a public entity, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

The Company is in the process of assessing the impact, if any, of ASU 2014-09 (including the amendments introduced through recent ASUs) on its consolidated financial statements.

3. Accounting Standards Update 2014-15, “Presentation of Financial Statements—Going Concern”

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15").

ASU 2014-15 provides guidance on management’s responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued, when applicable).

ASU 2014-15 also provides guidance related to the required disclosures as a result of management’s evaluation. 

The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

Due to the current financial condition of the Company and the existing uncertainty regarding its ability to continue as a going concern, management does not believe that the provisions of ASU 2014-15 will have a significant effect on its evaluation of the Company’s ability to continue as a going concern. However, management is currently considering if additional disclosures will be required as a result of ASU 2014-15.

4. Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory”

In July, 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11").

ASU 2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and the retail inventory method (RIM) are not impacted by the new guidance. Prior to the issuance of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin).

For a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periods beginning after December 15, 2016, including interim periods within the first such annual reporting period (the first quarter of fiscal year 2017 for the Company). Early adoption is permitted as of the beginning of an interim or annual reporting period.

The Company is in the process of assessing the impact, if any, of ASU 2015-11 on its consolidated financial statements.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

Schedule of Changes in Fair Value of Level 3 Liability

The changes in the fair value of the Level 3 liability are as follows (in US dollars):

	Series A Warrants
	September 30,
	2016			2015
Balance, Beginning of the period		321,695			2,057,618
Warrants issued as consideration for placement services		282,221			-
Amount classified out of stockholders deficit and presented as Warrants with Down-Round Protection		341,662			-
Exchange of Series A Warrants pursuant to the “most favored nation” provision		-			(1,586,831	)
Change in fair value Warrants with Down-Round Protection		(110,498	)		(119,148	)
Balance, End of period		835,080			351,639

Schedule of Warrant Inputs

The key inputs used in the fair value calculations were as follows:

	September 30,
	2016		2015
Dividend yield (%)		-		-
Expected volatility (%) (*)		62.16		105.14
Risk free interest rate (%)		0.72-1.21		1.01
Expected term of options (years) (**)		1.45-5.00		2.45
Exercise price (US dollars)		4.50-7.75		5.80
Share price (US dollars) (***)		2.38		2.31
Fair value (US dollars)		0.26-0.60		0.92

(*) Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on the historical volatility of the share price of other public companies that operate in the same industry sector as the Company.

(**) Due to the fact that the Company does not have sufficient historical exercise data, the expected term was determined based on the "simplified method" in accordance with Staff Accounting Bulletin No. 110.

(***) The Common Stock price, per share reflects the Company’s management’s estimation of the fair value per share of Common Stock as of September 30, 2016 and 2015. 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 C Units and the Series B Units, as applicable to each reporting period (See Note 3).

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INVENTORIES (Tables)

9 Months Ended

Sep. 30, 2016

Inventory Disclosure [Abstract]

Schedule of Inventory

US dollars
	September 30,		December 31,
	2016		2015
	(unaudited)
Raw materials		169,446		205,645
Work in process		408,600		551,111
Finished products		96,053		59,467
		674,099		816,223

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FINANCING (INCOME) EXPENSES, NET (Tables)

9 Months Ended

Sep. 30, 2016

Other Income and Expenses [Abstract]

Schedule of Financing (Income) Expenses, Net

US dollars						US dollars
	Nine month periodended September 30,						Three month periodended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Israeli CPI linkage difference on principal of loans from stockholders		27			(1,384	)		666			488
Exchange rate differences		33,329			23,877			9,118			(14,392	)
Change in fair value of Warrants with down round protection		(110,498	)		(119,148	)		(46,286	)		(27,839	)
Interest expenses on credit from banks and other		13,488			9,227			4,913			849
Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants		-			1,284,354			-			13,383
		(63,654	)		1,196,926			(31,589	)		(27,511	)

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LOSS PER SHARE (Tables)

9 Months Ended

Sep. 30, 2016

Earnings Per Share [Abstract]

Schedule of Loss and Weighted Average Number of Shares

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, 2016 and 2015 are as follows:

	US dollars						US dollars
	Nine month periodended September 30,						Three month periodended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Loss for the period		(4,270,506	)		(4,297, 307	)		(1,454,744	)		(1,095,970	)
Cash dividend on Series A Preferred Stock		(13,529	)		(52,361	)		(4,076	)		(5,325	)
Stock dividend on Series B Preferred Stock		(449,051	)		(270,307	)		(194,950	)		(84,512	)
Stock dividend on Series C Preferred Stock		(80,082	)		-			(59,727	)		-
Loss for the period attributable to common stockholders		(4,813,168	)		(4,619,975	)		(1,713,497	)		(1,185,807	)

	Number of shares				Number of shares
	Nine month periodended September 30,				Three month periodended September 30,
	2016		2015		2016		2015
Number of shares:
Common shares used in computing basic income (loss) per share		5,746,838		5,426,688		5,806,724		5,513,265
Common shares used in computing diluted income (loss) per share		5,746,838		5,426,688		5,806,724		5,513,265
Total weighted average number of common shares related to outstanding convertible Preferred Stock, options and warrants excluded from the calculations of diluted income (loss) per share (*)		12,125,368		9,425,407		13,915,740		9,539,832

 (*) All outstanding convertible Preferred Stock, 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 anti-dilutive.

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GENERAL (Details) - USD ($)	1 Months Ended	3 Months Ended	5 Months Ended	12 Months Ended
	Sep. 30, 2016	Sep. 30, 2016	Dec. 31, 2014	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2015
Class of Stock [Line Items]
Accumulated deficit	$ 34,189,683	$ 34,189,683					$ 29,376,515
Stockholders' deficit	$ 9,937,906	$ 9,937,906					$ 6,970,914
Proceeds from issuance of Common Stock, net of issuance expenses						$ 1,000,000
Proceeds from convertible preferred stock and warrants					$ 5,300,000
Series B-1 Warrant [Member]
Class of Stock [Line Items]
Warrants term				5 years
Warrant exercise price			$ 5.80	$ 5.80
Series B-2 Warrant [Member]
Class of Stock [Line Items]
Warrants term				5 years
Warrant exercise price			$ 10.00	$ 10.00
Series B Preferred Stock [Member]
Class of Stock [Line Items]
Proceeds from convertible preferred stock and warrants			$ 7,300,000
Dividend rate			5.50%
Par value per share			$ 0.001	0.001
Conversion price			$ 5.80	$ 5.80
April 2016 to September 2016 Offering [Member]
Class of Stock [Line Items]
Shares convertible into	1,186,000
Number of shares covered by warrants	2,372,000	2,372,000
Proceeds from issuance of Series C Units		$ 4,520,000
Number of units sold		5,323
April 2016 to September 2016 Offering [Member] | Series C-1 Warrant [Member]
Class of Stock [Line Items]
Warrants term		5 years
Warrant exercise price	$ 4.50	$ 4.50
April 2016 to September 2016 Offering [Member] | Series C-2 Warrant [Member]
Class of Stock [Line Items]
Warrants term		5 years
Warrant exercise price	7.75	$ 7.75
April 2016 to September 2016 Offering [Member] | Series C 5.5% Convertible Preferred Stock [Member]
Class of Stock [Line Items]
Dividend rate		5.50%
Par value per share	0.001	$ 0.001
Conversion price	$ 4.50	$ 4.50
Number of convertible preferred shares offered per unit sold	1	1

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Changes in Fair Value of Level 3 Liability) (Details) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Accounting Policies [Abstract]
Balance, Beginning of the period	$ 321,695	$ 2,057,618
Warrants issued as consideration for placement services	282,221
Amount classified out of stockholders deficit and presented as Warrants with Down-Round Protection	341,662
Exchange of Series A Warrants pursuant to the 'most favored nation' provision		(1,586,831)
Change in fair value Warrants with Down-Round Protection	(110,498)	(119,148)
Balance, End of period	$ 835,080	$ 351,639

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Schedule of Warrant Inputs) (Details) - $ / shares		9 Months Ended
		Sep. 30, 2016	Sep. 30, 2015
Common Stock [Member]
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Share price	[1]	$ 2.38	$ 2.31
Warrant [Member]
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Dividend yield
Expected volatility	[2]	62.16%	105.14%
Risk free interest rate			1.01%
Expected term of options	[3]		2 years 5 months 12 days
Exercise price			$ 5.80
Fair value			$ 0.92
Warrant [Member] | Minimum [Member]
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Risk free interest rate		0.72%
Expected term of options	[3]	1 year 5 months 12 days
Exercise price		$ 4.50
Fair value		$ 0.26
Warrant [Member] | Maximum [Member]
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Risk free interest rate		1.21%
Expected term of options	[3]	5 years
Exercise price		$ 7.75
Fair value		$ 0.60

[1] The Common Stock price, per share reflects the Company's management's estimation of the fair value per share of Common Stock as of September 30, 2016 and 2015. 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 C Units and the Series B Units, as applicable to each reporting period (See Note 3).

[2] Due to the low trading volume of the Company's Common Stock, the expected volatility was based on the historical volatility of the share price of other public companies that operate in the same industry sector as the Company.

[3] Due to the fact that the Company does not have sufficient historical exercise data, the expected term was determined based on the "simplified method" in accordance with Staff Accounting Bulletin No. 110.

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RECENT EVENTS (Details) - USD ($)	1 Months Ended		3 Months Ended	9 Months Ended
	Sep. 30, 2016	Feb. 29, 2016	Sep. 30, 2016	Sep. 30, 2016	Sep. 30, 2015
Class of Stock [Line Items]
Incremental fair market value adjustments of modified warrants issued to placement agent				$ 211,077
Advisory Agreement with Andrew Garrett, Inc.[Member]
Class of Stock [Line Items]
Number of prior warrants provided to Andrew Garrett, Inc. from the company's common stock offering completed in 2010, that were subsequently extended		422,077
Number of prior warrants provided to Andrew Garrett, Inc. in connection with the Series B Unit offering, that were subsequently extended				439,674
Amount company expects it will classify as the fair market value at the time the warrants are issued				$ 341,662
Advisory Agreement with Andrew Garrett, Inc.[Member] | Placement Agent Warrants Tranche One [Member]
Class of Stock [Line Items]
Warrant exercise price	$ 7.75		$ 7.75	$ 7.75
Warrants term			5 years
Number of common stock shares callable by warrants	118,600		118,600	118,600
Advisory Agreement with Andrew Garrett, Inc.[Member] | Placement Agent Warrants Tranche Two [Member]
Class of Stock [Line Items]
Warrant exercise price	$ 4.50		$ 4.50	$ 4.50
Warrants term			5 years
Number of common stock shares callable by warrants	237,201		237,201	237,201
Advisory Agreement with Andrew Garrett, Inc.[Member] | Initial Closing [Member]
Class of Stock [Line Items]
Commission fee to agent expressed as percentage of aggregate sales price of the Units			6.00%
Managment fee percentage commission to agent			4.00%
Non-accountable expense allowance fee to agent expressed as percentage of aggregate sales price of the Units			3.00%
Advisory Agreement with Andrew Garrett, Inc.[Member] | Second Closing [Member]
Class of Stock [Line Items]
Commission fee to agent expressed as percentage of aggregate sales price of the Units			10.00%
Non-accountable expense allowance fee to agent expressed as percentage of aggregate sales price of the Units			3.00%
April 2016 to September 2016 Offering [Member]
Class of Stock [Line Items]
Proceeds from issuance of Series C Units			$ 4,520,000
Number of units sold			5,323
Shares convertible into	1,186,000
Number of common stock shares callable by warrants	2,372,000		2,372,000	2,372,000

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INVENTORIES (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Inventory Disclosure [Abstract]
Raw materials	$ 169,446	$ 205,645
Work in progress	408,600	551,111
Finished products	96,053	59,467
Total	$ 674,099	$ 816,223

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FINANCING (INCOME) EXPENSES, NET (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Other Income and Expenses [Abstract]
Israeli CPI linkage difference on principal of loans from stockholders	$ 666	$ 488	$ 27	$ (1,384)
Exchange rate differences	9,118	(14,392)	33,329	23,877
Change in fair value of Warrants with down round protection	(46,286)	(27,839)	(110,498)	(119,148)
Interest expenses on credit from banks and other	4,913	849	13,488	9,227
Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants		13,383		1,284,354
Financing (income) expenses, net	$ (31,589)	$ (27,511)	$ (63,654)	$ 1,196,926

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LOSS PER SHARE (Details) - USD ($)		3 Months Ended		9 Months Ended
		Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Class of Stock [Line Items]
Loss for the period		$ (1,454,744)	$ (1,095,970)	$ (4,270,506)	$ (4,297,307)
Cash dividend				(13,529)
Loss for the period attributable to common stockholders		$ (1,713,497)	$ (1,185,807)	$ (4,813,168)	$ (4,619,975)
Number of shares:
Common shares used in computing Basic income (loss) per share		5,806,724	5,513,265	5,746,838	5,426,688
Common shares used in computing Diluted income (loss) per share		5,806,724	5,513,265	5,746,838	5,426,688
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	[1]	13,915,740	9,539,832	12,125,368	9,425,407
Series A Preferred Stock [Member]
Class of Stock [Line Items]
Cash dividend		$ (4,076)	$ (5,325)	$ (13,529)	$ (52,361)
Series B Preferred Stock [Member]
Class of Stock [Line Items]
Stock dividend		(194,950)	(84,512)	(449,051)	(270,307)
Series C 5.5% Convertible Preferred Stock [Member]
Class of Stock [Line Items]
Stock dividend		$ (59,727)		$ (80,082)

[1] All outstanding convertible Preferred Stock, 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 anti-dilutive.