UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For the quarterly period ended March 31, 2018

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For the transition period from                      to                    

 

Commission File No. 001-37704

 

DarioHealth Corp.

(Exact name of registrant as specified in its charter)

 

Delaware	45-2973162
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

8 HaTokhen Street
Caesarea Industrial Park, Israel	3088900
(Address of Principal Executive Offices)	(Zip Code)

 

+972-4-7704055

(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 x   No ¨

 

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

 

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

 

¨	Large accelerated filer	¨	Accelerated filer
¨	Non-accelerated filer	x	Smaller reporting company
	(Do not check if a smaller reporting company)	x	Emerging growth company

 

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

 

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

 

As of May 14, 2018, the registrant had 16,743,896 shares of common stock outstanding.

 

When used in this quarterly report, the terms “Dario,” “the Company,” “we,” “our,” and “us” refer to DarioHealth Corp., a Delaware corporation. “Dario” is registered as a trademark in the United States, Israel, China, Canada, Hong Kong, South Africa, Japan, Costa Rica and Panama. “DarioHealth” is registered as a trademark in the United States and Israel.

 

 

DarioHealth Corp.

 

Quarterly Report on Form 10-Q

 

TABLE OF CONTENTS

 

			Page
Cautionary Note Regarding Forward-Looking Statements			3
PART 1-FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)		F-1
	Consolidated Balance Sheets		F-2
	Consolidated Statements of Comprehensive Loss		F-4
	Statements of Changes in Stockholders’ Equity (Deficiency)		F-5
	Consolidated Statements of Cash Flows		F-6
	Notes to Consolidated Financial Statements		F-7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		4
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		9
Item 4.	Control and Procedures		9
PART II-OTHER INFORMATION			9
Item 6.	Exhibits		9
SIGNATURES			10

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information set forth in this Quarterly Report on Form 10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein may address or relate to future events and expectations and as such constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting our business, including many assumptions regarding future events. Such forward-looking statements include statements regarding, among other things:

 

	•	our current and future capital requirements and our ability to satisfy our capital needs through financing transactions or otherwise;
	•	our launch and market penetration plans;
	•	our ability to manufacture, market and generate sales of our Dario Smart Diabetes Management Solution;
	•	our ability to commercialize Dario Engage;
	•	our ability to develop, launch and commercialize Dario Intelligence;
	•	our ability to maintain our relationships with key partners;
	•	our ability to complete required clinical trials of our product and obtain clearance or approval from the United States Food and Drug Administration, or FDA, or other regulatory agencies in different jurisdictions;
	•	our ability to maintain or protect the validity of our U.S. and other patents and other intellectual property;
	•	our ability to retain key executive members;
	•	our ability to internally develop new inventions and intellectual property;
	•	interpretations of current laws and the passages of future laws; and
	•	acceptance of our business model by investors.

 

Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors. These statements may be found under the section of our Annual Report on Form 10-K for the year ended December 31, 2017 (filed on March 19, 2018) entitled “Risk Factors” as well as in our other public filings.

 

In light of these risks and uncertainties, and especially given the start-up nature of our business, there can be no assurance that the forward-looking statements contained herein will in fact occur. Readers should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF MARCH 31, 2018

 

UNAUDITED

 

INDEX 

 

		Page
Consolidated Balance Sheets		F-2 - F-3
Consolidated Statements of Comprehensive Loss		F-4
Statements of Changes in Stockholders' Equity (Deficiency)		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7 - F-13

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

U.S. dollars in thousands

 

		March 31,				December 31,
		2018				2017
		Unaudited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	7,041			$	3,718
Short-term bank deposits			188				258
Trade Receivables			200				282
Inventories			912				1,184
Other accounts receivable and prepaid expenses			566				604
Total current assets			8,907				6,046
LEASE DEPOSITS			45				42
PROPERTY AND EQUIPMENT, NET			828				869
Total assets		$	9,780			$	6,957

 

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

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

U.S. dollars in thousands (except stock and stock data)

 

		March 31,				December 31,
		2018				2017
		Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables		$	1,112			$	1,852
Other accounts payable and accrued expenses			1,297				1,163
Total current liabilities			2,409				3,015
LIABILITY RELATED TO WARRANTS			*) -				1
STOCKHOLDERS' EQUITY
Common Stock of $0.0001 par value – Authorized: 160,000,000 shares at March 31, 2018 (unaudited) and December 31, 2017; Issued and Outstanding: 16,480,164 and 14,074,238 shares at March 31, 2018 (unaudited) and December 31, 2017, respectively			7				7
Preferred Stock of $0.0001 par value - Authorized: 5,000,000 shares at March 31, 2018 (unaudited) and December 31, 2017; Issued and Outstanding: 1,234,080 and None shares at March 31, 2018 (unaudited) and December 31, 2017, respectively			*) -				-
Additional paid-in capital			81,241				74,892
Accumulated deficit			(73,877	)			(70,958	)
Total stockholders' equity			7,371				3,941
Total liabilities and stockholders' equity		$	9,780			$	6,957

 

*) Represents an amount lower than $1.

 

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

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

U.S. dollars in thousands (except stock and stock data)

 

		Three months ended March 31
		2018				2017
		Unaudited
Revenues		$	1,756			$	1,007
Cost of revenues			1,204				901
Gross profit			552				106
Operating expenses:
Research and development		$	742			$	469
Sales and marketing			1,824				1,825
General and administrative			861				2,017
Total operating expenses			3,427				4,311
Operating loss			(2,875	)			(4,205	)
Financial expenses, net:
Revaluation of warrants			(1	)			1,195
Other financial expense, net			45				13
Total financial expenses, net			44				1,208
Net loss		$	(2,919	)		$	(5,413	)
Net loss attributable to holders of Common Stock		$	(2,919	)		$	(5,413	)
Net loss per share
Basic and diluted loss per share		$	(0.20	)		$	(0.75	)
Weighted average number of Common Stock used in computing basic and diluted net loss per share			14,943,032				7,195,801

  

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

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

U.S. dollars in thousands (except stock and stock data)

 

		Common Stock								Preferred Stock								Additional paid-in				Accumulated				Total stockholders' equity
		Number				Amount				Number				Amount				capital				deficit				(deficiency)
Balance as of December 31, 2016			5,713,383				6				-				-				48,413				(54,960	)			(6,541	)
Issuance of Common Stock, net of issuance cost			3,754,770				1				-				-				9,469				-				9,470
Payment for executives and directors under Stock for Salary Program			271,880				*) -				-				-				707				-				707
Issuance of Common Stock to Employees			474,880				*) -				-				-				1,514				-				1,514
Issuance of Common Stock to consultants and service provider			281,681				*) -				-				-				874				-				874
Reclassification of warrants from liability to equity on March 8, 2017			-				-				-				-				8,655				-				8,655
Exercise of options			91,855				*) -				-				-				*) -				-				*) -
Issuance of Preferred Stock, net of issuance cost			-				-				2,307,654				*) -				3,711				-				3,711
Issuance of Common stock in November 2017 warrant exchange agreement			1,039,676				*) -				-				-				-				-				*) -
Conversion of Preferred Stock to Common Stock			2,307,654				*) -				(2,307,654	)			*) -				-				-				-
Deemed dividend related to Stock dividend			138,459				*) -				-				-				255				(255	)			-
Stock-based compensation			-				-				-				-				1,294				-				1,294
Net loss			-				-				-				-				-				(15,743	)			(15,743	)
Balance as of December 31, 2017			14,074,238			$	7				-			$	-			$	74,892			$	(70,958	)		$	3,941
Payment for executives and directors under Stock for Salary Program			102,548				*) -				-				-				161				-				161
Issuance of Common Stock to consultants and service provider			41,109				*) -				-				-				60				-				60
Issuance of Common Stock, net of issuance cost			2,262,269				*) -				-				-				2,865				-				2,865
Issuance of Preferred Stock, net of issuance cost			-				-				1,234,080				*) -				3,124				-				3,124
Stock-based compensation			-				-				-				-				139				-				139
Net loss			-				-				-				-				-				(2,919	)			(2,919	)
Balance as of March 31, 2018 (unaudited)			16,480,164			$	7				1,234,080			$	*) -			$	81,241			$	(73,877	)		$	(7,371	)

  

*) Represents an amount lower than $1.

 

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

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

U.S. dollars in thousands

 

		Three months ended March 31,
		2018				2017
		Unaudited
Cash flows from operating activities:
Net loss		$	(2,919	)		$	(5,413	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Stock-based compensation and Common Stock to service providers			230				1,585
Depreciation			53				43
Decrease (increase) is trade receivables			82				(256	)
Decrease (increase) in accounts receivables and prepaid expenses			38				(210	)
Decrease in inventories			272				39
Decrease in trade payables			(740	)			(328	)
Increase in other accounts payable and accrued expenses			219				262
Change in fair value of warrants to purchase shares of Common Stock			(1	)			1,195
Net cash used in operating activities			(2,766	)			(3,083	)
Cash flows from investing activities:
Maturities of short-term bank deposit			70				-
Investment in lease deposits			(3	)			(9	)
Purchase of property and equipment			(12	)			-
Net cash provided by (used in) investing activities			55				(9	)
Cash flows from financing activities:
Proceeds from issuance of Common Stock and warrants, net of issuance cost			6,034				4,816
Net cash provided by financing activities			6,034				4,816
Increase in cash and cash equivalents			3,323				1,724
Cash and cash equivalents at the beginning of the period			3,718				1,093
Cash and cash equivalents at the end of the period		$	7,041			$	2,817
Non-cash investing and financing activities:
Reclassification of warrants from liability to Common Stock		$	-			$	8,655
Payment for directors and Consultants under Shares for Salary Program		$	85			$	183

  

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

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except stock and stock data)

 

NOTE 1:-

GENERAL

 

a.

DarioHealth Corp. (formerly LabStyle Innovations Corp.) (the “Company”) was incorporated in Delaware and commenced operations on August 11, 2011. The Company is a digital health (mHealth) company that is developing and commercializing a patented and proprietary technology providing consumers with laboratory-testing capabilities using smart phones and other mobile devices. The Company’s flagship product, DarioTM, also referred to as the DarioTM Smart Diabetes Management Solution, is a mobile, real-time, cloud-based, diabetes management solution based on an innovative, multi-feature software application combined with a stylish, ‘all-in-one’, pocket-sized, blood glucose monitoring device, which we call the DarioTM Smart Meter.

 

b.

The Company’s wholly owned subsidiary, LabStyle Innovation Ltd. (“Ltd.” or “Subsidiary”), was incorporated and commenced operations on September 14, 2011 in Israel. Its principal business activity is to hold the Company’s intellectual property and to perform research and development, manufacturing, marketing and other business activities. Ltd. has a wholly-owned subsidiary, LabStyle Innovations US LLC, a Delaware limited liability company (“LabStyle US”), which was established in 2014, however it has not started its operations to date and was dissolved at the end of 2017.

 

c.

During the three months ended March 31, 2018, the Company incurred operating losses and negative cash flows from operating activities amounting to $2,919 and $2,766, respectively. The Company will be required to obtain additional liquidity resources in order to support the commercialization of its products and maintain its research and development activities. The Company is addressing its liquidity needs by seeking additional funding from public and/or private sources and by ramping up its commercial sales. There are no assurances, however, that the Company will be able to obtain an adequate level of financial resources that are required for the short and long-term development and commercialization of its product. According to management estimates, the Company has sufficient liquidity resources to continue its planned activity into March 2019.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

d.

On March 4, 2016, the Company's Common Stock and warrants were approved for listing on NASDAQ Capital Market under the symbols “DRIO” and “DRIOW,” respectively.

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except stock and stock data)

 

NOTE 2: -

SIGNIFICANT ACCOUNTING POLICIES

  

The significant accounting policies applied in the audited annual consolidated financial statements of the Company as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 are applied consistently in these unaudited interim consolidated financial statements.

 

NOTE 3: -

UNAUDITED INTERIM FINANCIAL STATEMENTS

  

The accompanying unaudited interim consolidated financial statements as of March 31, 2018, have been prepared in accordance with U.S. generally accepted accounting principles and standards of the Public Company Accounting Oversight Board for interim financial information. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the Company's consolidated financial position as of March 31, 2018, and the Company's consolidated results of operations and the Company's consolidated cash flows for the three months ended March 31, 2018. Results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

NOTE 4: -

INVENTORIES

  

		March 31,				December 31,
		2018				2017
		Unaudited
Raw materials		$	195			$	323
Finished products			717				861
		$	912			$	1,184

 

During the three months’ period ended March 31, 2018, and the year ended December 31, 2017, total inventory write-off expenses amounted to $6 and $190, respectively.

 

NOTE 5: -

COMMITMENTS AND CONTINGENT LIABILITIES

  

From time to time the Company is involved in claims and legal proceedings. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss.

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except stock and stock data)

 

NOTE 6:-

STOCKHOLDERS' EQUITY

 

a.

In January 2018, 102,548 shares of Common Stock were issued to certain members of the Board of Directors, Officers and employees of the Company as consideration for a reduction in or waiver of cash salary or fees owed to such individuals, totaling $161. The shares were issued under the Company’s Amended and Restated 2012 Equity Incentive Plan (the "2012 Plan").

 

b.

In January 2018, 8,859 shares of Common Stock were issued to a service provider instead of cash owed to him for services provided during the fourth quarter of 2017. The shares were issued under the 2012 Plan.

 

c.

On February 28, 2018 and March 6, 2018, the Company closed two concurrent private placements offerings consisting of 2,262,269 shares of the Company's Common Stock at $1.40 per share, 1,234,080 shares of the Company's newly designated Series C Convertible Preferred Stock (the "Series C Preferred Stock"), for aggregate gross proceeds of approximately $6,623 ($6,034 net of issuance expenses) at $2.80 per share, and warrants to purchase up to 3,784,351 shares of Common Stock. The shares of Series C Preferred Stock are convertible into an aggregate of 2,468,160 shares of Common Stock based on a conversion price of $1.40 per share. Such conversion price is not subject to any future price-based anti-dilution adjustments except for standard anti-dilution protection. The shares of Series C Preferred Stock are not redeemable nor contingently redeemable. The holders of the Series C Preferred Stock will not be entitled to convert such preferred stock into shares of the Company's Common Stock until the Company obtains stockholder approval for such issuance and upon obtaining such stockholder approval shall automatically convert into shares of Common Stock. The holders of the Series C Preferred Stock do not possess any voting rights but the Series C Preferred Stock does carry a liquidation preference for each holder equal to the investment made by such holder in the Offering. In addition, the holders of Series C Preferred Stock are eligible to participate in dividends and other distributions by the Company on an as converted basis. The warrants issued in the concurrent private placements are exercisable after the six-month anniversary of each respective closing and will expire on the 18-month anniversary of their issuance.

 

In conjunction with these offerings the Company issued 32,250 shares of Common Stock to certain finders. The shares were issued under the 2012 Plan.

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except stock and stock data)

 

NOTE 6:-

STOCKHOLDERS' EQUITY (Cont.)

 

d.

Stock option compensation:

 

Transactions related to the grant of options to employees, directors and non-employees under the above plans during the three-month period ended March 31, 2018, were as follows:

 

		Number of options				Weighted average exercise price				Weighted average remaining contractual life				Aggregate Intrinsic value
						$				Years				$
Options outstanding at beginning of year			1,378,160				7.39				4.75				437
Options granted			-				-
Options exercised			-				-
Options expired			-				-
Options forfeited			(10,000	)			4.62
Options outstanding at period end (unaudited)			1,368,160				7.44				4.78				420
Options vested and expected to vest at period end (unaudited)			1,253,165				7.63				4.49				420
Exercisable at period end (unaudited)			916,017				9.58				4.32				363

  

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company's closing stock price on the last day of the first quarter of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2018. This amount is impacted by the changes in the fair market value of the Common Stock.

 

As of March 31, 2018, the total amount of unrecognized stock-based compensation expense was approximately $906 thousand which will be recognized over a weighted average period of 0.91 years.

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except stock and stock data)

 

NOTE 6:-

STOCKHOLDERS' EQUITY (Cont.)

 

The total compensation cost related to all of the Company's equity-based awards recognized during the three-month period ended March 31, 2018, and 2017 was comprised as follows:

 

		Three months ended March 31,
		2018				2017
		Unaudited
Cost of revenues		$	10			$	54
Research and development			42				71
Sales and marketing			44				123
General and administrative			134				1,337
Total stock-based compensation expenses		$	230			$	1,585

 

NOTE 7:-

FAIR VALUE MEASUREMENTS

 

Accounting Standards Codification 820, “Fair Value Measurements and Disclosures” (“ASC 820”), defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

 

ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

 

Level 1 -	quoted prices in active markets for identical assets or liabilities;
Level 2 -	inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
Level 3 -	unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except stock and stock data)

 

NOTE 7:-

FAIR VALUE MEASUREMENTS (Cont.)

 

On September 23, 2014, the Company consummated a private placement (the “September 2014 Private Placement”).

 

The warrants issued in the September 2014 Private Placement contain a net settlement cash feature and liquidated damages penalties and therefore the Company accounts for such warrants as a liability according to the provisions of ASC 815-40 “Contracts in entity’s own equity,” and re-measures such liability using the Black-Scholes-Merton option-pricing model as described below.

 

In estimating the warrants' fair value, the Company used the following assumptions:

 

		March 31, 2018
Risk-free interest rate (1)			1.93	%
Expected volatility (2)			77.69	%
Expected life (in years) (3)			0.48
Expected dividend yield (4)			0	%
Fair value per warrant		$	0.0004

 

(1)

Risk-free interest rate - based on yield rates of non-index linked U.S. Federal Reserve treasury bonds.

 

(2)

Expected volatility - was calculated based on actual historical stock price movements of the Company together with companies in the same industry over a term that is equivalent to the expected term of the option.

 

(3)

Expected life - the expected life was based on the expiration date of the warrants.

 

(4)

Expected dividend yield - was based on the fact that the Company has not paid dividends to its shareholders in the past and does not expect to pay dividends to its shareholders in the future.

 

(5)

The changes in Level 3 liabilities associated with the warrants are measured at fair value on a recurring basis. The following tabular presentation reflects the components of the liability associated with such warrants as of March 31, 2018:

 

		Fair value of liability related to warrants
Balance on December 31, 2017		$	1
Change in fair value of warrants during the period			(1	)
Balance at March 31, 2018 (unaudited)		$	*) -

 

*) Represents an amount lower than $1.

 

 

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

U.S. dollars in thousands (except stock and stock data)

 

NOTE 8:-

FINANCIAL EXPENSES, NET

 

		Three months ended March 31,
		2018				2017
		Unaudited
Bank and credit card charges		$	42			$	5
Foreign currency translation adjustments			3				8
Change in fair value of warrants			(1	)			1,195
Total financial expenses, net		$	44			$	1,208

 

NOTE 9:-

SUBSEQUENT EVENTS

 

a.

In April 2018, 188,092 shares of Common Stock were issued to certain members of the Board of Directors, Officers and employees of the Company as consideration for a reduction in or waiver of cash salary, bonuses, and fees owed to such individuals.

 

b.

In April 2018, the Company's Compensation Committee of the Board of Directors approved the grants of 75,640 shares to service providers and the grant of an option to purchase 93,755 shares of Common Stock to a service provider of the Company.

 

c.

In May 2018, the Company’s Board of Directors approved the entrance into exchange agreements with certain company warrant holders who were granted warrants to purchase shares of Common Stock on March 2016 and January 2017. Pursuant to the terms of the Exchange Agreement, the warrant holders who will agree to surrender their warrants to purchase an aggregate of 1,020,357 shares of Common Stock for cancellation and will receive, as consideration for such cancellation an aggregate of 636,752 shares of Common Stock.

 

 

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

 

Readers are advised to review the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2017. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements”. You should review the “Risk Factors” section of our Annual Report for the fiscal year ended December 31, 2017 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

The following financial data in this narrative are expressed in thousands, except for stock and stock data or as otherwise noted.

 

We are a global digital health (mHealth) company serving our users with dynamic mobile health solutions. We employ what we believe to be a revolutionary approach to health management. We have developed unique ways for people to analyze and personalize their chronic disease management as it relates to diabetes. We have accomplished this through the combination of wearable technology and health monitoring. In addition, our solution is changing the way people with diabetes can manage their condition as a result of us providing them with continuous, as opposed to periodic, data.

 

Our flagship product, Dario, which we also refer to as our Dario Smart Diabetes Management Solution, is a mobile, real-time, cloud-based, diabetes management solution based on an innovative, multi-feature software application to track and monitor all facets of diabetes, combined with a stylish, ‘all-in-one’, pocket-sized, blood glucose monitoring device, which we call the Dario Blood Glucose Monitoring System, that essentially turns a smartphone into a glucometer. In addition, our product offerings will focus on the newly launched Dario Engage software platform, where we digitally engage with Dario users, assist them in monitoring their chronic illnesses and provide them with coaching, support, digital communications and real time alerts, trends and pattern analysis. The Dario Engage platform can be leveraged by our potential partners, such as clinics, health care service providers, employers and payers for scalable monitoring of people with diabetes in a cost-effective manner, which we expect will open for us additional revenue streams. Finally, we intend to utilize the data we obtain from our Dario Smart Diabetes Management Solution and Dario Engage platform to develop our upcoming healthcare analytics program, Dario Intelligence. As such our solutions will span the full spectrum of disease monitoring, user-centric engagement, coaching tools, and big data and intelligence solutions. We have obtained regulatory clearance or approval for the Dario Blood Glucose Monitoring System in the U.S., Canada, the E.U., Israel and Australia, among others. We believe that our targeted health platform is a highly personalized preventative and proactive approach to health improvement based on individual behavior and treatment, tailored to each person’s unique profile.

 

Our principal operating subsidiary, LabStyle Innovation Ltd., is an Israeli company with its headquarters in Caesarea, Israel. We were formed on August 11, 2011 as a Delaware corporation.

 

We commenced a commercial launch of the free Dario Smart Diabetes Management application in the United Kingdom in late 2013 and commenced an initial soft launch of the full Dario Smart Diabetes Management Solution (including the app and the Dario Blood Glucose Monitoring System) in selected jurisdictions in March 2014 with the goal of collecting customer feedback to refine our longer-term roll-out strategy and continued to scale up launch during 2014 in the United Kingdom, the Netherlands and New Zealand, in 2015 in Australia, Israel and Canada and in 2016 in the United States. We are consistently adding new additional features and functionality in making Dario the new standard of care in diabetes data management.

 

 

Through our Israeli subsidiary, Labstyle Innovation Ltd., our plan of operations is to continue the development of our software and hardware offerings and related technology. During 2015, we successfully launched the Dario Smart Diabetes Management Solution according to plan and are currently expanding the launch to other jurisdictions. In 2016, we established our direct to consumer model in the U.S. to achieve higher and faster penetration into the market during the launch phase. We have invested in a robust digital marketing department with in-house platforms, experienced personnel and robust infrastructures to support expected growth of users and online subscribers in this market. During the third quarter of 2016 we expanded these effort to include Australia as well. In 2017, we expanded our direct to consumer marketing efforts in the United Kingdom in cooperation with our local distributor and launched similar marketing efforts in Germany. In support of these goals, we intend to utilize our funds for the following activities:

 

·

ramp up of mass production, marketing and distribution and sales efforts related to the Dario Smart Diabetes Management Solution and the Dario Engage platform;

 

·

develop our customer support and telemarketing services in order to support the expect growth of our revenues and the increase of user, and service provider who will use our platform to better serve people with diabetes and improve their clinical outcome;

 

·

continued product and software development, and related activities (including costs associated with application development and data storage capabilities as well as any necessary design modifications to the various elements of the Dario Smart Diabetes Management Solution, the Dario Engage platform and the Dario Intelligence tools and capabilities);

 

·

continued work on registration of our patents worldwide;

 

·

Regulatory and quality assurance matters;

 

	·	professional fees associated with being a publicly reporting company; and
	·	general and administrative matters.

 

Readers are cautioned that, according to our management’s estimates, based on our budget and the initial launch of our commercial sales, we believe that we will have sufficient resources to continue our activity only into March 2019 without raising additional capital. This includes an amount of anticipated inflows from sales of Dario through direct sales in the United States and through distribution partners. As such, we have a significant present need for capital. If we are unable to scale up our commercial launch of Dario or meet our commercial sales targets (or if we are unable to ramp up revenues), and if we are unable to obtain additional capital resources in the near term, we may be unable to continue activities, absent a material alternations in our business plans and our business might fail.

 

Critical Accounting Policies

 

Reference is made to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the year ended December 31, 2017 (filed on March 19, 2018) with respect to our Critical Accounting Policies, which have not changed.

 

Results of Operations

 

Comparison of the three months ended March 31, 2018 and 2017 (in thousands)

 

Revenues

 

Revenues for the three months ended March 31, 2018, amounted to $1,756, an increase of 74% compared to $1,007 of revenues during the three months ended March 31, 2017. The increases in revenues for the three months ended March 31, 2018, compared to the three months ended March 31, 2017, are mainly as a result of an increase in the sales of our products.

 

Revenues were derived mainly from the sales of Dario’s components, including the Dario Blood Glucose Monitoring System itself, through direct sales to consumers located mainly in the United States and Australia, through our on-line store and through distributors.

 

 

Cost of Revenues

 

During the three months ended March 31, 2018, we recorded costs related to revenues in the amount of $1,204, an increase of 34%as compared to $901 of recorded costs related to revenues during the three months ended March 31, 2017. The increases in costs related to revenues in three months ended March 31, 2018, compared to the three months ended March 31, 2017, are mainly as a result of an increase in the sales of our products in the first quarter of 2018.

 

Cost of revenues consist mainly of cost of device production, employees' salaries and related overhead costs, depreciation of production line and related cost of equipment used in production, shipping and handling costs and inventory write-downs.

   

Research and Development Expenses

 

Our research and development expenses increased by $273, or 58%, to $742 for the three months ended March 31, 2018, compared to $469 for the three months ended March 31, 2017. This increase was mainly due to increases in salaries, and other research and development costs relating primarily to software development.

   

Research and development expenses consist mainly of payroll expenses to employees involved in research and development activities, expenses related to our Dario software application and related Dario Blood Glucose Monitoring System device, labor contractors and engineering expenses, depreciation and maintenance fees related to equipment and software tools used in research and development, clinical trials performed in the United States to satisfy the FDA product approval requirements and facilities expenses associated with and allocated to research and development activities.

 

Sales and Marketing Expenses

 

Our sales and marketing expenses were $1,824 for the three months ended March 31, 2018, compared to $1,825 for the three months ended March 31, 2017.

 

Sales and marketing expenses consist mainly of payroll expenses, online marketing campaigns of the Dario, trade show expenses, customer support expenses and marketing consultants and subcontractors.

 

General and Administrative Expenses

 

Our general and administrative expenses decreased by $1,156, or 57%, to $861 for the three months ended March 31, 2018, compared to $2,017 for the three months ended March 31, 2017. This decrease was mainly due to reduction in share based compensation.

 

Our general and administrative expenses consist mainly of payroll and stock-based compensation expenses for management, employees, directors and consultants, legal fees, patent registration, expenses related to investor relations, as well as our office rent and related expenses.

 

Financial Expenses, net

 

Our financial expenses for the three months ended March 31, 2018, was $44, a decrease of 96% compared to finance expenses of $1,208 for three months ended March 31, 2017. This decrease was mainly due to the fact that we had no warrant revaluation expense in the first quarter of 2018 compared to $1,195 of such expenses during the first quarter of 2017.

 

Financial expenses include mainly bank and credit card charges and foreign currency translation differences.

 

 

 

Net loss

 

Net loss decreased by $2,494 or 46%, to $2,919 for the three months ended March 31, 2018, compared to a net loss of $5,413 for the three months ended March 31, 2017.

 

The decrease in net loss for the three months ended March 31, 2018, compared to the three months ended March 31, 2017, was mainly due to the increase in the gross profit, a decrease in operating expenses and a decrease in financial expenses recorded in the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

 

Liquidity and Capital Resources

 

As of March 31, 2018, we had approximately $7,041,000 in cash and cash equivalents compared to $3,718,000 at December 31, 2017.

 

We have experienced cumulative losses of $73,877,000 from inception (August 11, 2011) through March 31, 2018, and have a stockholders’ equity of $7,371,000 at March 31, 2018. In addition, we have not completed our efforts to establish a stable recurring source of revenues sufficient to cover our operating costs and expect to continue to generate losses for the foreseeable future. There is no assurances that we will be able to obtain an adequate level of financing needed for our near term requirements or the long-term development and commercialization of our product. These conditions raise substantial doubt about our ability to continue as a “going concern”.

 

Since inception, we have financed our operations primarily through private placements and public offerings of our common stock and warrants to purchase shares of our common stock, receiving aggregate net proceeds totaling $58,469,000 as of March 31, 2018.

  

On January 9, 2017, we commenced a private placement offering of up to $5,100,000 consisting of up to 1,821,437 shares of common stock and warrants to purchase up to 1,821,437 shares of common stock. The warrants are exercisable after the six month anniversary of each respective closing and will expire on the 5 year anniversary of their issuance. On January 9, 2017, we held the initial closing of the offering with a lead investor and an additional investor and issued and sold 1,113,922 shares of common stock and warrants to purchase 1,113,922 shares of common stock for aggregate gross proceeds of approximately $3,119,000. On January 11, 2017, we entered into securities purchase agreements with 18 investors for the future issuance and sale of 707,515 shares of common stock and warrants to purchase 707,515 shares of common stock, provided that the issuance and sale of such securities shall only occur upon our obtaining stockholder approval, pursuant to Nasdaq rules. On March 9, 2017, following receipt of stockholder approval, we issued and sold 707,515 shares of common stock and warrants to purchase 707,515 shares of common stock to the 18 investors.

 

On March 31, 2017, we conducted a public offering, pursuant to which we issued and sold 1,450,000 shares of common stock for aggregate gross proceeds of $4,500,000.

 

Between August 16, 2017 and August 22, 2017, we executed securities purchase agreements with a total of 23 accredited and non-U.S. investors relating to two concurrent placement offerings consisting of 483,333 shares of our common stock at a purchase price of $1.80 per share and 2,307,654 shares of our designated Series B Preferred Stock at a purchase price of $1.80 per share, for aggregate gross proceeds of approximately $5,000,000. The closing of the offerings took place on August 22, 2017.

 

On February 28, 2018 and March 6, 2018, we closed two concurrent private placements offerings consisting of 2,262,269 shares of our common stock at $1.40 per share, 1,234,080 shares of our Series C Convertible Preferred Stock at $2.80 per share and warrants to purchase up to 3,784,351 shares of common stock for aggregate gross proceeds of approximately $6,623,000.

 

According to our management’s estimates, based on our budget and the initial launch of our commercial sales, we believe that we will have sufficient resources to continue our activity into March 2019 without raising additional capital. This includes an amount of anticipated inflows from sales of Dario through distribution partners and to direct customers.

 

 

As such, we have a significant present need for capital. If we are unable to scale up our commercial launch of Dario or meet our commercial sales targets (or if we are unable to generate any revenue at all), and if we are unable to obtain additional capital resources in the near term, we may be unable to continue activities absent material alterations in our business plans and our business might fail.

 

Additionally, readers are advised that available resources may be consumed more rapidly than currently anticipated, resulting in the need for additional funding sooner than expected. Should this occur, we will need to seek additional capital earlier than anticipated in order to fund (1) further development and, if needed, testing of our Dario Smart Diabetes Management Solution, (2) our efforts to obtain regulatory clearances or approvals necessary to be able to commercially launch Dario, Dario Engage and Dario Intelligence, (3) expenses which will be required in order to expand production of Dario, (4) sales and marketing efforts and (5) general working capital. Such funding may be unavailable to us on acceptable terms, or at all. Our failure to obtain such funding when needed could create a negative impact on our stock price or could potentially lead to the failure of our company. This would particularly be the case if we are unable to commercially launch Dario, Dario Engage and Dario Intelligence in the jurisdictions and in the timeframes we expect.

 

Cash Flows (in thousands)

 

The following table sets forth selected cash flow information for the periods indicated:

 

		March 31
		2018				2017
		$				$
Cash used in operating activities:			(2,766	)			(3,082	)
Cash used in investing activities:			55				(9	)
Cash provided by financing activities:			6,034				4,816
			3,323				1,724

  

Net cash used in operating activities

 

Net cash used in operating activities was $2,766 for the three months ended March 31, 2018, a decrease of 10% compared to $3,082 used in operations for the same period in 2017. Cash used in operations decreased due to the decrease in our operating loss.

 

Net cash used in investing activities

 

Net cash derived form investing activities was $55 for the three months ended March 31, 2018, a decrease of 711% compared to cash used in investing activities of $9 for the same period in 2017. Cash derived from investing activities increased mainly due to maturity of short term bank deposits.

 

Net cash provided by financing activities

 

Net cash provided by financing activities was $6,034 for the three months ended March 31, 2018, an increase of 25% compared to $4,816 for the same period in 2017. During three months ended March 31, 2018, we raised net proceeds of approximately $6,034 through our February 2018 and March 2018 private placements. During the three months ended March 31, 2017, we raised net proceeds of approximately $4,816. This increase was due to funds we raised from the sale of our equity securities.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2018, 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.

 

We are a smaller reporting company and therefore are not required to provide the information for this item of Form 10-Q.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer, or the Certifying Officers, conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a–15(e) and 15d–15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer 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. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

 

Based on their evaluation, the Certifying Officers concluded that, as of March 31, 2018, our disclosure controls and procedures were designed at a reasonable assurance level and were therefore effective.  

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Internal Controls

 

Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

PART II- OTHER INFORMATION

  

Item 6. Exhibits.

 

No.		Description of Exhibit
3.1		Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 6, 2018).
4.1		Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 6, 2018).
10.1		Form of Securities Purchase Agreement for the purchase of shares of Common Stock (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K filed with the SEC on March 19, 2018).
10.2		Form of Securities Purchase Agreement for the purchase of shares of Series C Convertible Preferred and/or Common Stock (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K filed with the SEC on March 19, 2018)
31.1*		Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a).
31.2*		Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a).
32.1**		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2**		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.1*		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Loss, (iii) Statements of Changes in Stockholders’ Deficiency, (iv) Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.

 

*	Filed herewith.

 

**	Furnished herewith.

 

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 hereunto duly authorized.

 

Date:  May 14, 2018		DarioHealth Corp.
	By:		/s/ Erez Raphael
		Name:	Erez Raphael
		Title:	Chairman and Chief Executive Officer
			(Principal Executive Officer)
	By:		/s/ Zvi Ben David
		Name:	Zvi Ben David
		Title:	Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer)