UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

 For the quarterly period ended September 30, 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 every Interactive Data File required to be submitted 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 such files). Yes x  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
x	Non-accelerated filer	x	Smaller reporting company
		x	Emerging growth company

 

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

 

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

 

As of November 9, 2018, the registrant had 25,936,165 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	12
Item 4.	Control and Procedures	12
PART II-OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 6.	Exhibits	13
SIGNATURES		14

 

 

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 SEPTEMBER 30, 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-12

 

  

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

 

		September 30,				December 31,
		2018				2017
		Unaudited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	11,427			$	3,718
Short-term bank deposits			184				258
Trade Receivables			374				282
Inventories			1,020				1,184
Other accounts receivable and prepaid expenses			523				604
Total current assets			13,528				6,046
LEASE DEPOSITS			47				42
PROPERTY AND EQUIPMENT, NET			758				869
Total assets		$	14,333			$	6,957

 

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

 

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

 

		September 30,				December 31,
		2018				2017
		Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables		$	2,203			$	1,852
Deferred revenues			385				-
Other accounts payable and accrued expenses			1,334				1,163
Total current liabilities			3,922				3,015
LIABILITY RELATED TO WARRANTS			-				1
STOCKHOLDERS' EQUITY
Common Stock of $0.0001 par value - Authorized: 160,000,000 shares at September 30, 2018 (unaudited) and December 31, 2017; Issued and Outstanding: 25,691,724 and 14,074,238 shares at September 30, 2018 (unaudited) and December 31, 2017, respectively			7				7
Preferred Stock of $0.0001 par value - Authorized: 5,000,000 shares at September 30, 2018 (unaudited) and December 31, 2017; Issued and Outstanding: 1,890,257 and 0 shares at September 30, 2018 (unaudited) and December 31, 2017, respectively			*)-				-
Additional paid-in capital			94,675				74,892
Accumulated deficit			(84,271	)			(70,958	)
Total stockholders' equity			10,411				3,941
Total liabilities and stockholders' equity		$	14,333			$	6,957

 

*) Represents an amount lower than $1.

 

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

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

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

 

		Three months ended September 30								Nine months ended September 30
		2018				2017				2018				2017
		Unaudited								Unaudited
Revenues		$	1,879			$	1,375			$	5,694			$	3,592
Cost of revenues			1,411				1,099				4,152				2,850
Gross profit			468				276				1,542				742
Operating expenses:
Research and development		$	997			$	797			$	2,749			$	2,450
Sales and marketing			2,693				1,677				6,820				5,707
General and administrative			709				781				4,506				3,887
Total operating expenses			4,399				3,255				14,075				12,044
Operating loss			(3,931	)			(2,979	)			(12,533	)			(11,302	)
Financial income (expenses), net:
Revaluation of warrants			*)-				1				1				(1,169	)
Other financial (expense) income, net			(132	)			5				(288	)			(7	)
Total financial income (expenses), net			(132	)			6				(287	)			(1,176	)
Net loss		$	(4,063	)		$	(2,973	)		$	(12,820	)		$	(12,478	)
Deemed dividend related to warrant exchange agreement		$	-			$	-			$	493			$	-
Net loss attributable to holders of Common Stock		$	(4,063	)		$	(2,973	)		$	(13,313	)		$	(12,478	)
Net loss per share
Basic and diluted loss per share		$	(0.17	)		$	(0.30	)		$	(0.67	)		$	(1.40	)
Weighted average number of Common Stock used in computing basic and diluted net loss per share			23,533,328				9,950,443				19,733,291				8,931,460

 

*) Represents an amount lower than $1.

 

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

 

 

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

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 and warrants, 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			521,254				*) -				-				-				809				-				809
Issuance of Common Stock to consultants and service provider			309,411				*) -				-				-				431				-				431
Issuance of Common Stock and warrants, net of issuance cost			6,529,069				*) -				-				-				6,332				-				6,332
Issuance of Preferred Stock and warrants, net of issuance cost			-				-				3,124,337				*) -				9,269				-				9,269
Deemed dividend related to May 2018 warrant exchange agreement			636,752				-				-				-				493				(493	)			-
Conversion of Preferred Stock to Common Stock			2,468,160								(1,234,080	)			*) -				-				-				-
Issuance of Common Stock to directors and employees			1,152,840				*) -				-				-				1,786				-				1,786
Stock-based compensation			-				-				-				-				663				-				663
Net loss			-				-				-				-				-				(12,820	)			(12,820	)
Balance as of September 30, 2018 (unaudited)			25,691,724			$	7				1,890,257				$   *) -			$	94,675			$	(84,271	)		$	10,411

 

*) Represents an amount lower than $1.

 

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

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

 

		Nine months ended September 30,
		2018				2017
		Unaudited
Cash flows from operating activities:
Net loss		$	(12,820	)		$	(12,478	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Stock-based compensation and Common Stock to service providers			3,284				3,062
Depreciation			160				155
Increase in trade receivables			(92	)			(193	)
Decrease (increase) in accounts receivables and prepaid expenses			81				(264	)
Decrease (increase) in inventories			164				(36	)
Increase in trade payables			351				171
Increase in other accounts payable and accrued expenses			457				191
Increase in deferred revenues			385				-
Change in fair value of warrants to purchase shares of Common Stock			(1	)			1,169
Net cash used in operating activities			(8,031	)			(8,223	)
Cash flows from investing activities:
Maturity (investment) of (in) short-term bank deposits			74				(16	)
Maturity (investment) in lease deposits			(5	)			3
Purchase of property and equipment			(49	)			(64	)
Net cash provided by (used in) investing activities			20				(77	)
Cash flows from financing activities:
Proceeds from issuance of Common Stock and warrants, net of issuance cost			15,720				13,469
Proceeds from exercise of options and warrants			-				(*-
Net cash provided by financing activities			15,720				13,469
Increase in cash and cash equivalents			7,709				5,169
Cash and cash equivalents at the beginning of the period			3,718				1,093
Cash and cash equivalents at the end of the period		$	11,427			$	6,262
Non-cash investing and financing activities:
Reclassification of warrants from liability to equity		$	-			$	8,655
Payment for directors, employees and service providers under Stock for Cash Program		$	286			$	183

 

*) Represents an amount lower than $1.

 

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

 

 

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 nine months ended September 30, 2018, the Company incurred operating losses and negative cash flows from operating activities amounting to $12,533 and $8,031 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.

 

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.

 

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES

 

a.

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.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

b.

Recently issued accounting pronouncements, not yet adopted:

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (Topic 606). This ASU provides a five-step approach to account for revenue arising from contracts with customers. This revenue standard will be effective for the Company starting in the first quarter of 2019. The new revenue standard permits companies to either apply the requirements retrospectively to all prior periods presented or apply the requirements in the year of adoption through a modified retrospective approach with a cumulative adjustment. The Company is in the process of assessing the impact of this ASU on the Company’s consolidated financial position, results of operations and cash flows.

 

On February 2016, the FASB issued ASU 2016-02, “Leases,” which creates Accounting Standards Codification (“ASC”) 842, “Leases”, and supersedes ASC 840, “Leases.” ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The new guidance will be effective for annual and interim reporting periods beginning on or after December 15, 2018.  The Company is in the process of assessing the impact that the adoption of this guidance will have on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This ASU supersedes ASC 505-50, “Equity—Equity Based Payments to Non-Employees,” and expands the scope of ASC 718, “Compensation – Stock Compensation,” to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. For public companies that file with the Securities and Exchange Commission, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606, “Revenue from Contracts with Customers.” The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

 

NOTE 3: - UNAUDITED INTERIM FINANCIAL STATEMENTS

 

The accompanying unaudited interim consolidated financial statements as of September 30, 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 September 30, 2018, and the Company's consolidated results of operations and the Company's consolidated cash flows for the nine months ended September 30, 2018. Results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

NOTE 4: - INVENTORIES

 

		September 30,				December 31,
		2018				2017
		Unaudited
Raw materials		$	406			$	323
Finished products			614				861
		$	1,020			$	1,184

 

During the nine months’ period ended September 30, 2018 and the year ended December 31, 2017, total inventory write-off expenses amounted to $33 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.

 

NOTE 6:- STOCKHOLDERS' EQUITY (DEFICIENCY)

 

a.

In January, April, June and July 2018, an aggregate of 521,254 shares of Common Stock were issued to certain members of the Board of Directors, executive officers and employees of the Company as consideration for a reduction in or waiver of cash salary, bonuses or fees owed to such individuals, totaling $809. 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 in lieu of $15 to a service provider instead of cash owed 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

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

NOTE 6:- STOCKHOLDERS' EQUITY (DEFICIENCY) (Cont.)

 

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. Following a shareholders meeting in May 2018 the shares of Series C Preferred Stock were converted into shares of Common Stock.

 

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.

 

d.

In April and July 2018, the Company's Compensation Committee of the Board of Directors approved the grants of an aggregate of 184,969 shares of Common Stock in lieu of $296 owed to service providers and the grant of an option to purchase 164,567 shares of Common Stock in lieu of $263 owed to a service provider of the Company. 75,640 shares and the options were issued under the 2012 Plan.

 

e.

In May 2018, the Company entered into exchange agreements (each an "Exchange Agreement") with certain Company warrant holders who were granted warrants to purchase shares of Common Stock in March 2016 and January 2017. Pursuant to the terms of the Exchange Agreements, the warrant holders agreed to surrender their warrants to purchase an aggregate of 1,020,357 shares of Common Stock for cancellation and received, as consideration for such cancellation, an aggregate of 636,752 restricted shares of Common Stock creating a benefit to the warrant holders. As such the Company recorded a deemed dividend in the amount of $493.

 

f.

In June and July 2018, the Company’s Compensation Committee of the Board of Directors approved the grant of an aggregate of 1,152,840 shares to directors, officers, employees and consultants of the Company, and the grant of 244,000 and 21,000 options to employees and consultants of the Company, respectively, at an exercise price of $1.729 per share. The stock options shall vest over a period of three years commencing on the respective grant dates. All of the aforementioned options have a six-year terms. All shares and options were issued under the 2012 Plan.

 

g.

On September 13, 2018 and September 26, 2018, the Company closed a private placements offerings consisting of 4,266,800 shares of the Company's Common Stock at $0.90 per share, 1,890,257 shares of the Company's newly designated Series D Convertible Preferred Stock (the "Series D Preferred Stock") at $3.60 per share, and warrants to purchase up to 9,462,272 shares of Common Stock, for aggregate gross proceeds of approximately $10,645 ($9,686 net of issuance expenses). The shares of Series D Preferred Stock are convertible into an aggregate of 7,561,028 shares of Common Stock based on a conversion price of $0.90 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 D Preferred Stock are not

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

NOTE 6:- STOCKHOLDERS' EQUITY (DEFICIENCY) (Cont.)

 

redeemable nor contingently redeemable. The holders of the Series D 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 D Preferred Stock do not possess any voting rights, but the Series D 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 D 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 36-month anniversary of their issuance.

 

In conjunction with these offerings the Company issued 83,333 shares of Common Stock to certain finders.

 

h.

Stock option compensation:

 

Transactions related to the grant of options to employees, directors and non-employees under the above plans during the nine-month period ended September 30, 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			429,567				1.07
Options exercised			-				-
Options expired			(47,065	)			6.77
Options forfeited			(63,339	)			3.14
Options outstanding at period end (unaudited)			1,697,323				5.97				4.41				470
Options vested and expected to vest at period end (unaudited)			1,548,658				6.14				4.38				470
Exercisable at period end (unaudited)			1,174,608				7.55				4.15				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 third 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 September 30, 2018. This amount is impacted by the changes in the fair market value of the Common Stock.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

NOTE 6:- STOCKHOLDERS' EQUITY (DEFICIENCY) (Cont.)

 

As of September 30, 2018, the total amount of unrecognized stock-based compensation expense was approximately $726 which will be recognized over a weighted average period of 1.04 years.

 

The total compensation cost related to all of the Company's equity-based awards recognized during the nine-month period ended September 30, 2018 and 2017 was comprised as follows:

 

		Nine months ended September 30,
		2018				2017
		Unaudited
Cost of revenues		$	99			$	102
Research and development			347				206
Sales and marketing			497				515
General and administrative			2,341				2,239
Total stock-based compensation expenses		$	3,284			$	3,062

 

NOTE 7:- FINANCIAL EXPENSES, NET

 

		Nine months ended September 30,
		2018				2017
		Unaudited
Bank and credit card charges and commissions		$	239			$	9
Foreign currency translation adjustments			49				(2	)
Change in fair value of warrants			(1	)			1,169
Total financial expenses, net		$	287			$	1,176

  

NOTE 8:- SUBSEQUENT EVENTS

 

In October 2018, 244,441 shares of Common Stock were issued to certain members of the Board of Directors, executive officers and employees of the Company as consideration for a reduction in or waiver of cash salary and fees owed to such individuals. The shares were issued under the 2012 Plan.

 

  

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 efforts 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 2020 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 alternation 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 and nine months ended September 30, 2018 and 2017 (dollar amounts in thousands)

 

Revenues

 

Revenues for the three and nine months ended September 30, 2018, amounted to $1,879 and $5,694, respectively, compared to $1,375 and $3,592 of revenues during the three and nine months ended September 30, 2017, representing an increase of 36.7% and 58.5%, respectively. The increase in revenues for the three and nine months ended September 30, 2018, compared to the three and nine months ended September 30, 2017, are mainly as a result of an increase in the sales of our products, including our membership offering.

 

 

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.

 

In the United States, in the third quarter we have begun to offer to our customers membership plans, which include the supply of unlimited test strips subject to proven usage. In addition, we have also begun to generate revenues from care givers who have begun to use our DarioEngage platform to gain online and real-time access to their customers data while also providing them with additional connection capabilities with such customers.

 

In addition, we have recognized $335,000 and $385,000 as deferred revenue for the three and nine months ended September 30, 2018, respectively. We have deferred such amounts due to Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (Topic 606), pursuant to which we are required to defer such revenue due to our 3, 6 and 12 months membership offerings to our customers.

 

Cost of Revenues

 

During the three and nine months ended September 30, 2018, we recorded costs related to revenues in the amount of $1,411 and $4,152, respectively, compared to $1,099 and $2,850 of recorded costs related to revenues during the three and nine months ended September 30, 2017, representing an increase of 28.4% and 45.7%, respectively. The increase in costs related to revenues in three and nine months ended September 30, 2018, compared to the three and nine months ended September 30, 2017, are mainly as a result of an increase in the sales of our products during 2018.

 

For the three months ended September 30, 2018, cost of revenues as a percent of sales decreased to 72.9% from 75.1% for the three months ended September 30, 2017. For the nine months ended September 30, 2018, cost of revenues as a percent of sales decreased to 79.3% from 79.9% for the nine months ended September 30, 2017. The decreases in the cost of revenues reflects an increase in the quantities of products sold while other manufacturing expenses increased only moderately.

 

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.

 

Gross Profit

 

Gross profit for the three and nine months ended September 30, 2018, amounted to $468 (24.9% of revenues) and $1,542 (27.1% of revenues), respectively, compared to $276 (20.1% of revenues) and $742 (20.7% of revenues) during the three and nine months ended September 30, 2017. The increase in gross profit for the three months and nine months ended September 30, 2018, compared to the three and nine months ended September 30, 2017, are mainly as a result of an increase in the quantities of products sold while other manufacturing expenses increased only moderately while improving efficiencies.

 

Research and Development Expenses

 

Our research and development expenses increased by $200, or 25.1%, to $997 for the three months ended September 30, 2018, compared to $797 for the three months ended September 30, 2017, and increased by $299, or 12.2%, to $2,749 for the nine months ended September 30, 2018 compared to $2,450 for the nine months ended September 30, 2017. The third quarter increase for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, was mainly due to increases in product and software development expenses. The third quarter increase for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, was mainly due to increases in payroll and expenses related to share based compensation.

 

 

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 increased by $1,016, or 60.6%, to $2,693 for the three months ended September 30, 2018, compared to $1,677 for the three months ended September 30, 2017, and increased by $1,113, or 19.5%, to $6,820 for the nine months ended September 30, 2018, compared to $5,707 for the nine months ended September 30, 2017. These increases were mainly due to expanding our sales and marketing activities in the United States, Australia, Germany and the United Kingdom, increases in costs of online marketing campaigns, costs related to marketing consultants and the costs associated with subcontractors and employee payroll.

 

For the three months ended September 30, 2018, sales and marketing expenses as a percent of sales increased to 143.3% from 122.0% for the three months ended September 30, 2017. For the nine months ended September 30, 2018, sales and marketing expenses as a percent of sales decreased to 119.8% from 158.9% for the nine months ended September 30, 2017. The increase for the three months ended September 30, 2018 is a result of increased marketing expenses due to an increase in payroll expenses and an increase in the costs of our digital marketing campaigns. The decrease for the nine months ended September 30, 2018 is a result of the Company increasing its recurring revenue from its product offerings.

 

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 $72, or 9.2%, to $709 for the three months ended September 30, 2018, compared to $781 for the three months ended September 30, 2017, and increased by $619, or 15.9%, to $4,506 for the nine months ended September 30, 2018, compared to $3,887 for the nine months ended September 30, 2017. The decrease for the three months ended September 30, 2018 was mainly due to a reduction in various general and administrative expenses, primarily relating to consulting services. The increase for the nine months ended September 30, 2018 was mainly due to an increase in share-based compensation following the grant of shares to board members and management during the second quarter of 2018, which were recorded as an expense of $1,612 in the second quarter.

 

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 Income( Expenses), net

 

Our financial expenses for the three months ended September 30, 2018 were $132, an increase of 2300%, compared to finance income of $6 for the three months ended September 30, 2017. Our financial expenses for the nine months ended September 30, 2018 were $287 a decrease of 75.6%, compared to finance expenses of $1,176 for the nine months ended September 30, 2017. The increase in financial expenses for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, is attributable mainly due to the increase in credit card fees, banking fees and expenses related to currency translation differences. The decrease in financial expenses for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, is mainly attributable to the reduction in warrant evaluation expenses.

 

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

 

 

Net loss

 

Net loss increased by $1,090 or 36.7%, to $4,063 for the three months ended September 30, 2018, compared to a net loss of $2,973 for the three months ended September 30, 2017, and increased by $342, or 2.7%, to $12,820 for the nine months ended September 30, 2018, compared to $12,478 for the nine months ended September 30, 2017.

   

The increase in net loss for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, was mainly due to an increase in our operating expenses, mainly sales and marketing expenses, and research and development expenses, partially offset by the increase in our gross profit. The increase in net loss for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, was mainly due to the increase in operating expenses mainly our sales and marketing expenses, partially offset by an increase in the gross profit, and a decrease in financial expenses recorded in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

 

Deemed Dividend

 

In May 2018, the Company entered into exchange agreements (each an “Exchange Agreement”) with certain Company warrant holders who were granted warrants to purchase shares of Common Stock in March 2016 and January 2017. Pursuant to the terms of the Exchange Agreements, the warrant holders agreed to surrender their warrants to purchase an aggregate of 1,020,357 shares of Common Stock for cancellation and received, as consideration for such cancellation, an aggregate of 636,752 restricted shares of Common Stock, creating a benefit to the warrant holders. As such, the Company recorded a deemed dividend in the amount of $493.

 

Non-GAAP Financial Measures

 

The factors described above resulted in net loss attributable to common stockholders of $12,478 and $12,820 for the nine months ended September 30, 2018 and 2017, respectively.

 

To supplement our unaudited condensed consolidated financial statements presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) within this Quarterly Report on Form 10-Q, management provides certain non-GAAP financial measures (“NGFM”) of the Company’s financial results, including such amounts captioned: “net loss before interest, taxes, depreciation, and amortization” or “EBITDA”, and “Non-GAAP Adjusted Loss”, as presented herein below. Importantly, we note the NGFM measures captioned “EBITDA” and “Non-GAAP Adjusted Loss” are not recognized terms under U.S. GAAP, and as such, they are not a substitute for, considered superior to, considered separately from, nor as an alternative to, U.S. GAAP and /or the most directly comparable U.S. GAAP financial measures.

 

Such NGFM are presented with the intent of providing greater transparency of information used by us in our financial performance analysis and operational decision-making. Additionally, we believe these NGFM provide meaningful information to assist investors, shareholders, and other readers of our unaudited condensed consolidated financial statements, in making comparisons to our historical financial results, and analyzing the underlying financial results of our operations. The NGFM are provided to enhance readers’ overall understanding of our current financial results and to provide further information to enhance the comparability of results between the current year period and the prior year period.

 

We believe the NGFM provide useful information by isolating certain expenses, gains, and losses, which are not necessarily indicative of our operating financial results and business outlook. In this regard, the presentation of the NGFM herein below, is to help the reader of our unaudited condensed consolidated financial statements to understand the effects of the non-cash impact on our (U.S. GAAP) unaudited condensed consolidated statement of operations of the revaluation of the warrants and the expense related to stock-based compensation, each as discussed herein above.

 

 

A reconciliation to the most directly comparable U.S. GAAP measure to NGFM, as discussed above, is as follows:

   

		Three Months Ended September 30, (in thousands)
		2018				2017				$ Change
Net Loss Reconciliation
Net loss attributable to common stockholders		$	(4,063	)		$	(2,973	)		$	(1,090	)
Deemed dividend – related to Warrant Exchange Agreement			-				-
Net loss - as reported			(4,063	)			(2,973	)			(1,090	)
Adjustments
Depreciation expense			59				54				5
Other financial expenses (income), net			132				(5	)			137
EBITDA			(3,872	)			(2,924	)			(948	)
Stock-based compensation expenses			633				621				12
Revaluation of warrants			-				1				(1	)
Non-GAAP adjusted loss		$	(3,239	)		$	(2,302	)		$	(937	)

 

		Nine Months Ended September 30, (in thousands)
		2018				2017				$ Change
Net Loss Reconciliation
Net loss attributable to common stockholders		$	(13,313	)		$	(12,478	)		$	(835	)
Deemed dividend – related to Warrant Exchange Agreement			493				-				493
Net loss - as reported			(12,820	)			(12,478	)			(342	)
Adjustments
Depreciation expense			160				155				5
Other financial expenses, net			287				7				280
EBITDA			(12,373	)			(12,316	)			(57	)
Stock-based compensation expenses			3,284				3,062				222
Revaluation of warrants			(1	)			1,169				(1,170	)
Non-GAAP adjusted loss		$	(9,090	)		$	(8,085	)		$	(1,005	)

 

 

Liquidity and Capital Resources (dollar amounts in thousands)

 

As of September 30, 2018, we had approximately $11,427 in cash and cash equivalents compared to $3,718 at December 31, 2017.

 

We have experienced cumulative losses of $84,271 from inception (August 11, 2011) through September 30, 2018 and have a stockholders’ equity of $10,411 at September 30, 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 are 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 $68,156 as of September 30, 2018.

  

On January 9, 2017, we commenced a private placement offering of up to $5,100 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. 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.

 

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. 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.

 

Between September 7, 2018 and September 22, 2018, we executed securities purchase agreements with a total of 35 accredited and non-U.S. investors relating to a private placement offering consisting of 4,266,800 shares of our common stock at $0.90 per share, 1,890,257 shares of our Series D Convertible Preferred Stock at $3.60 per share and warrants to purchase up to 9,462,272 shares of common stock for aggregate gross proceeds of approximately $10,645.

 

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 2020 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:

 

		September 30
		2018				2017
		$				$
Cash used in operating activities:			(8,031	)			(8,223	)
Cash used in investing activities:			20				(77	)
Cash provided by financing activities:			15,720				13,469
			7,709				5,169

 

Net cash used in operating activities

 

Net cash used in operating activities was $8,031 for the nine months ended September 30, 2018, a decrease of 2.3% compared to $8,223 used in operations for the same period in 2017. Cash used in operations decreased due to the increase in our gross profit.

 

Net cash used in investing activities

 

Net cash derived from investing activities was $20 for the nine months ended September 30, 2018, an increase of 126% compared to cash used in investing activities of $77 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 $15,720 for the nine months ended September 30, 2018, an increase of 16.7% compared to $13,469 for the same period in 2017. During the nine months ended September 30, 2018, we raised net proceeds of approximately $15,720 through our September 2018, February 2018 and March 2018 private placements. During the nine months ended September 30, 2017, we raised net proceeds of approximately $13,469. This increase was due to a higher amount of funds raised from the sale of our equity securities.

 

Off-Balance Sheet Arrangements

 

As of September 30, 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 September 30, 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 September 30, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the third quarter of 2018, we issued an aggregate of 109,329 shares of our common stock to certain of our service providers as compensation in lieu of cash compensation owed to them for services rendered. We claimed exemption from registration under the Securities Act of 1933, as amended, or the Securities Act, for the foregoing transactions under Section 4(a)(2) of the Securities Act.

 

Item 6. Exhibits.

 

No.		Description of Exhibit
3.1		Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on November 6, 2018).
3.2		Certificate of Elimination of Preferences, Rights and Limitations of Series A, B and C Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on November 6, 2018).
4.1		Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on November 6, 2018).
10.1		Form of Securities Purchase Agreement for the purchase of shares of Common Stock and Series D Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on November 6, 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 September 30, 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:  November 13, 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)