10-K
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tm211148d1_10k.htm
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2020
¨
TRANSITION REPORT UNDER 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 Number)
142 W. 57th St., 8th Floor
New
York, New York
10019
(Address of principal executive offices)
(Zip Code)
(646) 665-4667
(Registrant’s telephone number, including
area code)
Securities Registered pursuant to Section 12(b) of
the Act
Title of each class
Trading Symbol(s)
Name of each exchange on which
registered:
Common Stock, par value $0.0001 per
share
DRIO
The Nasdaq Stock Market LLC
Warrants to purchase Common Stock
DRIOW
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(b) of
the Exchange Act: None
Securities registered pursuant to Section 12(g) of
the Act: Common Stock, par value $0.0001 per share; Warrants to purchase Common Stock
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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
¨
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 has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by
the registered public accounting firm that prepared or issued its audit report. ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the closing price as of the last business day of the
registrant’s most recently completed second fiscal quarter is $26,029,228.
As of March 5, 2021, the registrant had
outstanding 15,273,389 shares of common stock, $0.0001 par value per share.
Documents Incorporated By Reference: None.
TABLE OF CONTENTS
Item No.
Description
Page
Cautionary Note Regarding Forward-Looking Statements
1
PART I
Item 1.
Business
3
Item 1A.
Risk Factors
21
Item 1B.
Unresolved Staff Comments
44
Item 2.
Properties
44
Item 3.
Legal Proceedings
44
Item 4.
Mine Safety Disclosures
44
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
45
Item 6.
Selected Financial Data
48
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
48
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
57
Item 8.
Financial Statements and Supplementary Data
57
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
58
Item 9A.
Controls and Procedures
58
Item 9B.
Other Information
59
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
60
Item 11.
Executive Compensation
65
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
77
Item 13.
Certain Relationships and Related Transactions, and Director Independence
79
Item 14.
Principal Accounting Fees and Services
80
PART IV
Item 15.
Exhibits and Financial Statement Schedules
81
Item 16.
Form 10-K Summary
83
Signatures
84
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Annual Report
on Form 10-K, or the Annual Report, contains “forward-looking statements,” which includes information relating
to future events, future financial performance, financial projections, strategies, expectations, competitive environment and regulation.
Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,”
“continue,” “expects,” “anticipates,” “future,” “intends,” “plans,”
“believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking
statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate
indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when
those statements are made or management’s good faith belief as of that time with respect to future events, and are subject
to significant risks and uncertainties that could cause actual performance or results to differ materially from those expressed
in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited
to:
●
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;
●
the expected execution of agreements with various providers for our solution;
●
our ability to manufacture, market and generate sales of our medical devices, including Dario Blood Glucose monitor, Dario Blood Pressure monitor and Dario Weight Scale;
●
our ability to commercialize our membership programs, including our per member per month program for people with diabetes and hypertension, and our Business to Business to Consumer (“B2B2C”) services;
●
our ability to develop, launch and commercialize the Dario Loop;
●
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 (the “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.
The foregoing does
not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors
that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Please
see “Risk Factors” for additional risks that could adversely impact our business and financial performance.
1
Moreover, new risks
regularly emerge and it is not possible for our management to predict or articulate all the risks we face, nor can we assess the
impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ
from those contained in any forward-looking statements. All forward-looking statements included in this Annual Report are based
on information available to us on the date of this Annual Report. Except to the extent required by applicable laws or rules, we
undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future
events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained above and throughout this Annual Report.
When used in this Annual
Report, the terms “DarioHealth,” “the Company,” “we,” “our,” and “us”
refer to DarioHealth Corp., a Delaware corporation and our subsidiary LabStyle Innovation Ltd., an Israeli company. “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.
All information in
this Annual Report relating to shares or price per share reflects the 1-for-20 reverse stock split effected by us on November 18,
2019.
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PART I
Item 1.
Business
Overview
We are a leading global
Digital Therapeutics (“DTx”) company revolutionizing the way people manage their health across the chronic condition
spectrum to live a better and healthier life. Our mission is to transform how affected individuals manage their health and chronic
conditions by empowering our customers to easily manage their conditions and take steps to improve their overall health. Most chronic
conditions are driven by personal behaviors and the individual actions that are or are not taken. We believe that changing these
behaviors can dramatically improve our customers’ overall health and substantially reduce unnecessary health spending. However,
behavioral change and habit formation are difficult, especially in managing chronic disease and related conditions. Our digital
therapeutics endeavor to produce lasting behavior changes in our customers by applying a novel combination of artificial intelligence
(“AI”)-driven dynamic personalization and behavioral science at scale. This allows us to engage and support our customers,
and offer them a complete virtual care solution, ideally resulting in improved health outcomes and reduced total cost of care.
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 with the name LabStyle Innovations
Corp. On July 28, 2016, we changed our name to DarioHealth Corp. We began our sales in the direct-to-consumer space,
solving first for what we deemed the most difficult problems: how to engage users and support behavior change to improve
clinical outcomes in diabetes. Our most developed AI tools leverage the direct-to-consumer experience from over 150,000
members to drive superior engagement and outcomes. In early 2020, we broadened our solutions to include other medical
conditions in addition to diabetes, and to serve business customers who seek to improve the health of their stakeholders.
Presently, we have deployed solutions for diabetes, hypertension, and pre-diabetes, and through our acquisition of Upright
Technologies Ltd. (“Upright”), we now offer solutions for musculoskeletal (“MSK”) conditions. We are currently
delivering B2B2C solutions for providers, employers, and pharmaceutical companies, and we plan to develop a full-risk health
plan business, which we expect will provide our AI driven, remote patient monitoring (“RPM”) and coaching
for a variety of chronic conditions, across a range of customer product lines in 2021.
Upright Technologies
Ltd., which we acquired in February 2021, is a leading digital MSK health company focused on preventing and treating the most
common MSK conditions through behavioral science, biofeedback, coaching, and wearable tech. Upright has over 90,000 active users
and its clinically validated solution is recommended by more than 500 clinics worldwide.
In-market first-generation
digital health solutions offer static or nominal personalization at best, integrating signals to customize nudges or personalize
communications in a manner that does not significantly adapt to changing user needs over time, while user journey’s, or experiences,
remain fairly static. First generation solutions generally lack user experience benefit of insight from tens of thousands of direct-to-consumer
engagements over years that adaptively personalize user journeys for high engagement and outcomes. These solutions are often described
as “fingerprinted,” but while fingerprints don’t change over time, users do. As a result, any static or minimally
dynamic approaches are not sufficiently customized to address user needs.
Market intelligence
confirms that enterprise customers are frustrated by existing solutions with static user journeys, limited transparency, inability
to integrate with existing technologies and workflows, low engagement and retention and challenges with flexible deployments. Some
customers want a single solution for most-major chronic conditions, others wish to deploy piecemeal solutions or may have already
invested in solutions for a portion of their populations. Health systems and health plans have invested significantly in their
technology and digital strategy and require solutions that interoperate with their existing and planned deployments. First generation
digital health solutions that have piloted with complex customers such as health plans have been forced to pivot their business
strategies to employers and others owing to enrollment, integration, return on investment and reporting challenges. Our solutions
are designed from the ground-up for integration, can be deployed for single or multiple conditions, deliver behavioral-science
informed dynamically personalized and integrated user journeys, deliver clear returns on investment in required time horizons and
allow for real-time granulated customer reporting.
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Unlike other digital
health solutions, we also personalize user experience beyond nudges. Healthcare journeys and pathways must be individualized, informed
by behavioral science, and dynamically responsive to drive engagement and outcomes. Customized, dynamic user journeys are delivered
by our AI-driven journey engine, the “Dario Loop” (formerly called Dario Intelligence), which personalizes user experience
across a range of factors including timing, tone, channel, content, frequency, and intervention. We believe that our dynamic personalized
approach ensures superior engagement and retention, reduced costs, and ultimately, improved user health. This is reflected in our
user experience feedback, with an unparalleled 4.9 out of 5 stars across more than 15 thousand reviews in the Apple App Store,
a best-in-class net promoter score of 76, and industry-leading, published improvements in clinical metrics such as estimated glucose
monitoring (“HbA1c”), hypertension (“HTN”), pain and health-related quality of life.
Our Solutions
We offer a customized,
user-centric, modular platform integrating digital therapeutics, coaching, devices, and care providers. Our suite of offerings
includes Dario Tools, which are devices that integrate with applications on a user’s smartphone, DarioEngage, a population
health management platform (“DarioEngage”), and the Dario Loop, our AI-driven journey engine.
Dario Tools
Our platform is designed
for integration across a range of devices including partner devices. Our digital architecture and user experience can easily integrate
with partnered devices such as continuous glucose monitor (“CGM”) and other remote patient monitoring devices. For
example, we recently partnered with one of the “big 4” diabetes companies to integrate their meter as well in certain
commercial deployments. Our native devices include:
• All-in-one smart glucose meter
• Bluetooth connected blood pressure cuff
• Digital Scale
• Upright MSK training device
Because of the widespread
and growing use of smartphones and the evolution of user preferences, our primary device is the user’s smartphone. Our connected
device strategy has been to develop or acquire devices when existing market requirements are not adequately met (for example, our
smart glucometer and Upright’s MSK device), and to partner with best-in-class devices for the remaining applications (including,
for example, our digital scale, blood pressure cuff, and CGM).
DarioEngage
Dario targets conditions
for which behaviors drive a significant portion of the outcomes, and which conditions bear a substantial cost burden to our users.
We combine our “Dario Tools” with our software, by which we offer RPM of their conditions and progress. Dario divides
its solutions into metabolic and non-metabolic categories:
• Metabolic conditions currently deployed include diabetes
(primarily type I and type II), hypertension and obesity/pre-diabetes.
• Non-Metabolic conditions currently deployed include MSK
conditions.
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We present our users
with a digital center of excellence - a low friction integrated experience from contracting through onboarding, data exchange,
enrollment, outcomes, and reporting. Regardless of which conditions or populations our customers select, and independent of whether
they choose to deploy portions of their strategy through other partners, we present a unified application experience that simplifies
deployments, creates market-leading transparency, and accelerates and broadens user engagement.
The Dario Loop
Users vary significantly
in their interests and preferences, and unique user preferences also vary over time, insofar as optimal timing, tone, content,
channel, frequency, and intervention required to produce sustained behavior change. Users interactions with devices, smartphones,
coaches, providers, and third-party solutions must be personalized along these axes to ensure optimal engagement, retention, and
outcomes. To engage and sustain user interest and participation, and to drive outcomes, platforms must be dynamically responsive.
Because of a lack of responsiveness to these types of variances, many digital health platforms that achieve high initial engagement
often fail to retain users over time.
Key to our ability
to accommodate user behavioral changes is our mature AI-driven user journey engine, the “Dario Loop.” While several
in-market solutions now integrate health signals across a range of categories to apply limited, nominal personalization, primarily
in the form of nudges, our solution is informed by years of user experience data from over 150,000 users, enabling us to continually
personalize and adapt user journeys over time. The Dario Loop journey engine drives our multichannel targeted outreach and enrollment
campaigns, informs specific recommendations around a range of categories such as diet, physical activity, self-care, coaching interventions,
and provider engagement, and evolves in real time in response to the data exhaust from a user’s interaction with the care
ecosystem.
The Dario Loop combines
complex behavioral science insights with data from tens of thousands of users over several years to recommend AI-driven initial
and updated care journeys in response to a user’s engagement with the platform. Most digital health solutions consist primarily
of tracking, content, and nudges. These are often perceived by users as non-rewarding work, and often do not feel relevant to their
concerns, particularly as they evolve over time. We believe that current in-market solutions trivialize within person changes over
time and do not appropriately respond to dynamically evolving interests of users. This results in reduced engagement and impaired
outcomes. The Dario Loop adapts user journeys’ to drive engagement, retention, and clinical outcomes by optimizing timing,
tone, channel, content, frequency and intervention to deliver dynamically personalized user journeys that are more likely to result
in the behavior changes needed to drive improved outcomes across a range of conditions. As we partner with solutions in additional
conditions or categories, we “loop them in” to our solution, enhancing the engagement and efficacy of these partnered
solutions to deliver additional value to our users. The engine is designed for integration and scale; as we add populations and
conditions for which behaviors are primary drivers of outcomes, our engine becomes more adept at customizing a user’s preferences
and needs.
Our Growth Strategies
Add
customers across a range of channels . Due to our unique ability to deploy flexibly and interoperability, and since we
cover the range of chronic conditions of common concern to health plans, providers and employers, we are experiencing increased
interest in our behavior change platform for chronic diseases. We have already engaged with several large providers and one fortune
500 company subsidiary, and are in late stage negotiations to enter contracts with several health plans on their fully insured
businesses. We anticipate continued growth and demand in these channels as we acquire customers. Each additional contract not only
increases revenues, but also the likelihood of attracting additional new customers as they recognize our solutions being adopted
and trusted by peers and competitors.
Increase
the eligible populations within customers . Initially, Dario’s solutions were deployed for type I and type II diabetes.
Since that time, we have added HTN, MSK. Each new condition added increases our ability to cover larger portions of our customers’
populations, thereby reducing the need for our customers to engage multiple vendors, and reducing their costs as compared to the
alternative of partnering with multiple solutions to cover the conditions and categories that we cover on one single platform.
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Drive
Engagement . Our business model is predominantly a subscription model, where we charge per user engaged on the platform.
As our AI matures and as we deploy increasingly dynamic and adaptive personalization, we intend to engage a large portion of eligible
populations, potentially driving increased revenue. A user is considered as an engaged user if (i) the user is measuring high
blood glucose and/or blood pressure using our app and our connected devices, (ii) a user is interacting with our coach via
one of the communication channels such as chat, SMS, email or phone call, or (iii) a user who is performing one of the following
activities on his application such as: reading messages of articles sent to him over the app, setting or updating goal on his application,
updating his profile, tagging meals, recording intake of drugs and other activities available on our application.
Optimize
solutions for value . Our customers primarily engage for 3 key reasons: (1) the opportunity for cost savings; (2) our
competitive advantage in breadth of conditions serviced and our AI technology; and (3) revenue opportunities from our digital
center of excellence. Our pricing strategy is designed to deliver return on investment to our customers soon after engagement,
and steadily over time. As we evolve our solutions to deliver increased value to our users, we can offer customers value-based
pricing models that can lead to greater revenue.
Acquisitions
and Partnerships . In early 2021, as part of our plan to expand our suite of offerings to provide a wider range of solutions
to our potential customers, we acquired Upright, and we are now planning to deploy a comprehensive MSK virtual
clinic in the second half of 2021.
Post-COVID
Rebalancing: The COVID-19 pandemic has had a major impact on health. Our members and eligible members were disproportionately
affected as researched showed that chronic condition comorbidities increased the risk of hospitalization and death from COVID-19.
In 2020, telehealth and digital care spiked significantly, as health plans and providers sought to deliver solutions virtually.
Across the industry, telehealth use spiked in 2020 and has since withdrawn some, albeit to still more than 50x pre-pandemic levels.
However, telehealth as delivered today is not appreciably different from how it was delivered 30 years ago, with largely telephone
only visits, and even where video is present, remote monitoring, real-time data and device integration remain mostly absent. Our
customers and potential customers recognize the tremendous potential of building on the shift to telehealth with the evolution
of more complete virtual care models as they see the limitations of pure telehealth-based care for chronic conditions.
Sales and Marketing
Our initial marketing
efforts in the United States were focused on the early adopter users who have diabetes and who are paying out of pocket for their
monitoring tools to manage their chronic condition, and we have concentrated our efforts in gaining market share and brand awareness
through direct-to-consumer marketing efforts.
In 2018, we began to
expand our marketing efforts to the insured population by offering our DarioEngage platform to a variety of healthcare providers
who are supporting and coaching individuals with diabetes. We believe this will help us to diversify our revenues, from only selling
our Dario Blood Glucose Monitoring System and its consumables to revenues generated from providing online real-time monitoring,
supervising and coaching capabilities to all relevant healthcare providers who support individuals with diabetes and hypertension,
and in the longer terms also other chronic conditions. As part of these efforts, during 2019 we announced our planned cooperation
with Attain Health, Giant Eagle, BestBuy, and Better Living Now (BLN).
On the marketing side,
we primarily utilize online marketing in order to create awareness of Dario. Rather than solely rely on an online advertisement,
we will also consider revenue sharing with affiliate networks and a variety of other pay-for-performance methods commonly used
in online commerce.
We also expect to collaborate
with the medical community to showcase what we expect will be the Dario Smart Diabetes Management Solution’s clinical equivalence
and usability superiority through DarioEngage and Dario Loop.
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As part of transforming
our offering from the direct-to-consumer market to the (B2B2C and payors market, in the beginning of 2020, we hired a President
and General Manager for North America who is leading our sales and marketing organization in the United States aimed to offer
our digital solution to health plans, employers, hospital, clinics, and remote patient monitoring centers. We expect this organization
to grow as we enter into service agreements with such payors. In that regard, in 2020, we announced a variety of agreements expanding
our sales in the B2B2C market including: (i) in January 2021, our announcement that we entered into an agreement to
provide its digital therapeutics solution to eligible employees of a subsidiary of a U.S. based Fortune 500 technology and engineering
company, which was obtained through our partnership with the Vitality Group (“Vitality”); (ii) in December 2020,
we announced that we entered into an agreement to provide our RPM solution to Presbyterian
Medical Services, one of the largest integrated healthcare systems in the State of New Mexico, effective January 1,
2021; (iii) in November 2020, we announced that we entered into an agreement to provide our digital therapeutics solution
to eligible employees of a U.S.-based Fortune 500 technology company; (iv) in October 2020, we announced our
inclusion in Vitality’s Gateway Flex offering, allowing our digital therapeutics platform to be marketed to Vitality's vast
employer base that provides benefits solutions to 20 million people, (v) in September 2020, we announced our partnership
with HMC Healthworks, that extends our reach into HMC's vast multi-employer client base through which HMC is currently managing
more than one million members; (vi) in July 2020, we announced that we entered the U.K. RPM market through an agreement
with Williams Medical, making our platform available to healthcare professionals throughout the U.K. and Ireland; and (vii) in
June 2020, we announced two RPM agreements in the U.S., allowing healthcare providers to monitor patients between office
visits while utilizing new CMS reimbursement codes, an added source of revenue.
Manufacturing
As we do not directly
manufacture our products ourselves, we have supply agreements with manufacturers for the Dario Blood Glucose Monitoring System,
glucose test strips, lancing devices, lancets, blood pressure monitor and weight scale. We have arrangements in place
with commercial-scale manufacturers for both the Dario Blood Glucose Monitoring System, for our test strips and the other
devices. As a result of investments, we have made over the past several years, we own the specialized equipment used to manufacture Dario
Blood Glucose Monitoring System.
During 2015, we commenced
the manufacturing of our Dario Blood Glucose Monitoring System with a Chinese manufacturer as part of our efforts to further reduce
manufacturing cost. At the beginning of 2016, we transitioned our manufacturing to a new Chinese manufacturer as part of our effort
to increase our manufacturing capacity and improve cost savings.
Our primary
product offering is primarily subscription based software and services which do not require manufacturing, and which are
developed by us.
Clinical Studies and Outcomes
Our platform is planned
to target different chronic conditions. Our initial focus has been on diabetes because that is a condition in which we believe
there is the biggest opportunity to make a meaningful impact and improve healthcare outcomes and lower costs. It is also a condition
that is associated with multiple different comorbidities, each of which represents a significant health and economic burden. The
majority of our end-users are individuals with type 2 diabetes. Most people with type 2 diabetes are diagnosed after age 45 and
have at least two co-existing chronic conditions. The most common chronic condition in people living with type 2 diabetes include
hypertension (73.6%), overweight/obesity (87.5%), hyperlipidemia (75.2%), chronic kidney disease (36.5%), and cardiovascular disease
(32.2%). Typically, the health of people with type 2 diabetes is managed by a primary care physician, although few may also be
seen by an endocrinologist.
On average, people
with type 2 diabetes see a physician more than five times per year. While there are a number of metrics that physicians use to
track the health of these patients, the most common is hemoglobin A1c, or HbA1c, which measures the average 90-day glycemic (blood
glucose) level in red blood cells. Clinical guidelines published by the ADA suggest that a reasonable HbA1c target for many non-pregnant
adults is less than 7%, or 154 milligrams per deciliter. A higher HbA1c has been associated with increased health risk and associated
costs. The ADA estimates that annual healthcare costs for a person with diabetes cost an average of $16,750 compared to $7,151
for a healthy individual. Research published by Oxford University in the United Kingdom suggests that a 1% reduction in HbA1c levels
leads to a 21% reduction in death from diabetes, a 14% reduction in heart attacks and a 43% reduction in peripheral vascular disease.
Monitoring HbA1c levels is typically done through routine blood work in a clinical laboratory with a physician order. Treatment
can involve a range of therapies, the most common of which is lifestyle management such as nutrition, physical activity and medication.
Physicians will also employ various strategies to manage diabetes-associated comorbidities.
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We believe that patients
using a digital diabetes management platform have the potential to promote behavioral modification and sustain adherence to diabetes
management, demonstrating better glycemic control. Our sophisticated customer-focused solutions provide significant, meaningful
improvements in the measurable clinical outcomes of our members.
Clinical Studies
The system accuracy and user performance
of our product has been evaluated in several studies that we have performed, in over 1,300 diabetic patients from 2015 through
2017, and was found compliant with the most stringent current requirements of FDA guidelines and international standards then in
effect.
Clinical validation
of our product was performed with 350 diabetic patients for each product type, namely the meter with the audio jack and the meter
with the lightning connector, and the results that were achieved were as follows:
·
Dario BGMS (Android): For all subject's samples 96.6% within ±15% and 100% within ±20% of the medical laboratory values at the entire glucose concentrations range
·
Dario LC BGMS (iPhone, Lightning connector): For all subject’s samples 96.3% within ±15% and 99.4% within ±20% of the medical laboratory values at the entire glucose concentrations range.
Published Clinical Data
Since 2017, we have
conducted numerous real-world-data studies through analyzing the clinical data of our user’s utilizing the rapidly increasing
database that is stored on our data cloud.
Several scientific
studies were published by us between 2017 and through 2020 in leading diabetes conferences such as the ADA, AADE and ATTD.
Main Highlights
In all of the below
studies, we believe that the results show a trend of continued improvement, demonstrating a direct correlation between using the
Dario Blood Glucose Monitoring System and app and improving clinical parameters. The combination of Dario’s Blood Glucose
Monitoring System and app may promote behavioral modification and enhanced adherence to diabetes management, demonstrating improvement
in glycemic outcomes and sustainment for a long period of time.
Dario reported
an Average Reduction in Estimated HbA1C of 1.4% for High-Risk type 2 Diabetes Users.
Dario presented at
the 77 th ADA session a study that was titled “Reducing A1C Levels in Individuals with High-Risk Diabetes Using
the Mobile Glucose Meter Technology.” In the study Dario reported an average reduction in estimated HbA1C of 1.4% for high-risk
type 2 Diabetes users.
At the ADA 2018 session, Dario presented
three real-world-data analysis studies, as detailed below.
Type 2 Diabetes Users
of Dario Digital Diabetes Management System Experience a Shift from Greater than 180 mg/dL to Normal Glucose Levels with Sustainable
Results
·
Reduction of 19.3% in high glucose readings within 12 months
·
Increase of 11.3% in in-range readings within 12 months
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Method :
A retrospective data evaluation study was performed on the Dario TM cloud database. A population of all active Type 2
Diabetic (T2D) users that took measurements with Dario TM BGMS on average of 20 measurements per month during 2017. The
study assessed the ratio of all high blood glucose readings (180-400 mg/dL) and the ratio of all normal blood glucose readings
(80-120 mg/dL) in their first month of use to their last month of use during 2017 as recorded in the database.
Results :
For 17,156 T2D users activated during 2017 the average ratio of high events (180-400 mg/dL) was reduced by 19.3% (from 28.4% to
22.9% of the entire measurements). While at the same time, the ratio of normal range readings (80-120 mg/dL) was increased by 11.3%
(from 25.6% to 28.5% of the entire measurements). The most significant shift occurred after one month of usage (14% decrease) and
maintained stability over the following months throughout the full year. |
Updated
Analysis combining 2017 and 2018 data totals 38,838 Type 2 Diabetes active users and 3,318,014 measurements show
14.3% decrease in high readings (180-400 mg/dL) and 9.2 % increase in In-range (80-120 mg/dL) readings
A decrease in High Readings
and Severe Hyperglycemic Events for People with T2D over the Full Year of 2017 in Users Monitoring with Dario Digital Diabetes
Management System
·
Reduction of 20% of High events (180-400 mg/dL) in T2D sustained within 12 months
·
Reduction of 58% of Hyper events (>400mg/dL) in T2D within 12 months
Method:
A retrospective data evaluation study was performed on the Dario TM cloud database. A population of active Type 2 Diabetic
(T2D) users that continuously measured their blood glucose using Dario TM BGMS during the full year of 2017 was evaluated.
The study assessed the ratio of high (180-400 mg/dL) and hyperglycemic (>400mg/dL) blood glucose readings during full year of
2017 as recorded in the database. The average of high and hyperglycemic glucose readings were calculated in periods of 30-60, 60-90,
90-120, 120-150, 150-180, 180-210, 210-240, 240-270, 270-300, 300-330, 330-360 days and compared to first 30 days as a starting
point of analysis.
Results:
For 225 T2D active users the ratio of high events (180-400 mg/dL) was reduced gradually in 19.6% (from 23.4% to 18.8% of the entire
measurements) from baseline compared to the 12 th month of the year. Moreover, the ratio of severe hyperglycemia events
(>400 mg/dL) was decreased in 57.8% (from 0.90% to 0.38% of the entire measurements) at the same period.
Continuous Reduction of
Blood Glucose Average during One Year of Glucose Monitoring Using Dario Digital Monitoring System in a High-Risk Population
·
Reduction of 14% Blood Glucose average was observed in T2D within 12 months
·
76% of the population showed 24% improvement in Blood glucose average within 12 months
Methods :
An exploratory data analysis study reviewed a population of high risk active type 2 Diabetic users with initial 30 days glucose
average above 180 mg/dL during a full calendar year. The study assessed the average blood glucose readings along a year of usage.
The average of glucose readings was calculated per user in periods of 30 days intervals from 30-60 to 330-360 days and compared
to the first 30 days as the starting point baseline of analysis.
Results:
Overall of 238 highly engaged T2D users (more than one daily measurement in average) whose average blood glucose
level was above 180mg/dL in the first 30 days of measurements (225±45 mg/dL) showed continuous reduction in glucose level
average vs. baseline. Reduction in blood glucose average level was demonstrated gradually, in the succeeding 3, 6 and 12 months
showing average decrease of 7%, 11% and 14% vs. baseline, respectively. Furthermore, 76% of the entire population (180 out of 238
users) improved their average blood glucose level over a year. Those 180 users (average blood glucose 228±46) showed an
average decrease of 10%, 16% and 24% in their glucose average following 3, 6 and 12 months, respectively.
9
At the American Association
of Diabetes Educators (AADE) 2018 Dario presented a study titled “Decrease in Estimated A1C for people in High-risk over
a full year of users monitoring with a digital Diabetes management system.”
A reduction of 1.4%
in estimated HbA1C in Type 2 Diabetes high risk users from baseline after one year of the Dario system use.
Method :
A retrospective data evaluation study was performed on the Dario TM cloud database. A population of high-risk (with baseline
A1C > 7.5 percent), active users that continuously measured their blood glucose using Dario TM BGMS during a full
year was evaluated. The study assessed estimated A1C values based on blood glucose readings during a full year as recorded in the
database. The estimated A1C values were calculated in periods of 3, 6, 9 and 12 months and compared to first 30 days as a starting
point of analysis.
Results :
A group of 363 high-risk Dario BGMS users (A1C>7.5) with greater than two blood glucose measurements taken per day in the first
30 days and in the 12 th month of the year was selected. Estimated A1C was improved by -0.7, -0.8 and -1 percent from
baseline to 3, 6 and 9 months respectively, and remained -1 percent lower following 12 months of usage (8.65±0.96 vs.7.65±1.0).
Moreover, subgroup analyses by diabetes type revealed substantial estimated A1C improvement among people with T2D showing improvement
of -1 percent from baseline to 3, 6 months and 1.4 percent following 12 months (8.5 ± 0.91% vs. 7.14% ±
0.98%).
An additional study
evaluated on the potential improvement in glycemic variability in Type 2 diabetes over six months in patients monitoring with Dario
Digital Diabetes Management System. Dario presented the study results at the Advance Technologies and Treatment for Diabetes (ATTD)
conference in February 2019 in Berlin. We presented two additional studies outcomes at ADA 2019 conference.
Decrease in Glycemic Variability
for T2D over Six Months in Patients Monitoring with Dario Digital Diabetes Management System
·
Reduction of 14%-18% in measurements variability was observed in T2D within 6 months
·
Hypo events (<70 mg/dL) remained <1 event on average
Method:
A retrospective data evaluation study was performed on the Dario TM database. A population of T2D high-risk
patients (blood glucose measurements average (GM avg ) >180 mg/dL) measuring more than 20 times in the first 30 days
(analysis baseline) was evaluated on days 60-90 (3 months) and 150-180 days (6 months). Standard deviation (SD) and GM avg
were calculated and compared to the baseline.
Results:
A group of 698 T2D high-risk Dario TM users was selected. GV was reduced by 10% and 14% from baseline through 3 and 6
months, respectively (SD of 55.7, 58.4 vs.65.0). GM avg was reduced by 8% and 12% from baseline through 3 and 6 months,
respectively (201.1±25.57, 192.8±54.3 vs. 219.5±38.5) while patient’s hypoglycemic event (<70mg/dL)
was in average, less than one (<1) during this period. Subgroup analyses (355 patients) revealed substantial GV improvement
among non-Insulin T2D patients. The GV was reduced by 14% and 18% from baseline through 3 and 6 months, respectively (SD of 52.8,
50.7 vs.61.7).
T2D Users of Dario Digital
Diabetes Management System Experience an Increase of in-range Glucose Levels Linked to App Engagement
Relative Increase
of 10 % In-range linked to App engagement
Method :
A retrospective data evaluation study was performed on the Dario TM cloud database. A population of active Type 2 Diabetic
(T2D) users (>15 measurements per month on average) was evaluated. The study assessed the ratio of in-range blood glucose readings
(70-140 mg/dL) as a function of App engagement level for 6 months as recorded in the database compared to first 30 days as a starting
point of analysis.
10
Results :
A population of 4917 T2D non-insulin users measuring more than 15 times per month on average during 6 months in a row was evaluated.
The ratio of in-range (70-140 mg/dL) readings was increased following 3 months in correlation to the level of tagging meal reference/carbs/physical
activity occurrences (4.0%, 9.1% and 11.9% for tagging 0-1, 1-2 and >2 times per day on average, respectively) and sustained
for 6 months (3.1%, 7.0% and 12.2%, respectively). In subgroup analysis focusing on users entering their meal reference, high correlation
was observed following 3 months with an increase of in-range measurements in 4.6%, 8.4% and 12.0% for 0-1, 1-2 and >2 meal reference
tagging per day on average, respectively, and maintained stability over 6 months period (3.2%, 7.4%, and 12.5%, respectively).
Reduction of Blood Glucose
Average Less than 140mg/dL in People with Type2 Diabetes Using Dario Digital Diabetes Management System
30-40% of T2D Dario
users experienced Reduction of Blood Glucose Average below 140 mg/dL
Method:
A retrospective data evaluation study was performed on the Dario TM cloud database. A population of
active T2D users that continuously measured for 6 months was evaluated. The study assessed their BG avg and estimated A1C (eA1C)
values based on blood glucose readings as recorded in the database. Values were calculated in periods of 3 and 6 months and compared
to their first 30 days as a starting point analysis.
Results:
A group of 1248 Dario BGMS T2D active users (1.98 measurements per day on average during 6 months in a row) with
BG avg >140mg/dL (eA1C>6.5) was evaluated.100% reduced their BG avg along 6 months on average.
A group of 31% (387)
achieved BG avg of <140 mg/dL (eA1C<6.5) following 3 months showing 19% reduction on average from baseline (132.38±13.36
vs.162.79±25.41 mg/dL and eA1C 6.24±0.46 vs 7.3±0.88) and sustained their glycemic control during a 6 months
period (131.57±13.86 mg/dL and eA1C 6.21±0.48).
Subgroup analyses
of 568 non-insulin users revealed that 40% (226) achieved a BG avg <140 mg/dL following 3 months (131.95±13.21 vs.161.67±24.18
mg/dL and eA1C 6.22±0.46 vs 7.26±0.84) and sustained for 6 months period (131.03±13.70 mg/dL and eA1C 6.19±0.47).
Along the 6 months period, hypo events (<50mg/dL) per user per month on average remained stable.
In August 2019
another study was presented at the AADE 2019 in Atlanta. The study evaluated the “Impact of Digital Intervention on In-range
Glucose Levels in Users with Diabetes.” The study results showed 6% improvement in average blood glucose levels over 3 months
intervention program for a group of 162 users. A 39% increase in the in-range measurements was observed in a subgroup of 101 patients
who started with average blood glucose levels of over 140mg/dL.
In February 2020,
we presented an additional clinical study at the Advanced Technologies & Treatments for Diabetes (“ATTD”)
conference in Madrid, Spain. The presented data shows the Dario digital therapeutics platform successfully assists insulin dependent
patients with diabetes in reducing hypoglycemic events.
Decrease in Hypoglycemia Events Over Two Years
in Patients Monitoring with Dario’s Digital Diabetes Management System
Method:
A retrospective data analysis was performed on the Dario real-world database. Insulin dependent of users with type 1
or type 2 diabetes population was evaluated for two year of continuous system use. Average numbers of level 1 hypoglycemia (<70mg/dL)
and level 2 hypoglycemia (<54 mg/dL) events were calculated monthly and compared to baseline (first month).
Results:
For 1481 type 1 and type 2 insulin dependent users, average of level 1 hypoglycemia events and level 2 were reduced
by 24% and by 17% after 6 months and by 50% and 57% after 2 years vs. baseline respectively. Users with type 1 diabetes (N=363)
reduced level 1 hypoglycemia events by 50% and Level 2 by 55% after 2 years. Moreover, a 40% reduction in high blood glucose readings
was observed as well after 2 years.
In November 2020,
we presented additional clinical study data at the Virtual Diabetes Technology Society (DTS) meeting. The presented data indicated
the potential for a digital diabetes management solution to effect and sustain glycemic control improvements and demonstrated long
term reduction of blood glucose average (eA1c) and glycemic variability in type 2 diabetes over two years. The system assists users
through a variety of mechanisms including behavior modification in diabetes self-management and in long-term routines for self-care.
11
The Effect of a Digital Therapeutic Platform on Glycemic Control in Adults above Age 65 with Type 2 Diabetes.
Reduction of 13% blood glucose average in age group ≥65 (N=298) at six months by 13% sustained for 12 months.
Reduction of 38.1% in high readings ratio (>250 mg/dL) in the ≥65 age group at six months and by 41.5% at 12 months.
Method:
A retrospective study of high-risk users (BG avg >180 mg/dL equivalent to e A1c 8.0) 2 with type 2 diabetes that measured their
blood glucose using the Dario® platform database over two consecutive years was performed. The minimum engagement level for
inclusion was at least two blood glucose measurements per day on average taken in Month 1 and Month 24. Actual blood glucose readings
were taken by the Dario meter and loaded into the cloud database. These were evaluated for the blood glucose average (BGavg), estimated
A1c (eA1c)values and glycemic variability (by Standard Deviation; SD) following 24 months compared to the first month (baseline).
Results:
368 high-risk, T2D active and engaged users for at least consecutive 2 years were identified and assessed for their risk-level
and insulin usage. A group of 148 T2D, non-Insulin users that started with a blood glucose average (BG avg) >180 mg/dl (equivalent
to eA1c>8.0) consistently reduced their BG avg by 18% on average and sustained these values (179±45 vs. 219±56
mg/dL) following 2 years on the Dario platform. Glycemic variability was reduced over two years by 20% on average (SD:45 vs. 56)
. Substantial reductions were observed for higher risk groups (insulin and non-insulin treated). The subset that started with average
BG levels > 212 mg/dL (eA1c >9.0) and average BG levels >240 mg/dL (eA1c>10) reduced their average BG by 22.5% and
25.7% respectively on average over two years. The equivalent reductions in eA1c were 1.95% and 2.42%
In August 2020, we
presented an additional clinical study at the Virtual Association of Diabetes Care & Education Specialists (ADCES) conference.
The presented observational study data demonstrated better glycemic and blood pressure control. Patients using an integrated chronic
disease management digital platform have the potential to improve user activation which may assist to better manage their blood
glucose and blood pressure levels and sustain behavioral change.
Impact of Digital Management on Clinical Outcome in Patients with Chronic Conditions: Diabetes and
Hypertension.
Hypertension: Increase in normal level % measurements from 6% to 12% while hypertension stage
2 measurements decreased from 53% to 45%. 70% of the users (243 out of 345) improved their blood pressure levels by 8.4 mmHg Systolic
and 6.2 mmHg on average.
Glucose levels: A reduction of 33% in
high readings (>250 mg/dL) and 67% in severe events (>400 mg/dL) was observed over six months .
Methods:
A retrospective data evaluation study was performed on the Dario TM cloud database. A population of active
users that measured both blood pressure and blood glucose for at least 3 months was observed. Blood pressure and blood glucose
levels were evaluated. First month measuring on Dario platform was used as study baseline. Clinical outcomes examined were blood
pressure values, percentage of blood pressure categories, average blood glucose (BGavg) and high blood glucose readings (>250
mg/dL, >400 mg/dL) ratios.
Results:
A group of 345 active users started at baseline with Hypertension stage 1, 2 or hypertensive crisis levels and measured
following 3 months was evaluated.
· Blood pressure:
o Normal levels increased from 6% to 12% and percentage of users with hypertension stage 2 decreased
from 53% to 45%
o 70% of the users (243 out of 345) improved their blood pressure levels in 8.4 mmHg Systolic and
6.2 mmHg on average (Systolic 134.2±12 vs.142.6±14; Diastolic 89.9 ±11 vs.83.7 ±8.7)
· Blood Glucose:
o A group of 345 users measured with Dario their blood glucose in addition to blood pressure, 89%
are type 2 and pre-diabetes - average age is 60.4.
o For the group of 345 users a reduction of 33% (5.4% vs.8.0%) in high readings ratio (>250 mg/dL)
and 67% (0.3%vs.0.9%) in severe events ratio (>400 mg/dL) was observed following six months on average.
12
A subset of 114 users
with diabetes in higher risk started with BG average >160 mg/dL improved their average blood glucose by 14% (207±47 vs.177±50
mg/dL) following six months.
In June 2020, we presented
two clinical studies at the ADA Virtual conference. The presented data from these studies showed:
· The use of a digital diabetes platform resulted in a large population are consistent with previous
studies and show the potential to promote behavior modification in users with T2D. The study demonstrated that digital management
platforms may assist user to better control their blood glucose levels and sustain behavioral change. This observational data presented
an improvement in high glycemia readings ratios, and an increase in prediabetes fasting blood glucose levels sustained over one
year.
· The additional study confirmed the potential of digital diabetes solutions to sustain glycemic
achievements in users with type 2 diabetes over two years. The system may assist the users to experience an actual behavior modification
in their diabetes self-management as well as in their long-term routine for self-care.
Users with type 2 diabetes using a digital platform experienced
sustained improvement in blood glucose levels.
Method:
A retrospective data evaluation (Q1:2018-2019) was performed on the Dario ® data base. A population of active
users (18 measurements per month with the Dario ® System on average) with T2D, non-Insulin treated was evaluated
over a full year. High blood glucose readings (180-400 mg/dL, >250 mg/dL), fasting readings (<126 mg/dL) and post-meal readings
(<180mg/dL) ratios were assessed in their first month of use until the 12 th month.
Results:
For 9,200 users with T2D, non-Insulin users, the average ratio of high glycemia events (180-400 mg/dL) from entire set of measurements
was reduced by 26% (18.62% vs. 23.43%) while readings of >250mg/dL were reduced by 33% (4.65% vs. 6.93%) over a year. Fasting
measurements analysis revealed an increase of 16% in ratios of readings <126 mg/dL per entire set of fasting measurements (40.59%
vs. 34.92%) on average. Post-meal readings ratio of <180 mg/dL per entire post-meal measurements increased by 5% (73.75% vs.
70.42%) on average over a year.
Estimated A1C Reduction in High-Risk Patients over Two
Years of Using a Digital Diabetes Management Platform
Method:
A retrospective data evaluation study was performed on high-risk users with type 2 diabetes that measured their blood glucose using
Dario ® platform database for two consecutive years. The study assessed BGavg, estimated A1c (eA1c) values and
glycemic variability following 24 months compared to the first month (baseline).
Results:
A group of 148 high-risk users with type 2 diabetes, non-Insulin treated was evaluated. Their BGavg was of >180mg/dL (eA1c>8.0)
for users taking ∼ 2 blood glucose measurements per day in the
first month and in the 24 th month on average. Their BGavg was consistently reduced by 18% and sustained (179±45
vs. 219±56 mg/dL) and eA1c was reduced by 1.5 percentage points (9.26±1.3 vs. 7.86±1.8). Glycemic variability
was reduced by 20% (SD: 45 vs. 56) at the end of 2 years. Additional analysis of 220 users with type 2 diabetes,147 started with
eA1c >9.0% and 73 started with eA1c >10%, revealed substantial eA1c reduction of 2.0 percentage points (10.31 ± 1.8%
vs. 8.36 ± 1.2%) and 2.4 percentage points (11.15 ± 1.2% vs. 8.73% ± 2.1%) from baseline after 2 years, respectively.
Glycemic variability was reduced by 20% for both (SD: 55 vs. 69 and 59 vs. 74, respectively).
13
Government Regulation
The principal markets
that we have initially targeted for Dario are the United States, Canada, the European Union, Australia, and New Zealand. The
following is an overview of the regulatory regimes in these jurisdictions.
United States Regulation
Generally
In the United States,
devices are subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation
is conducted before a device receives clearance for commercial distribution. Under Section 201(h) of the Food,
Drug, and Cosmetic Act, a medical device is an article, which, among other things, is intended for use in the diagnosis of disease
or other conditions, or in the cure, mitigation, treatment or prevention of disease, in man or other animals. The Dario
Blood Glucose Monitoring System is classified as a medical device and subject to regulation by numerous agencies and legislative
bodies, including the FDA and its foreign counterparts. FDA regulations govern product design and development, pre-clinical
and clinical testing, manufacturing, labeling, storage, pre-market clearance or approval, advertising and promotion, and sales
and distribution. Specifically, the FDA classifies medical devices into one of three classes. Class I devices
are relatively simple and can be manufactured and distributed with general controls. Class II devices are somewhat
more complex and require greater scrutiny. Class III devices are new and frequently help sustain life.
Unless an exemption
applies, each medical device commercially distributed in the United States will require a 510(k) clearance, 510(k)+ “de-novo”
clearance, or pre-market approval (or PMA) from the FDA.
510(k) Clearance
Process. After a device receives 510(k) clearance, any modification that could significantly affect
its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance
or could even require a premarket application approval. The FDA requires each manufacturer to make this determination
in the first instance, but the FDA can review any such decision. If the FDA disagrees with the determination, the agency
may retroactively require the manufacturer to seek 510(k) clearance or premarket application approval. The FDA
also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket
application approval is obtained.
De
Novo Classification . If the FDA denies 510(k) clearance of a device because it is novel and an
adequate predicate device does not exist, the “de novo classification” procedure can be invoked based upon a reasonable
assurance that the device is safe and effective for its intended use. This procedure approximates the level of scrutiny
in the 510(k) process but may add several months to the clearance process. If the FDA grants the request, the device is permitted
to enter commercial distribution in the same manner as if 510(k) clearance had been granted.
Premarket
Application Approval Process . After approval of a premarket application, a new premarket application or
premarket application supplement is required in the event of a modification to the device, its labeling or its manufacturing process. The
premarket application approval pathway is much more costly, lengthy and uncertain. It generally takes from one to three
years or longer.
European and Non-European
Regulation Generally
Sales of medical devices
outside the United States are subject to foreign regulatory requirements that vary widely from country to country. These laws and
regulations range from simple product registration requirements in some countries to complex clearance and production controls
in others. As a result, the processes and time periods required to obtain foreign marketing clearance may be longer
or shorter than those necessary to obtain FDA clearance.
The commercialization
of medical devices in Europe is regulated by the European Union. The European Union presently requires that all medical products
bore the CE mark, an international symbol of adherence to quality assurance standards and demonstrated clinical effectiveness. Compliance
with the Medical Device Directive (MDD) or the Active Implantable Medical Device Directive (AIMD) or the In Vitro Diagnostic Medical
Device Directive (IVDD) as audited by a notified body and certified by a recognized European Competent Authority, permits the manufacturer
to affix the CE mark on its products.
14
In September 2013,
we obtained ISO 13485 certification for our quality management system and CE Mark certification to market Dario, and
in May 2015 Dario was cleared to fulfill the criteria according to EN ISO 15197:2013 The granting of the CE Mark allows Dario to
be marketed and sold in 32 countries across Europe as well as in certain other countries worldwide. On November 21, 2014,
MDSS, our European Authorized Representative, completed the registration of the Dario Blood Glucose Monitoring System with the
German Authority as required by Article 10 of Directive 98/79/EC on in vitro diagnostic medical devices. We commenced an initial
soft launch of the product in Europe in 2014, created initial demand for the product and established brand awareness and marketing
techniques to reach our target market with a goal to continue expansion to new markets and territories.
We achieved regulatory
clearance to market Dario in other countries that do not rely on the CE Mark. To date, the non-CE Mark jurisdictions which we have
begun to market Dario include the United States, New Zealand, Canada, and Australia.
To the extent that
we seek to market our product in other non-CE Mark countries in the future, we will be required to comply with the applicable regulatory
requirements in each such country. Such regulatory requirements vary by country and may be tedious. As a
result, no assurance can be given that we will be able to satisfy the regulatory requirements to sell our products in any such
country.
Clinical Studies
Even when a clinical
study has an approved Investigational Device Exemption (IDE) from the FDA under significant risk (SR) determination, has been approved
by an Institutional Review Board (IRB) under non-significant risk (NSR) determination and/or has been approved by local or regional
Ethics Committee, the study is subject to factors beyond a manufacturer’s control, including, but not limited
to the fact that the institutional review board at a given clinical site might not approve the study, might decline to renew approval
which is required annually, or might suspend or terminate the study before the study has been completed. There is no assurance
that a clinical study at any given site will progress as anticipated; the interim results of a study may not be satisfactory leading
the sponsor or others to terminate the study, there may be an insufficient number of patients who qualify for the study or who
agree to participate in the study or the investigator at the site may have priorities other than the study. Also, there
can be no assurance that the clinical study will provide sufficient evidence to assure regulatory authorities that the product
is safe, effective and performs as intended as a prerequisite for granting market clearance. See “Clinical Trials”
above for clinical trials performed to date.
Post-Clearance Matters
Even if the FDA or
other non-US regulatory authorities approve or clear a device, they may limit its intended uses in such a way that manufacturing
and distributing the device may not be commercially feasible. After clearance or approval to market is given, the FDA and foreign
regulatory agencies, upon the occurrence of certain events, are authorized under various circumstances to withdraw the clearance
or approval or require changes to a device, its manufacturing process or its labeling or additional proof that regulatory requirements
have been met.
A manufacturer of a
device approved through the premarket approval application process is not permitted to make changes to the device which
affects its safety or effectiveness without first submitting a supplement application to its premarket approval application
and obtaining FDA clearance for that supplement. In some instances, the FDA may require a clinical trial to support
a supplement application. A manufacturer of a device cleared through a 510(k) submission or a 510(k)+ “de-novo”
submission must submit another premarket notification if it intends to make a change or modification in the device that could significantly
affect the safety or effectiveness of the device, such as a significant change or modification in design, material, chemical composition,
energy source or manufacturing process. Any change in the intended uses of a premarket approval application device
or a 510(k) device requires an approval supplement or cleared premarket notification. Exported devices are subject
to the regulatory requirements of each country to which the device is exported, as well as certain FDA export requirements.
15
Mobile Medical Applications Guidance
On September 23,
2013, the FDA issued final guidance for developers of mobile medical applications, or apps, which are software programs that run
on mobile communication devices and perform the same functions as traditional medical devices. The guidance outlines
the FDA’s tailored approach to mobile apps. The FDA plans to exercise enforcement discretion (meaning it will not enforce
requirements under the Federal Food, Drug & Cosmetic Act) for the majority of mobile apps as they pose minimal risk to
consumers. The FDA plans to focus its regulatory oversight on a subset of mobile medical apps that present a greater
risk to patients if they do not work as intended. The FDA is focusing its oversight on mobile medical apps that:
●
are intended to be used as an accessory to a regulated medical device – for example, an application that allows a health care professional to make a specific diagnosis by viewing a medical image from a picture archiving and communication system (PACS) on a smart mobile device or a mobile tablet; or
●
transform a mobile platform into a regulated medical device – for example, an application that turns a smart mobile device into an electrocardiography (ECG) machine to detect abnormal heart rhythms or determine if a patient is experiencing a heart attack.
Ongoing Regulation by FDA
Even after a device
receives clearance or approval and is placed on the market, numerous regulatory requirements apply. These include:
●
establishment registration and device listing;
●
quality system regulation, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation, and other quality assurance procedures during all phases of the product life-cycle;
●
labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses, and other requirements related to promotional activities;
●
medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;
●
corrections and removals reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug and Cosmetic Act that may present a risk to health; and
●
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
Failure to comply with
applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
fines, injunctions, civil or criminal penalties, recall or seizure of our current or future products, operating restrictions, partial
suspension or total shutdown of production, refusing our request for 510(k) clearance or PMA approval of new products, rescinding
previously granted 510(k) clearances or withdrawing previously granted PMA approvals.
We may be subject to
announced and unannounced inspections by the FDA, and these inspections may include the manufacturing facilities of our subcontractors.
If, as a result of these inspections, the FDA determines that our or our subcontractor’s equipment, facilities, laboratories
or processes do not comply with applicable FDA regulations and conditions of product clearance, the FDA may seek civil, criminal
or administrative sanctions and/or remedies against us, including the suspension of our manufacturing and selling operations.
Ongoing Regulation
by International Regulators
International sales
of medical devices are subject to foreign government regulations, which may vary substantially from country to country.
16
In order to maintain
the right to affix the CE Mark to sell medical devices in the European Union, an annual surveillance audit in the company premises
and, if needed, at major subcontractors’ premises needs to be carried out by the notified body. Additionally,
European Directives dictate the following requirements:
●
Vigilance system, which requires the manufacturer to immediately notify the relevant Competent Authority when a company product has been involved in an incident that led to a death; led to a serious injury or serious deterioration in the state of health of a patient, user or another person; or might have led to death, serious injury or serious deterioration in health; and
●
Post-market surveillance including a documented procedure to review experience gained from devices on the market and to implement any necessary corrective action, commensurate with nature and risks involved with the product.
Failure to comply with
applicable regulatory requirements can result in enforcement action by the regulatory agency, which may include any of the following
sanctions: fines, injunctions, civil or criminal penalties, recall or seizure of our current or future products, operating restrictions,
partial suspension or total shutdown of production, refusing our request for renewing clearance and/or registration of our products
or granting clearance/registration for new products.
State Licensure
Requirements
Several states require
that Durable Medical Equipment (“DME”) providers be licensed in order to sell products to patients in that state. Certain
of these states require that DME providers maintain an in-state location. If these rules are determined to be applicable to
us and if we were found to be noncompliant, we could lose our licensure in that state, which could prohibit us from selling our
current or future products to patients in that state.
Federal Anti-Kickback
and Self-Referral Laws
The Federal Anti-Kickback
Statute prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or
to induce the:
●
referral of a person;
●
furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental programs; or
●
purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid or other governmental programs.
To the extent we are
required to comply with these regulations, it is possible that regulatory authorities could allege that we have not complied, which
could subject us to sanction. Noncompliance with the federal anti-kickback legislation can result in exclusion from
Medicare, Medicaid or other governmental programs, restrictions on our ability to operate in certain jurisdictions, as well as
civil and criminal penalties, any of which could have an adverse effect on our business and results of operations.
Federal law also includes
a provision commonly known as the “Stark Law,” which prohibits a physician from referring Medicare or Medicaid patients
to an entity providing “designated health services,” including a company that furnishes durable medical equipment,
in which the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement.
Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant arrangement,
civil penalties, and exclusion from Medicare, Medicaid or other governmental programs.
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Federal False Claims
Act
The Federal False Claims
Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented,
or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement
or used a false record to get a claim approved. In addition, amendments in 1986 to the Federal False Claims Act have
made it easier for private parties to bring “qui tam” whistleblower lawsuits against companies. Penalties
include fines ranging from $5,500 to $11,000 for each false claim, plus three times the number of damages that the federal government
sustained because of the act of that person.
Civil Monetary Penalties
Law
The Federal Civil Monetary
Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows
or should know likely to influence the beneficiary’s selection of a particular supplier of Medicare or Medicaid payable items
or services. Noncompliance can result in civil money penalties of up to $10,000 for each wrongful act, assessment of three times
the amount claimed for each item or service and exclusion from the Federal healthcare programs.
State Fraud and Abuse Provisions
Many states have also
adopted some form of anti-kickback and anti-referral laws and false claims acts. A determination of liability under such laws could
result in fines and penalties and restrictions on our ability to operate in these jurisdictions.
Administrative Simplification
of the Health Insurance Portability and Accountability Act of 1996
The Health Insurance
Portability and Accountability Act of 1996, or HIPAA, mandated the adoption of standards for the exchange of electronic health
information in an effort to encourage overall administrative simplification and enhance the effectiveness and efficiency of the
healthcare industry. Ensuring the privacy and security of patient information is one of the key factors driving the legislation.
Intellectual Property
Patent applications
On May 8, 2011,
certain of our founders filed a Patent Cooperation Treaty (PCT) Application No. PCT/IL2011/000369, titled “Fluids Testing
Apparatus and Methods of Use.” This PCT claimed priority from two preceding U.S. provisional applications filed
by our founders, with the earliest priority date being May 9, 2010. The PCT application was transferred to us by our founders
on October 27, 2011.
This application covers
the novel blood glucose measurement device, comprising the glucose meter; and an adaptor that connects the glucose meter to a smart-phone
to receive power supply and data display, storage, and analysis. A PCT search report and written opinion on patentability
that we received from World Intellectual Property Organization (known as WIPO) that included only two “Y” citations
and one additional non-relevant reference. Corresponding national applications of our PCT were filed in the U.S., Europe,
Japan, China, Australia and Israel.
On May 1, 2014,
we announced the receipt of a U.S. Notice of Allowance for a key patent relating to how the Dario Blood Glucose Monitoring System
draws power from and transmits data to a smartphone via the audio jack port. This patent was issued as U.S. Patent No. 8,797,180
in August 2014, and in August2015, we received U.S. patent (No. 9,125,549) that broadened our registered patent No. 8,797,180
to include testing of other bodily fluids through an audio jack connection. We believe these early patents represent critical intellectual
property recognition and a significant initial validation of our intellectual property efforts. Further, a corresponding European
patent was granted to us in May 2016, as European patent No. 2569622 for testing of fluids through an audio jack connection.
An additional corresponding patent was granted in Israel in April 2016. In February 2016 we were granted U.S. patent
No. 9,257,038, which is a further Continuation application connected to the U.S. patent No. 8,797,180, this new patent
enhanced the way the Dario Blood Glucose Monitoring System communicates with the end user’s smartphone devices.
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In November 11,
2017, U.S. patent No. 9,832,301 titled “Systems and methods for adjusting power levels on a monitoring device”
was granted. This patent enhances the way the Dario Blood Glucose Monitoring System communicates with users’ smartphone devices.
This family includes a corresponding pending application in China.
Additionally, we recently
received U.S. patent No. 10,445,072 that enables optical communication between the Dario Blood Glucose Monitoring System and
the end user’s smartphone devices.
Additional patent applications
are in the process of being discussed and developed, and we believe that we have a rich potential pipeline of future technologies
that we intend to develop.
For example, we are
further seeking to develop and protect new intellectual property around future generations of our hardware and software with the
goal of achieving enhanced functionality, user interface, data usability, cyber protection, and artificial intelligence enhancement.
Design patents and
patent applications on the Dario Blood Glucose Monitoring System
To further protect
our market distinction and branding for the Dario Blood Glucose Monitoring System, three U.S. Design Applications have been filed
and granted covering the glucose meter, the cartridge, and connection dongle. At least some of these applications were granted
and registered in the United States, as well as Brazil, Canada, China, Europe, and Hong Kong.
Trademark applications
We have also filed
several families of trademark applications covering the “Dario” name (wordmark), the Dario name and logo (logo), the
Dario logo alone (logo), the DARIO-LITE wordmark, the LABSTYLE INNOVATIONS wordmark, the DARIOHEALTH wordmark, and the DARIOHEALTH
logo. In particular, the “Dario” wordmark is registered as a trademark in the Australia, Canada, China,
Costa Rica, United States, Israel, China, Canada, Hong Kong, South Africa, Japan, Costa Rica, Europe, Israel, Japan,
Korea, Mexico, New Zealand, Panama, Russia, South Africa, and the USA. The “DARIOHEALTH” wordmark is registered as
a trademark in the United States, Canada, China and India.
Utility Models
We have been granted
Utility Models for our core invention in Japan and Germany.
Other intangible
assets
As the number of Dario
users grows, an ever-growing amount of data is being collected from diabetic patients, including their blood sugar levels, meal
compositions, routines, physical exercise (intensity and duration) as well as many other factors, and lately also blood pressure
data, which are all useful for creating meaningful correlations between these factors and insulin use. We expect that
this database will be highly valuable and may be capitalized in many ways. The accumulation of this type of know-how and related
algorithms are protected as trade secrets using specialized confidentiality protocols.
Competition
In recent years, a
number of digitally supported solutions have emerged to manage diabetes and other chronic conditions. Competitors are developing
new technologies rapidly and, in some cases, are also expanding to manage other chronic conditions. In this crowded field, our
success is predicated on our flexibility to adapt to evolving customer requirements in digital health and superior execution in
engagement, retention and clinical outcomes in a manner that delivers clear return on investment in required time-horizons and
in complex, highly regulated business environments. We expect new entrants in the field and the emergence of novel technologies,
as well as competition from larger technology platform players such as Amazon, Apple and Google. Dario’s competitors vary
by intervention (devices, applications, coaching and analytics), by channel (health plan, pharma, provider, employer) and by condition
(including, for example, diabetes, MSK, HTN, and others). Certain of our competitors offer this integrated approach in varying
degrees, including, among others, Hinge Health, Inc., Livongo Health Inc. (acquired by Teladoc Health Inc.), Omada Health, Inc.,
Vida Health, Inc., Virta Health Corp., Informed Data Systems Inc. (OneDrop), Glooko, Inc., and OnDuo LLC. We believe
that our competitors are comparatively disadvantaged along several axes:
19
● Our competitors offer point solutions for a single condition (which model is unattractive to enterprise
customers needing to manage multiple vendor relationships);
● Our competitors fail to share member-level data or granular reporting with partners, which prevents
these partners from leveraging their own assets to support care;
● Competitor applications have limited or minimal levels of personalization, where communications
(or “nudge”) from the application may be somewhat personalized, but actual user experiences are heavily templated,
and not personalized or dynamic;
● Competitor applications are supported only by short term outcome data, as compared to our studies
which cover a 2-year period and offer 7 years of direct-to-consumer data;
● Failure of any one of our competitors to successfully engage and retain a substantial portion of
the base population, as none has the direct-to-consumer experience or data required, resulting in frustrated customers who cannot
realize promised cost savings;
● Customers of our competitors suffer an inadequate user experience, as evidenced by few app store
reviews and low scores in Apple, Google and Amazon stores;
● Our competitors offer medical device-oriented approaches with delayed product update cadences,
rather than our more agile, software-driven approaches that push out new products every few weeks;
● Our competitors have slowed their improvements in the area of clinical metrics (including, for
example, blood pressure, HbA1c, and pain), which decreases the solution’s return on investment;
● Our competitors often utilize cumbersome form factors and alternative connected devices, which
are not easily portable or that otherwise require significant user effort for connectivity. By contrast, our diabetes solution,
for example, utilizes lancets, strips and a dongle held in a lipstick-sized device that physically connects to a user’s phone
and doesn’t require independent charging. As another example, our MSK device is small and easily attaches to body parts for
convenient and easy use;
● Our competitors’ applications experience limited interoperability and connectivity, such
that they are unable to integrate with third party devices, electronic health records or partnered solutions; and
● Our competitors have higher costs; our solutions are priced 30-50% lower than current comparable
in-market solutions.
Employees
As of March 1, 2021,
we had 127 full-time employees and 12 part-time employees. We have employment agreements with our five executive officers. See
“Management – Employment Agreements.”
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Item 1A.
Risk Factors
Investing in our
securities is highly speculative and involves a high degree of risk. You should carefully consider the following factors and other
information in this Annual Report and our other SEC filings before making a decision to invest in our securities. Additional risks
and uncertainties that we are unaware of may become important factors that affect us. If any of the following events occur, our
business, financial conditions and operating results may be materially and adversely affected. In that event, the trading price
of our common stock and warrants may decline, and you could lose all or part of your investment.
Summary of Risk Factors
Our business is subject to a number of
risks, including risks that may adversely affect our business, financial condition and results of operations. These risks are discussed
more fully below and include, but are not limited to, risks related to:
Risks Related to Our Financial Position
and Capital Requirements
● Risks associated with our relatively new business;
● our future capital needs and their potential impact on our existing stockholders;
● our history of losses and stockholder’s inability to rely upon our historical operating performance;
Risks Related to Our Business
● the acceptance of our products in the market and our exposure to market trends;
● the impact of COVID-19 on our operations;
● our risks of basing our business on the sale of our principal technology;
● our reliance on manufacturers and distributors;
● the impact of a failure of our digital marketing efforts;
● our reliance on the Apple App Store and Google’s Android platform;
● the risks associated with conducting business internationally;
● potential errors in our business processes and product offerings;
● our reliance on the performance of key members of our management team and our need to attract highly
skilled personnel;
● the integration of Upright’s business;
Risks Related to Product Development and Regulatory Approval
● the expense and time required to obtain regulatory clearance of our products;
● our limited clinical studies and the susceptibility to varying interpretations of such studies;
● our ability to complete clinical trials;
● the failure to comply with the FDA’s Quality System Regulation or any applicable state equivalent;
● our reliance on third parties to conduct clinical trial work;
● the impact of legislation and federal, state and foreign laws on our business, including protecting
the confidentiality of patient health information;
● the potential impact of product liability suits;
Risks Related to Our Intellectual Property
● the risks relating to obtaining or maintaining our intellectual property;
● potential litigation relating to the protection of our intellectual property;
● our limited foreign intellectual property rights;
● Our reliance on confidentiality agreements and the difficulty in enforcing such agreements;
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Risks Related to Our Industry
● the intense competition we face in the markets we operate;
● our need to respond quickly to technological developments;
● the risks relating to obtaining or maintaining our intellectual property;
● the risks relating to third-party payors not providing for adequate coverage and reimbursement
for our products;
Risks Related to Our Operations in Israel
● the risks relating to the political, economic and military instability that may exist in Israel;
● the potential for operations to be disrupted as a result of obligations of Israeli citizens to
perform military service;
● the difficulty in enforcing judgements against us or certain of our executive officers and directors;
Risks Related to the Ownership of Our Common Stock and Warrants
● the ability for our officers, directors and founding stockholders to exert influence over our affairs;
● the potential lack of liquidity, or volatility, of our common stock and warrants;
● the impact of analysts not publishing research or reports about us;
● the expense relating to our requirements as a U.S. public company;
● the potential failure to maintain effective internal controls over financial reporting;
● the existence of anti-takeover provisions in our charter documents and Delaware law; and
● that we do not intend to pay dividends on our common stock.
Risks Related to Our Financial Position
and Capital Requirements
We were formed in August 2011 and are thus subject
to the risks associated with new businesses.
We were formed in August 2011
as a new business and, commencing from 2015, we entered the commercialization stage of our technology. As such, this limited operating
history may not be adequate to enable you to fully assess our ability to develop and commercialize the Dario Smart Diabetes Management
Solution, achieve market acceptance of the Dario Smart Diabetes Management Solution, develop other products and respond to competition.
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. These efforts have not generated sufficient revenues, and
we will need to generate additional revenues over the next years. Therefore, we are, and expect for the foreseeable future to be,
subject to all the risks and uncertainties, inherent in a new business and the development and sale of new medical devices and
related software applications. As a result, we may be unable to fully develop, obtain regulatory approval for, commercialize, manufacture,
market, sell and derive material revenues in the timeframes we project, if at all, and our inability to do so would materially
and adversely impact our viability as a company. In addition, we still must establish many functions necessary to operate a business,
including finalizing our managerial and administrative structure, continuing product and technology development, assessing and
commencing our marketing activities, implementing financial systems and controls and personnel recruitment.
Accordingly, you should
consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in their
initial revenue generating stages, particularly those in the medical device and mobile health fields. In particular, potential
investors should consider that there is a significant risk that we will not be able to:
●
implement or execute our current business plan, or that our business plan is sound;
●
maintain our management team and the Company’s board of directors (the “Board of Directors”);
●
raise sufficient funds in the capital markets or otherwise to effectuate our business plan;
22
●
determine that our technologies that we have developed are commercially viable; and/or
●
attract, enter into or maintain contracts with, and retain customers.
In the event that we
do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially
and adversely affected.
Given our limited revenue and lack
of positive cash flow, we will need to raise additional capital, which may be unavailable to us or, even if consummated, may cause
dilution or place significant restrictions on our ability to operate.
According to our management’s
estimates, based on our current cash on hand and further based on our budget and the assumption that initial commercial sales
will commence during our anticipated timeframes, we believe that we will have sufficient resources to continue our activities
through 2023.
Since we might be unable
to generate sufficient revenue or cash flow to fund our operations for the foreseeable future, we will need to seek additional
equity or debt financing to provide the capital required to maintain or expand our operations. We may also need additional funding
for developing products and services, increasing our sales and marketing capabilities, and promoting brand identity, as well as
for working capital requirements and other operating and general corporate purposes. Moreover, the regulatory compliance arising
out of being a publicly registered company has dramatically increased our costs.
We do not currently
have any arrangements or credit facilities in place as a source of funds, and there can be no assurance that we will be able to
raise sufficient additional capital on acceptable terms, or at all. If such financing is not available on satisfactory terms, or
is not available at all, we may be required to delay, scale back or eliminate the development of business opportunities and our
operations and financial condition may be materially adversely affected.
If we raise additional
capital by issuing equity securities, the percentage ownership of our existing stockholders may be reduced, and accordingly these
stockholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and
privileges senior to those of our common stock. Given our need for cash and that equity raising is the most common type of fundraising
for companies like ours, the risk of dilution is particularly significant for stockholders of our company.
Debt financing, if
obtained, may involve agreements that include liens on our assets, covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, could increase our expenses and require that our assets be provided as a security for
such debt. Debt financing would also be required to be repaid regardless of our operating results.
If we raise additional
funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or candidate
products, or to grant licenses on terms that are not favorable to us.
Funding from any source
may be unavailable to us on acceptable terms, or at all. If we do not have sufficient capital to fund our operations and expenses,
we may not be able to achieve or maintain competitiveness, which could lead to the failure of our business and the loss of your
investment.
We have incurred significant losses
since inception. As such, you cannot rely upon our historical operating performance to make an investment decision regarding our
company.
Since our inception,
we have engaged primarily in research and development activities and in 2015 entered the commercialization stage. We have financed
our operations primarily through private placements and public offerings of common stock and have incurred losses in each year
since inception including net losses of $29 ,445 ,000 and $17,736,000 in 2020 and 2019, respectively.
Our accumulated deficit at December 31, 2020 was approximately $143,248,000. We do not know whether or when we will become profitable.
Our ability to generate revenue and achieve profitability depends upon our ability, alone or with others, to launch Dario in additional
European countries, and elsewhere and manufacture, market and sell Dario where approved. We may be unable to achieve any or all
of these goals.
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We may be subject to claims for rescission
or damages in connection with certain sales of shares of our securities.
In March 2016,
the Securities and Exchange Commission declared effective a registration statement that we filed to cover 66,667 shares 76,667
warrants to purchase common stock, 76,667 shares of common stock underlying such warrants, and underwriters’ warrants to
purchase up to 7,172 shares of common stock. Sales of approximately 2,778 shares of common stock, approximately 12,778 shares of
common stock underlying warrants and approximately 1,278 shares of common stock underlying underwriters’ warrants may not
have been made in accordance with Section 5 of the Securities Act of 1933, as amended. Accordingly, the purchasers of those
securities may have rescission rights or be entitled to damages. The amount of such liability, if any, is uncertain. In the event
that we are required to make payments to investors as a result of these unregistered sales of securities, our liquidity could be
negatively impacted.
Risks Related to Our Business
We only recently began commercializing
Dario, and our success will depend on the acceptance of Dario in the healthcare market.
Dario
has been CE marked since 2013, enabling us to commercialize in 32 countries across Europe as well as in certain other countries
worldwide . It was also approved by the regulatory authorities in Australia, New Zealand,
Canada, Israel and South Africa, and most recently in December 2015, we received FDA clearance. As a result, we have
a limited history of commercializing Dario and commenced selling Dario in the United States in 2016. We have limited experience
engaging in commercial activities and limited established relationships with physicians and hospitals as well as third-party suppliers
on whom we depend for the manufacture of our product. We are faced with the risk that the marketplace will not be receptive
to Dario over competing products and that we will be unable to compete effectively. Factors that could affect our ability to establish
Dario or any potential future product include:
●
the development of products or devices which could result in a shift of customer preferences away from our device and services and significantly decrease revenue;
●
the increased use of improved diabetes drugs that could encourage certain diabetics to test less often, resulting in less usage of a self-monitoring test device for certain types of diabetics;
●
the challenges of developing (or acquiring externally-developed) technology solutions that are adequate and competitive in meeting the requirements of next-generation design challenges, including interoperability with various electronic health records;
●
the significant number of current competitors in the BGMS market who have significantly greater brand recognition and more recognizable trademarks and who have established relationships with healthcare providers and payors; and
●
intense competition to attract acquisition targets, which may make it more difficult for us to acquire companies or technologies at an acceptable price or at all.
We cannot assure you
that Dario or any future product will gain broad market acceptance. If the market for Dario or any future product fails to develop
or develops more slowly than expected, or if any of the technology and standards supported by us do not achieve or sustain market
acceptance, our business and operating results would be materially and adversely affected.
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There is no assurance that our DarioEngage
software platform will succeed or be adopted by healthcare providers.
Our product offering
consists of our DarioEngage 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. We
expect that the DarioEngage software platform may 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. However, the success of our DarioEngage software platform will depend entirely on our potential
partners’ adoption of the platform and we cannot assure you that our potential partners will do so, or, if adopted, that
they will continue to use the platform continually and for an extended period of time. If we cannot encourage potential partners
to utilize our DarioEngage software platform we may not succeed in marketing the product to our potential partners, the failure
of which may materially and adversely affect our business and operating results.
A pandemic, epidemic or outbreak
of an infectious disease in the United States, Israel or elsewhere may adversely affect our business.
A regional or global
health pandemic, including COVID-19, could severely affect our business, results of operations and financial condition. A regional
or global health pandemic, depending upon its duration and severity, could have a material adverse effect on our business. For
example, the COVID-19 pandemic has had numerous effects on the global economy and governmental authorities around the world have
implemented measures to reduce the spread of COVID-19. These measures, including shutdowns and “shelter-in-place” orders
suggested or mandated by governmental authorities or otherwise elected by companies as a preventive measure, have adversely affected
workforces, customers, consumer sentiment, economies and financial markets, and, along with decreased consumer spending, have led
to an economic downturn in many of our markets.
As a result of the
COVID-19 pandemic, as near-term measures, we have transitioned many of our employees to remote working arrangements. The transition
has had little impact on our employee productivity and has not caused any interruption to our business. Due to the uncertainty
of COVID-19, we will continue to assess the situation, including abiding by any government-imposed restrictions, market by market.
As a result of the
COVID-19 pandemic, many of our personnel are working remotely, and it is possible that this could have a negative impact on the
execution of our business plans and operations. If a natural disaster, power outage, connectivity issue, or other event occurred
that impacted our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue
our business for a substantial period of time. The increase in remote working may also result in consumer privacy, IT security
and fraud concerns as well as increase our exposure to potential wage and hour issues.
We are unable to accurately
predict the impact that COVID-19 will have on our operations going forward due to uncertainties that will be dictated by the length
of time that the pandemic and related disruptions continue, the impact of governmental regulations that might be imposed in response
to the pandemic and overall changes in consumer behavior. Numerous state and local jurisdictions have imposed, and others in the
future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions
for their residents to control the spread of COVID-19. For example, Israel, federal and state governments in the United States,
and various governments in Europe, continue to impose limitations on gatherings, social distancing measures and restrictions on
movement, only allowing essential businesses to remain open. Such orders or restrictions have and are continuing to result in temporary
store closures, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, any
of which may negatively impact workforces, customers, consumer sentiment and the economies in many of our markets, and as a result,
may adversely affect our operations.
At this point in time, there is significant
uncertainty relating to the potential effect of COVID-19 on our business. As infections may continue to become more widespread,
we could experience a severe negative impact on our business, financial condition and results of operations. To the extent the
COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the
other risks described in this “Risk factors” section.
We may not be successful in launching
Dario Loop and even if we are successful in doing so, there is no assurance that we will be successful in marketing and/or selling
our product in the marketplace.
We intend to launch
our Dario Loop program, which will utilize a large amount of data collected on our servers to develop predictive models and artificial
intelligence algorithms to meet the potential demand of intelligence-driven analytics that healthcare providers may be looking
for to improve their services. However, the launch of Dario Loop will require significant financial and technical resources. There
is no assurance that we will successfully develop or launch Dario Loop. Even if we are successful in doing so, there is no assurance
that the marketplace will accept or adopt the usage of Dario Loop. If we cannot successfully develop Dario Loop, or encourage the
use and adoption of Dario Loop by market participants, our business and operating results may be materially and adversely affected.
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We cannot accurately predict the
volume or timing of any future sales, making the timing of any revenues difficult to predict.
We may be faced with
lengthy customer evaluation and approval processes associated with Dario. Consequently, we may incur substantial expenses and devote
significant management effort and expense in developing customer adoption of Dario which may not result in revenue generation.
We must also obtain regulatory approvals of Dario in certain jurisdictions as well as approval for insurance reimbursement in order
to initiate sales of Dario, each of which is subject to risk and potential delays, and neither of which may actually occur. As
such, we cannot accurately predict the volume or timing of any future sales.
If Dario fails to satisfy current
or future customer requirements, we may be required to make significant expenditures to redesign the product, and we may have insufficient
resources to do so.
Dario is being designed
to address an evolving marketplace and must comply with current and evolving customer requirements in order to gain market acceptance.
There is a risk that Dario will not meet anticipated customer requirements or desires. If we are required to redesign our products
to address customer demands or otherwise modify our business model, we may incur significant unanticipated expenses and losses,
and we may be left with insufficient resources to engage in such activities. If we are unable to redesign our products, develop
new products or modify our business model to meet customer desires or any other customer requirements that may emerge, our operating
results would be materially adversely affected, and our business might fail.
We expect to derive substantially
all of our revenues from our principal technology, which leaves us subject to the risk of reliance on such technology.
We expect to derive
substantially all of our revenues from sales of products derived from our principal technology. Our initial product utilizing this
technology is Dario. As such, any factor adversely affecting sales of Dario, including the product release cycles, regulatory issues,
market acceptance, product competition, performance and reliability, reputation, price competition and economic and market conditions,
would likely harm our operating results. We may be unable to develop other products utilizing our technology, which would likely
lead to the failure of our business. Moreover, in spite of our efforts related to the registration of our technology, if patent
protection is not available for our principal technology, the viability of Dario and any other products that may be derived from
such technology would likely be adversely impacted to a significant degree, which would materially impair our prospects.
We
are dependent upon third-party manufacturers and suppliers making us vulnerable to supply shortages and problems and price fluctuations,
which could harm our business.
We
do not own or operate manufacturing facilities for clinical or commercial production of the Dario Blood Glucose Monitoring System ,
and we lack the resources and the capability to manufacture the Dario Blood Glucose Monitoring System on a commercial scale. Therefore,
we rely on a limited number of suppliers who manufacture and assemble certain components of the Dario Blood Glucose Monitoring
System. Our suppliers may encounter problems during manufacturing for a variety of reasons, including, for example, failure to
follow specific protocols and procedures, failure to comply with applicable legal and regulatory requirements, equipment malfunction
and environmental factors, failure to properly conduct their own business affairs, and infringement of third-party intellectual
property rights, any of which could delay or impede their ability to meet our requirements. Our reliance on these third-party suppliers
also subjects us to other risks that could harm our business, including:
●
we are not a major customer of many of our suppliers, and these suppliers may therefore give other customers’ needs higher priority than ours;
●
third parties may threaten or enforce their intellectual property rights against our suppliers, which may cause disruptions or delays in shipment, or may force our suppliers to cease conducting business with us;
26
●
we may not be able to obtain an adequate supply in a timely manner or on commercially reasonable terms;
●
our suppliers, especially new suppliers, may make errors in manufacturing that could negatively affect the efficacy or safety of the Dario Blood Glucose Monitoring System or cause delays in shipment;
●
we may have difficulty locating and qualifying alternative suppliers;
●
switching components or suppliers may require product redesign and possibly submission to FDA, European Economic Area Notified Bodies, or other foreign regulatory bodies, which could significantly impede or delay our commercial activities;
●
one or more of our sole- or single-source suppliers may be unwilling or unable to supply components of the Dario Blood Glucose Monitoring System;
●
other customers may use fair or unfair negotiation tactics and/or pressures to impede our use of the supplier;
●
the occurrence of a fire, natural disaster or other catastrophe impacting one or more of our suppliers may affect their ability to deliver products to us in a timely manner; and
●
our suppliers may encounter financial or other business hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.
We
may not be able to quickly establish additional or alternative suppliers if necessary, in part because we may need to undertake
additional activities to establish such suppliers as required by the regulatory approval process. Any interruption or delay in
obtaining products from our third-party suppliers, or our inability to obtain products from qualified alternate sources at acceptable
prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to switch to competing products.
Given our reliance on certain single-source suppliers, we are especially susceptible to supply shortages because we do not have
alternate suppliers currently available.
We rely in part on a small group
of third-party distributors to effectively distribute our products.
We
depend in part on medical device distributors for the marketing and selling of our products in certain territories in which we
have launched product sales. We depend on these distributors’ efforts to market our products, yet we are unable to control
their efforts completely. These distributors typically sell a variety of other, non-competing products that may limit the resources
they dedicate to selling Dario. In addition, we are unable to ensure that our distributors comply with all applicable laws regarding
the sale of our products. If our distributors fail to effectively market and sell Dario, in full compliance with applicable laws,
our operating results and business may suffer. Recruiting and retaining qualified third-party distributors and training them in
our technology and product offering requires significant time and resources. To develop and expand our distribution, we must continue
to scale and improve our processes and procedures that support our distributors. Further, if our relationship with a successful
distributor terminates, we may be unable to replace that distributor without disruption to our business. If we fail to maintain
positive relationships with our distributors, fail to develop new relationships with other distributors, including in new markets,
fail to manage, train or incentivize existing distributors effectively, or fail to provide distributors with competitive products
on attractive terms, or if these distributors are not successful in their sales efforts, our revenue may decrease and our operating
results, reputation and business may be harmed.
Failure in our online and digital
marketing efforts could significantly impact our ability to generate sales.
In several of our principal
target markets, we utilize online and digital marketing in order to create awareness to Dario. Our management believes that using
online advertisement through affiliate networks and a variety of other pay-for-performance methods will be superior for marketing
and generating sales of Dario rather than utilizing traditional, expensive retail channels. However, there is a risk that our marketing
strategy could fail. Because we plan to use non-traditional retail sales tools and to rely on healthcare providers to educate our
customers about Dario, we cannot predict the level of success, if any, that we may achieve by marketing Dario via the internet.
The failure of our online marketing efforts would significantly and negatively impact our ability to generate sales.
27
Our Dario Smart Diabetes Management
application, which is a key to our business model, is available via Apple’s App Store and via Google’s Android platforms
and maybe in the future via additional platforms. If we are unable to achieve or maintain a good relationship with each of Apple
and Google or similar platforms, or if the Apple App Store or the Google Play Store or any other applicable platform were unavailable
for any prolonged period of time, our business will suffer.
A key component of
the Dario Smart Diabetes Management Solution is an iPhone or Android application which includes tools to help diabetic patients
manage their disease. This application is compatible with Apple’s iOS and with Google’s Android platforms and may in
the future become compatible via additional platforms. If we are unable to make our Dario Smart Diabetes Management application
compatible with these platforms, or if there is any deterioration in our relationship with either Apple or Google or others after
our application is available, our business would be materially harmed.
We are subject to each
of Apple’s and Google’s standard terms and conditions for application developers, which govern the promotion, distribution,
and operation of games and other applications on their respective storefronts. Each of Apple and Google has broad discretion to
change its standard terms and conditions, including changes which could require us to pay to have our Dario Smart Diabetes Management
application available for downloading. In addition, these standard terms and conditions can be vague and subject to changing interpretations
by Apple or Google. We may not receive any advance warning of such changes. In addition, each of Apple and Google has the right
to prohibit a developer from distributing its applications on its storefront if the developer violates its standard terms and conditions.
In the event that either Apple or Google ever determines that we are in violation of its standard terms and conditions, including
by a new interpretation, and prohibits us from distributing our Dario Smart Diabetes Management application on its storefront,
it would materially harm our business.
Additionally, we will
rely on the continued function of the Apple App Store and the Google Play Store as digital storefronts where our Dario Smart Diabetes
Management application may be obtained. There have been occasions in the past when these digital storefronts were unavailable for
short periods of time or where there have been issues with the in-app purchasing functionality within the storefront. In the event
that either the Apple App Store or the Google Play Store is unavailable or if in-app purchasing functionality within the storefront
is non-operational for a prolonged period of time, it would have a material adverse effect on the ability of our customers to secure
the Dario Smart Diabetes Management application, which would materially harm our business.
Our products are subject to technological
changes which may impact their use.
Our Dario Blood Glucose
Monitoring System is currently designed to be plugged into the Lighting jack for Apple devices or the USB-C jack for other mobile
devices. As a result, our products are subject to future technological changes to mobile devices that may occur in the future.
If we are unable to modify our products to keep pace with such technological changes, it would have a material adverse effect the
ability of our customers to use our products, which would materially harm our business.
As we conduct business internationally,
we are susceptible to risks associated with international relationships.
Outside of the United
States, we operate our business internationally, presently in Europe, Australia and Canada. The international operation of our
business requires significant management attention, which could negatively affect our business if it diverts their attention from
their other responsibilities. In the event that we are unable to manage the complications associated with international operations,
our business prospects could be materially and adversely affected. In addition, doing business with foreign customers subjects
us to additional risks that we do not generally face in the United States. These risks and uncertainties include:
●
management, communication and integration problems resulting from cultural differences and geographic dispersion;
28
●
localization of products and services, including translation of foreign languages;
●
delivery, logistics and storage costs;
●
longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
●
difficulties supporting international operations;
●
difficulties supporting customer services;
●
changes in economic and political conditions;
●
impact of trade protection measures;
●
complying with import or export licensing requirements;
●
exchange rate fluctuations;
●
competition from companies with international operations, including large international competitors and entrenched local companies;
●
potentially adverse tax consequences, including foreign tax systems and restrictions on the repatriation of earnings;
●
maintaining and servicing computer hardware in distant locations;
●
keeping current and complying with a wide variety of foreign laws and legal standards, including local labor laws;
●
securing or maintaining protection for our intellectual property; and
●
reduced or varied protection for intellectual property rights, including the ability to transfer such rights to third parties, in some countries.
The occurrence of any
or all of these risks could adversely affect our international business and, consequently, our results of operations and financial
condition.
We expect to be exposed to fluctuations
in currency exchange rates, which could adversely affect our results of operations.
Because we expect
to conduct a material portion of our business outside of the United States but report our financial results in U.S. Dollars, we
face exposure to adverse movements in currency exchange rates. Our foreign operations will be exposed to foreign exchange rate
fluctuations as the financial results are translated from the local currency into U.S. Dollars upon consolidation. Specifically,
the U.S. Dollar cost of our operations in Israel is influenced by any movements in the currency exchange rate of the New Israeli
Shekel (NIS). Such movements in the currency exchange rate may have a negative effect on our financial results. If the U.S. Dollar
weakens against foreign currencies, the translation of these foreign currencies denominated transactions will result in increased
revenue, operating expenses and net income. Similarly, if the U.S. Dollar strengthens against foreign currencies, the translation
of these foreign currencies denominated transactions will result in decreased revenue, operating expenses and net income. As exchange
rates vary, sales and other operating results, when translated, may differ materially from our or the capital market’s expectations.
29
Non-U.S. governments often impose
strict price controls, which may adversely affect our future profitability.
We intend to seek approval
to market Dario and any future product in both the U.S. and in non-U.S. jurisdictions. If we obtain approval in one or more non-U.S.
jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our products. In some countries,
particularly countries of the European Union, each of which has developed its own rules and regulations, pricing may be subject
to governmental control under certain circumstances. In these countries, pricing negotiations with governmental authorities can
take considerable time after the receipt of marketing approval for a medical device candidate. To obtain reimbursement or pricing
approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product
to other available products. If reimbursement of our product candidates is unavailable or limited in scope or amount,
or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
Our Dario Smart Diabetes Management
Solution and associated business processes may contain undetected errors, which could limit our ability to provide our services
and diminish the attractiveness of our service offerings.
The Dario Smart Diabetes
Management Solution may contain undetected errors, defects or bugs. As a result, our customers or end users may discover errors
or defects in our products, software or the systems we design, or the products or systems incorporating our designs and intellectual
property may not operate as expected. We may discover significant errors or defects in the future that we may not be able to fix.
Our inability to fix any of those errors could limit our ability to provide our products, impair the reputation of our brand and
diminish the attractiveness of our product offerings to our customers.
In addition, we may
utilize third-party technology or components in our products, and we rely on those third parties to provide support services to
us. Failure of those third parties to provide necessary support services could materially adversely impact our business.
Our future performance will depend
on the continued engagement of key members of our management team.
Our future performance
depends to a large extent on the continued services of members of our current management including, in particular, Erez Raphael,
our Chief Executive Officer and a member of our Board of Directors and Zvi Ben David, our Chief Financial Officer, Treasurer and
Secretary, Dror Bacher, our Chief Operating Officer, and Richard Anderson, our President and General Manager for North America.
In the event that we lose the continued services of such key personnel for any reason, this could have a material adverse effect
on our business, operations, and prospects.
If we are not able to attract and
retain highly skilled managerial, scientific and technical personnel, we may not be able to implement our business model successfully.
We believe that our
management team must be able to act decisively to apply and adapt our business model in the rapidly changing markets in which we
will compete. In addition, we will rely upon technical and scientific employees or third-party contractors to effectively establish,
manage and grow our business. Consequently, we believe that our future viability will depend largely on our ability to attract
and retain highly skilled managerial, sales, scientific and technical personnel. In order to do so, we may need to pay higher compensation
or fees to our employees or consultants than we currently expect, and such higher compensation payments would have a negative effect
on our operating results. Competition for experienced, high-quality personnel is intense and we cannot assure that we will be able
to recruit and retain such personnel. We may not be able to hire or retain the necessary personnel to implement our business strategy.
Our failure to hire and retain such personnel could impair our ability to develop new products and manage our business effectively.
We may not generate the expected
benefits of our recent acquisition of Upright, and the integration of Upright could disrupt our ongoing business, distract our
management and increase our expenses.
Through
our recent acquisitions of Upright, we expanded our product offering to include solutions for MSK conditions. We believe
that the successful integration of Upright’s business into our operations is important for our future financial performance.
This will require that we integrate more closely the companies’ product offerings and research and development capabilities,
retain key employees, assimilate diverse corporate cultures, further integrate management information systems and consolidate the
acquired operations, each of which could pose significant challenges. The difficulty of combining Upright with our company may
be increased by the need to integrate personnel, and changes effected in the combination may cause key employees to leave.
30
It is possible that
the integration process could take longer than anticipated and could result in the loss of valuable employees, additional and unforeseen
expenses, the disruption of our ongoing business, processes and systems, or inconsistencies in standards, controls, procedures,
practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits
of the acquisitions. The diversion of the attention of management created by the integration process, any disruptions or other
difficulties encountered in the integration process, and unforeseen liabilities or unanticipated problems with the acquired businesses
could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that
these acquisitions will provide the benefits we expect or that we will be able to integrate and develop the operations of Upright
successfully. Any failure to do so could have a material adverse effect on our business, operating results and financial condition.
Risks Related to Product Development
and Regulatory Approval
The
regulatory clearance process which we must navigate is expensive, time-consuming, and uncertain and may prevent us from obtaining
clearance for the commercialization of Dario or our any future product.
We are not permitted
to market Dario until we receive regulatory clearance. To date, we have received regulatory clearance in Australia, Canada, Israel, Italy,
the Netherlands, New Zealand, the United Kingdom, and the United States.
The research, design,
testing, manufacturing, labeling, selling, marketing and distribution of medical devices are subject to extensive regulation by
the FDA and non-U.S. regulatory authorities, which regulations differ from country to country. There
can be no assurance that even after such time and expenditures, we will be able to obtain necessary regulatory approvals for clinical
testing or for the manufacturing or marketing of any products. In addition, during the regulatory process, other companies
may develop other technologies with the same intended use as our products.
We are also subject
to numerous post-marketing regulatory requirements, which include labeling regulations and medical device reporting regulations,
which may require us to report to different regulatory agencies if our device causes or contributes to a death or serious injury,
or malfunctions in a way that would likely cause or contribute to a death or serious injury. In addition, these regulatory requirements
may change in the future in a way that adversely affects us. If we fail to comply with present or future regulatory requirements
that are applicable to us, we may be subject to enforcement action by regulatory agencies, which may include, among others, any
of the following sanctions:
●
untitled letters, warning letters, fines, injunctions, consent decrees, and civil penalties;
●
customer notification, or orders for repair, replacement or refunds;
●
voluntary or mandatory recall or seizure of our current or future products;
●
imposing operating restrictions, suspension or shutdown of production;
●
refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses or modifications to Dario or future products;
●
rescinding 510(k) clearance or suspending or withdrawing pre-market approvals that have already been granted; and
●
criminal prosecution.
The occurrence of any
of these events may have a material adverse effect on our business, financial condition and results of operations.
31
In addition, on September 23,
2013, the FDA issued final guidance (which we refer to herein as the Guidance) for developers of mobile medical applications, or
apps, which are software programs that run on mobile communication devices and perform the same functions as traditional medical
devices. The Guidance outlines the FDA’s tailored approach to mobile apps. The FDA plans to exercise enforcement discretion
(meaning it will not enforce requirements under the Federal Food, Drug and Cosmetic Act) for the majority of mobile apps as they
pose minimal risk to consumers. The FDA plans to focus its regulatory oversight on a subset of mobile medical apps that present
a greater risk to patients if they do not work as intended. We anticipate that the Dario Smart Diabetes Management application
will be subject to FDA regulation as a “mobile medical app.”
We
have conducted limited clinical studies of Dario. Clinical and pre-clinical data is susceptible to varying interpretations, which
could delay, limit or prevent additional regulatory clearances.
To
date, we have conducted limited clinical studies on Dario. There can be no assurance that we will successfully complete
additional clinical studies necessary to receive additional regulatory approvals in certain jurisdictions. While studies conducted
by us have produced results we believe to be encouraging and indicative of the potential efficacy of Dario, data already obtained,
or in the future obtained, from pre-clinical studies and clinical studies do not necessarily predict the results that will be obtained
from later pre-clinical studies and clinical studies. Moreover, pre-clinical and clinical data are susceptible to varying interpretations,
which could delay, limit or prevent additional regulatory approvals. A number of companies in the medical device and pharmaceutical
industries have suffered significant setbacks in advanced clinical studies, even after promising results in earlier studies. The
failure to adequately demonstrate the safety and effectiveness of an intended product under development could delay or prevent
regulatory clearance of the device, resulting in delays to commercialization, and could materially harm our business. Even
though we have received CE mark and FDA clearance of Dario, there can be no assurance that we will be able to receive approval
for other potential applications of our principal technology, or that we will receive regulatory clearances from other targeted
regions or countries.
We may be unable to complete required
clinical trials, or we may experience significant delays in completing such clinical trials, which could significantly delay our
targeted product launch timeframe and impair our viability and business plan.
The completion of any
future clinical trials for Dario or other trials that we may be required to undertake in the future could be delayed, suspended
or terminated for several reasons, including:
●
our failure or inability to conduct the clinical trial in accordance with regulatory requirements;
●
sites participating in the trial may drop out of the trial, which may require us to engage new sites for an expansion of the number of sites that are permitted to be involved in the trial;
●
delays that we may experience in enrollment, or completion of certain trials, as a result of COVID-19;
●
patients may not enroll in, remain in or complete, the clinical trial at the rates we expect; and
●
clinical investigators may not perform our clinical trial on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices.
If our clinical trial
is delayed it will take us longer to further commercialize Dario and generate additional revenues. Moreover, our development costs
will increase if we have material delays in our clinical trial or if we need to perform more or larger clinical trials than planned.
We may be faced with similar risks in connection with future trials we conduct. See “Business - Clinical Trials” for
a description of our clinical trials performed to date.
32
If we or our manufacturers fail to
comply with the FDA’s Quality System Regulation or any applicable state equivalent, our operations could be interrupted , and
our operating results could suffer.
We, our manufacturers
and suppliers must, unless specifically exempt by regulation, follow the FDA’s Quality System Regulation (QSR) and are also
subject to the regulations of foreign jurisdictions regarding the manufacturing process. If our affiliates, our manufacturers or
suppliers are found to be in significant non-compliance or fail to take satisfactory corrective action in response to adverse QSR
inspectional findings, the FDA could take enforcement actions against us and our manufacturers which could impair our ability to
produce our products in a cost-effective and timely manner in order to meet our customers’ demands. Accordingly, our operating
results could suffer.
We are subject to the risk of reliance
on third parties to conduct our clinical trial work.
We depend on independent
clinical investigators to conduct our clinical trials. Contract research organizations may also assist us in the collection and
analysis of data. These investigators and contract research organizations will not be our employees and we will not be able to
control, other than by contract, the number of resources, including the time that they devote to products that we develop. If independent
investigators fail to devote sufficient resources to our clinical trials, or if their performance is substandard, it will delay
the approval or clearance and commercialization of any products that we develop. Further, the FDA and other regulatory bodies around
the world require that we comply with standards, commonly referred to as good clinical practice, for conducting, recording and
reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity, and
confidentiality of trial subjects are protected. If our independent clinical investigators and contract research organizations
fail to comply with good clinical practice, the results of our clinical trials could be called into question and the clinical development
of our product candidates could be delayed. Failure of clinical investigators or contract research organizations to meet their
obligations to us or comply with federal regulations could adversely affect the clinical development of our product candidates
and harm our business. Moreover, we intend to have several clinical trials in order to support our marketing efforts and business
development purposes. Such clinical trials will be conducted by third parties as well. Failure of such clinical trials to meet
their primary endpoints could adversely affect our marketing efforts.
Legislative
reforms to the United States healthcare system may adversely affect our revenues and business.
From
time to time, legislative reform measures are proposed or adopted that would impact healthcare expenditures for medical services,
including the medical devices used to provide those services. For example, in March 2010, U.S. President Barack Obama signed
the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred
to as the Affordable Care Act. The Affordable Care Act made a number of substantial changes in the way health care is financed
by both governmental and private insurers and the way that Medicare providers are reimbursed. Among other things, the Affordable
Care Act requires certain medical device manufacturers and importers to pay an excise tax equal to 2.3% of the price for which
such medical devices are sold, beginning January 1, 2013.
In
addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2,
2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee
on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted
deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction
to several government programs. This includes reductions to Medicare payments to providers of 2.0% per fiscal year. On January 2,
2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months
the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. On March 1, 2013, the President
signed an executive order implementing sequestration, and on April 1, 2013, the 2% Medicare payment reductions went into effect.
The Bipartisan Budget Act of 2013, enacted on December 26, 2013, extends these cuts to 2023. The ATRA also, among other things,
reduced Medicare payments to several providers, including hospitals, imaging centers, and cancer treatment centers, and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years. In December 2014,
Congress passed an omnibus funding bill (the Consolidated and Further Continuing Appropriations Act, 2015) and a tax extenders
bill, both of which may negatively impact coverage and reimbursement of healthcare items and services. We expect that additional
state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and
state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional
pricing pressure. For example, former U.S. President Donald Trump publicly indicated an intent to lower healthcare costs through
various potential initiatives. In addition, former President Trump and other U.S. lawmakers have made statements about potentially
repealing and/or replacing the Affordable Care Act, although specific legislation for such repeal or replacement has not yet been
introduced. While we are unable to predict what changes may ultimately be enacted, to the extent that future changes affect how
our products are paid for and reimbursed by government and private payers our business could be adversely impacted.
33
Government
and private sector initiatives to limit the growth of health care costs, including price regulation, competitive pricing, coverage
and payment policies, comparative effectiveness reviews of therapies, technology assessments, and managed-care arrangements, are
continuing. Government programs, including Medicare and Medicaid, private health care insurance and managed-care plans have attempted
to control costs by limiting the amount of reimbursement they will pay for particular procedures or treatments, tying reimbursement
to outcomes, and other mechanisms designed to constrain utilization and contain costs, including delivery reforms such as expanded
bundling of services. Hospitals are also seeking to reduce costs through a variety of mechanisms, which may increase price sensitivity
among customers for our products, and adversely affect sales, pricing, and utilization of our products. Some third-party payors
must also approve coverage for new or innovative devices or therapies before they will reimburse health care providers who use
medical devices or therapies. We cannot predict the potential impact of cost-containment trends on future operating results.
We may be subject to federal, state
and foreign healthcare fraud and abuse laws and regulations.
Many federal, state
and foreign healthcare laws and regulations apply to the BGMS business and medical devices. We may be subject to certain federal
and state regulations, including the federal healthcare programs’ Anti-Kickback Law, the federal Health Insurance Portability
and Accountability Act of 1996, and other federal and state false claims laws. The medical device industry has been under heightened
scrutiny as the subject of government investigations and enforcement actions involving manufacturers who allegedly offered unlawful
inducements to potential or existing customers in an attempt to procure their business, including arrangements with physician consultants.
If our operations or arrangements are found to be in violation of such governmental regulations, we may be subject to civil and
criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment of our operations. All
of these penalties could adversely affect our ability to operate our business and our financial results.
Product liability suits, whether
or not meritorious, could be brought against us due to an alleged defective product or for the misuse of Dario or our potential
future products. These suits could result in expensive and time-consuming litigation, payment of substantial damages, and an increase
in our insurance rates.
If Dario or any of
our future products are defectively designed or manufactured contain defective components or are misused, or if someone claims
any of the foregoing, whether or not meritorious, we may become subject to substantial and costly litigation. Misusing our device
or failing to adhere to the operating guidelines or the device producing inaccurate meter readings could cause significant harm
to patients, including death. In addition, if our operating guidelines are found to be inadequate, we may be subject to liability.
Product liability claims could divert management’s attention from our core business, be expensive to defend and result in
sizable damage awards against us. While we maintain product liability insurance, we may not have sufficient insurance coverage
for all future claims. Any product liability claims brought against us, with or without merit, could increase our product liability
insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and could reduce revenue.
Product liability claims in excess of our insurance coverage would be paid out of cash reserves harming our financial condition
and adversely affecting our results of operations.
If we are found to have violated
laws protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties, which could
increase our liabilities and harm our reputation or our business.
Part of our business
plan includes the storage and potential monetization of medical data of users of Dario. There are a number of federal and state
laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and
disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient
privacy rules under the Health Insurance Portability and Accountability Act of 1996 (which we refer to as HIPAA). These privacy
rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals
the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health
information to the minimum amount reasonably necessary to accomplish the intended purpose. We may face difficulties in holding
such information in compliance with applicable law. If we are found to be in violation of the privacy rules under HIPAA, we
could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material
adverse effect on our business, financial condition and results of operations.
34
Risks Related to Our Intellectual Property
The failure to obtain or maintain
patents, licensing agreements and other intellectual property could materially impact our ability to compete effectively.
In order for our business
to be viable and to compete effectively, we need to develop and maintain, and we will heavily rely on, our proprietary position
with respect to our technologies and intellectual property. We filed a Patent Cooperation Treaty (or PCT) application for a “Fluids
Testing Apparatus and Methods of Use” in May 2011 which incorporates two U.S. provisional applications submitted in
the preceding year. The PCT covers the specific processes related to blood glucose level measurement as well as more general methods
of rapid tests of body fluids and has subsequently been converted into several national phase patent applications. We have also
filed patent applications for other aspects of the Dario Blood Glucose Monitoring Solution. We have also obtained numerous Web
domains.
However, to date, we
have only been issued four patents (three of which were issued in the United States) relating to how the Dario Blood Glucose Monitoring
System draws power from and transmits data to a smartphone via the audio jack port. None of our other patents have been granted
by a patent office. In addition, there are significant risks associated with our actual or proposed intellectual property. The
risks and uncertainties that we face with respect to our pending patent and other proprietary rights principally include the following:
·
pending patent applications we have filed or will file may not result in issued patents or may take longer than we expect to result in issued patents;
·
we may be subject to interference proceedings;
·
we may be subject to opposition proceedings in foreign countries;
·
any patents that are issued to us may not provide meaningful protection;
·
we may not be able to develop additional proprietary technologies that are patentable;
·
other companies may challenge patents licensed or issued to us;
·
other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies;
·
other companies may design their technologies around technologies we have licensed or developed; and
·
enforcement of patents is complex, uncertain and very expensive.
We cannot be certain
that patents will be issued as a result of any of our pending or future applications, or that any of our patents, once issued,
will provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged,
declared invalid or unenforceable, or narrowed in scope. In addition, since the publication of discoveries in scientific or patent
literature often lags behind actual discoveries, we cannot be certain that we were the first to make our inventions or to file
patent applications covering those inventions.
35
It is also possible
that others may have or may obtain issued patents that could prevent us from commercializing our products or require us to obtain
licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents
that we have licensed, our rights depend on maintaining our obligations to the licensor under the applicable license agreement,
and we may be unable to do so.
Costly litigation may be necessary
to protect our intellectual property rights and we may be subject to claims alleging the violation of the intellectual property
rights of others.
We may face significant
expense and liability as a result of litigation or other proceedings relating to patents and intellectual property rights of others.
In the event that another party has also filed a patent application or been issued a patent relating to an invention or technology
claimed by us in pending applications, we may be required to participate in an interference proceeding declared by the United States
Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and costs for us,
even if the eventual outcome was favorable to us. We, or our licensors, also could be required to participate in interference proceedings
involving issued patents and pending applications of another entity. An adverse outcome in an interference proceeding could require
us to cease using the technology, substantially modify it or to license rights from prevailing third parties.
The cost to us of any
patent litigation or other proceeding relating to our licensed patents or patent applications, even if resolved in our favor, could
be substantial, especially given our early stage of development. Our ability to enforce our patent protection could be limited
by our financial resources and may be subject to lengthy delays. A third party may claim that we are using inventions claimed by
their patents and may go to court to stop us from engaging in our normal operations and activities, such as research, development
and the sale of any future products. Such lawsuits are expensive and would consume significant time and other resources. There
is a risk that a court will decide that we are infringing the third party’s patents and will order us to stop the activities
claimed by the patents. In addition, there is a risk that a court will order us to pay the other party damages for having infringed
their patents.
Moreover, there is
no guarantee that any prevailing patent owner would offer us a license so that we could continue to engage in activities claimed
by the patent, or that such a license if made available to us, could be acquired on commercially acceptable terms. In addition,
third parties may, in the future, assert other intellectual property infringement claims against us with respect to our services,
technologies or other matters.
We have limited foreign intellectual
property rights and may not be able to protect our intellectual property rights throughout the world.
We have limited intellectual
property rights outside the United States. Filing, prosecuting and defending patents on devices in all countries throughout the
world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be
less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property
to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our
inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into
the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patents
to develop their own products and further, may export otherwise infringing products to territories where we have patents, but enforcement
is not as strong as that in the United States.
Many companies have
encountered significant problems in protecting and defending intellectual property in foreign jurisdictions. The legal systems
of certain countries, particularly China and certain other developing countries, do not favor the enforcement of patents, trade
secrets and other intellectual property, particularly those relating to medical devices and biopharmaceutical products, which could
make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary
rights generally. To date, we have not sought to enforce any issued patents in these foreign jurisdictions. Proceedings to enforce
our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects
of our business could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk
of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate
and the damages or other remedies awarded, if any, may not be commercially meaningful. The requirements for patentability may differ
in certain countries, particularly developing countries. Certain countries in Europe and developing countries, including China
and India, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those
countries, we and our licensors may have limited remedies if patents are infringed or if we or our licensors are compelled to grant
a license to a third party, which could materially diminish the value of those patents. This could limit our potential revenue
opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain
a significant commercial advantage from the intellectual property that we develop or license.
36
We rely on confidentiality agreements
that could be breached and may be difficult to enforce, which could result in third parties using our intellectual property to
compete against us.
Although we believe
that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the non-disclosure
of confidential information to third parties, as well as agreements that purport to require the disclosure and assignment to us
of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we employ them, the
agreements can be difficult and costly to enforce. Although we seek to enter into these types of agreements with our contractors,
consultants, advisors and research collaborators, to the extent that employees and consultants utilize or independently develop
intellectual property in connection with any of our projects, disputes may arise as to the intellectual property rights associated
with our technology. If a dispute arises, a court may determine that the right belongs to a third party. In addition, enforcement
of our rights can be costly and unpredictable. We also rely on trade secrets and proprietary know-how that we seek to protect in
part by confidentiality agreements with our employees, contractors, consultants, advisors or others. Despite the protective measures
we employ, we still face the risk that:
·
these agreements may be breached;
·
these agreements may not provide adequate remedies for the applicable type of breach;
·
our proprietary know-how will otherwise become known; or
·
our competitors will independently develop similar technology or proprietary information.
We may be subject to claims challenging
the inventorship of our patents and other intellectual property.
We may be subject to
claims that former employees, collaborators or other third parties have an interest in our patents or other intellectual property
as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of consultants
or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other
claims challenging inventorship. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome
could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could
result in substantial costs and be a distraction to management and other employees. In addition, the Israeli Supreme Court ruled
in 2012 that an employee who receives a patent or contributes to an invention during his employment may be allowed to seek compensation
for such contributions from his or her employer, even if the employee’s contract of employment specifically states otherwise
and the employee has transferred all intellectual property rights to the employer. The Israeli Supreme Court ruled that the fact
that a contract revokes an employee’s right for royalties and compensation, does not rule out the right of the employee
to claim their right for royalties. As a result, it is unclear whether and, if so, to what extent our employees may be able to
claim compensation with respect to our future revenue. We may receive less revenue from future products if any of our employees
successfully claim for compensation for their work in developing our intellectual property, which in turn could impact our future
profitability.
Risks Related to Our Industry
We face intense competition in the
digital support solution and the self-monitoring of blood glucose market, and as a result we may be unable to effectively compete
in our industry.
In recent years, a
number of digitally supported solutions have emerged to manage diabetes and other chronic conditions. Competitors are developing
new technologies rapidly and, in some cases, are also expanding to manage other chronic conditions. With our first product, Dario,
we compete directly and primarily with large pharmaceutical and medical device companies such as Abbott Laboratories, Asensia (formerly
Bayer Diabetes Care), Johnson & Johnson LifeScan, Roche Diagnostics and Sanofi. The first four of these companies has
a combined majority market share of the BGMS business and strong research and development capacity for next-generation products.
Their dominant market position since the late 1990s, and significant control over the market could significantly limit our ability
to introduce Dario or effectively market and generate sales of the product. We will also compete with numerous second-tier and
third-tier competitors.
37
In addition, we only
recently transformed our business to primarily focus on the sale of our digital support solution, which joins a crowded field of
competitors such as Amazon, Apple and Google. Our competitors vary by intervention (devices, applications, coaching and analytics),
by channel (health plan, pharma, provider, employer) and by condition (including, for example, diabetes, MSK, blood hypertension,
and others). Certain of our competitors offer this integrated approach in varying degrees, including, among others, , Hinge Health, Inc.,
Livongo Health Inc. (acquired by Teladoc Health Inc.), Omada Health, Inc., Vida Health, Inc., Virta Health Corp., Informed
Data Systems Inc. (OneDrop), Glooko, Inc., and OnDuo LLC .
We only recently commenced
sales of our products, and most of our competitors have long histories and strong reputations within the industry. They have significantly
greater brand recognition, financial and human resources than we do. They also have more experience and capabilities in researching
and developing testing devices, obtaining and maintaining regulatory clearances and other requirements, manufacturing and marketing
those products than we do. There is a significant risk that we may be unable to overcome the advantages held by our competition,
and our inability to do so could lead to the failure of our business and the loss of your investment.
Competition in the
digitally supported solutions market and BGMS market is extremely intense, which can lead to, among other things, price reductions,
longer selling cycles, lower product margins, loss of market share and additional working capital requirements. To succeed, we
must, among other critical matters, gain consumer acceptance for Dario and potential future devices incorporating our principal
technology and offer better strategic concepts, technical solutions, prices and response time, or a combination of these factors,
than those of other competitors. If our competitors offer significant discounts on certain products, we may need to lower our prices
or offer other favorable terms in order to compete successfully. Moreover, any broad-based changes to our prices and pricing policies
could make it difficult to generate revenues or cause our revenues, if established, to decline. Some of our competitors may bundle
certain software products offering competing applications for diabetes management at low prices for promotional purposes or as
a long-term pricing strategy. These practices could significantly reduce demand for Dario or potential future products or constrain
prices we can charge. Moreover, if our competitors develop and commercialize products that are more effective or desirable than
Dario or the other products that we may develop, we may not convince our customers to use our products. Any such changes would
likely reduce our commercial opportunity and revenue potential and could materially adversely impact our operating results.
If we fail to respond quickly to
technological developments our products may become uncompetitive and obsolete.
The BGMS market and
other markets in which we plan to compete experience rapid technological developments, changes in industry standards, changes in
customer requirements and frequent new product introductions and improvements. If we are unable to respond quickly to these developments,
we may lose competitive position, and Dario or any other device or technology may become uncompetitive or obsolete, causing revenues
and operating results to suffer. In order to compete, we must develop or acquire new devices and improve our existing device on
a schedule that keeps pace with technological developments and the requirements for products addressing a broad spectrum and designers
and designer expertise in our industries. We must also be able to support a range of changing customer preferences. For instance,
as non-invasive technologies become more readily available in the market, we may be required to adopt our platform to accommodate
the use of non-invasive or continuous blood glucose sensors. We cannot guarantee that we will be successful in any manner in these
efforts.
If
third-party payors do not provide adequate coverage and reimbursement for the use of our products and
services , our revenue will be negatively impacted.
In
the United States and other jurisdictions such as Germany and England, we expect that our products and services should generally
be available for full or partial patient reimbursement by third-party payers. Our success in marketing our services depend
and will depend in large part on whether U.S. and international government health administrative authorities, private health insurers
and other organizations adequately cover and reimburse customers for the cost of our products and services.
38
In
the United States, we expect to derive nearly all our sales from sales directly to consumers as well as retail pharmacy and DME
distributors who typically bill various third-party payors, including Medicare, Medicaid, private commercial insurance companies,
health maintenance organizations, health plans and other healthcare-related organizations, to cover all or a portion of the costs
and fees associated with our products and services and bill patients for any applicable deductibles or co-payments. Access to adequate
coverage and reimbursement for Center for Medicare and Medicaid Services (CMS) procedures using our products and services (and
our other products and services in development) by third-party payors is essential to the acceptance of our products by our customers.
Third-party
payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling
healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medical device products
and services exists among third-party payors. Therefore, coverage and reimbursement for medical device products and services can
differ significantly from payor to payor. In addition, payors continually review new technologies for possible coverage and can,
without notice, deny coverage for these new products and procedures. As a result, the coverage determination process is often a
time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to
each payor separately, with no assurance that coverage and adequate reimbursement will be obtained, or maintained if obtained.
Reimbursement
systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals
must be obtained on a country-by-country basis. In many international markets, a product must be approved for reimbursement before
it can be approved for sale in that country. Further, many international markets have government-managed healthcare systems that
control reimbursement for new devices and procedures. For example, the government healthcare system in the Netherlands, New Zealand
and Israel have not yet approved reimbursement of Dario. In most markets, there are private insurance systems as well as government-managed
systems. If sufficient coverage and reimbursement are not available for our current or future products, in either the United States
or internationally, the demand for our products and our revenues will be adversely affected.
Risks Related to Our Operations in Israel
Potential political, economic and
military instability in the State of Israel, where our management team and our research and development facilities are located,
may adversely affect our results of operations.
Our operating subsidiary,
along with our management team and our research and development facilities, is located in Israel. Accordingly, political, economic
and military conditions in Israel and the surrounding region may directly affect our business and operations. Since the establishment
of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any
hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely
affect our operations and results of operations. The hostilities involved missile strikes against civilian targets in various parts
of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions
in Israel. Our offices, located in Caesarea, Israel, are within the range of the missiles and rockets that have been fired
at Israeli cities and towns from Gaza sporadically since 2006, with escalations in violence (such as the recent escalation in July 2014)
during which there were a substantially larger number of rocket and missile attacks aimed at Israel. In addition, since February 2011,
Egypt has experienced political turbulence and an increase in terrorist activity in the Sinai Peninsula. Such political turbulence
and violence may damage peaceful and diplomatic relations between Israel and Egypt, and could affect the region as a whole. Similar
civil unrest and political turbulence has occurred in other countries in the region, including Syria which shares a common border
with Israel, and is affecting the political stability of those countries. This instability and any outside intervention may lead
to deterioration of the political and economic relationships that exist between the State of Israel and some of these countries,
and may have the potential for causing additional conflicts in the region. In addition, Iran has threatened to attack Israel
and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups
in the region, such as Hamas in Gaza, Hezbollah in Lebanon, and various rebel militia groups in Syria. Additionally, a violent
jihadist group named Islamic State of Iraq and Levant (ISIL) is involved in hostilities in Iraq and Syria and have been growing
in influence. Although ISIL’s activities have not directly affected the political and economic conditions in Israel, ISIL’s
stated purpose is to take control of the Middle East, including Israel. These situations may potentially escalate in the future
to more violent events which may affect Israel and us. Any armed conflicts, terrorist activities or political instability in the
region could adversely affect business conditions and could harm our results of operations and could make it more difficult for
us to raise capital. Parties with whom we do business may decline to travel to Israel during periods of heightened unrest or tension,
forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the
political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming
that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still
restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse
impact on our operating results, financial condition or the expansion of our business.
39
Our commercial insurance
does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although
the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts
of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could have
a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect
business conditions and could harm our results of operations.
Further, the State
of Israel and Israeli companies have been subjected to an economic boycott. Several countries still restrict business with the
State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results,
financial condition or the expansion of our business.
Our operations may be disrupted as
a result of the obligation of Israeli citizens to perform military service.
Many Israeli citizens
are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age
of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict,
may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of
military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted
by such call-ups, which may include the call-up of members of our management. Such disruption could materially adversely affect
our business, financial condition and results of operations.
Investors may have difficulties enforcing
a U.S. judgment, including judgments based upon the civil liability provisions of the U.S. federal securities laws, against us,
or our executive officers and directors or asserting U.S. securities laws claims in Israel.
Certain of our directors
and officers are not residents of the United States and whose assets may be located outside the United States. Service of process
upon us or our non-U.S. resident directors and officers and enforcement of judgments obtained in the United States against us or
our non-U.S. our directors and executive officers may be difficult to obtain within the United States. We have been informed by
our legal counsel in Israel that it may be difficult to assert claims under U.S. securities laws in original actions instituted
in Israel or obtain a judgment based on the civil liability provisions of U.S. federal securities laws. Israeli courts may refuse
to hear a claim based on a violation of U.S. securities laws against us or our officers and directors because Israel may not be
the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine
that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable
U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be
governed by Israeli law. There is little binding case law in Israel addressing the matters described above. Israeli courts might
not enforce judgments rendered outside Israel, which may make it difficult to collect on judgments rendered against us or our officers
and directors.
Moreover, among other
reasons, including but not limited to, fraud or absence of due process, or the existence of a judgment which is at variance with
another judgment that was given in the same matter if a suit in the same matter between the same parties was pending before a court
or tribunal in Israel, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws do not provide
for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice
the sovereignty or security of the State of Israel.
40
Risks Related to the Ownership of Our
Common Stock and Warrants
Our officers, directors and founding
stockholders may exert significant influence over our affairs, including the outcome of matters requiring stockholder approval.
As of the date of this
Annual Report, our officers, directors and affiliated stockholders collectively have a beneficial ownership interest of approximately
19.8% of our Company. As a result, such individuals will have the ability, acting together, to control the election of our directors
and the outcome of corporate actions requiring stockholder approval, such as: (i) a merger or a sale of our company, (ii) a
sale of all or substantially all of our assets, and (iii) amendments to our certificate of incorporation and bylaws. This
concentration of voting power and control could have a significant effect in delaying, deferring or preventing an action that might
otherwise be beneficial to our other stockholders and be disadvantageous to our stockholders with interests different from those
individuals. Certain of these individuals also have significant control over our business, policies and affairs as officers or
directors of our company. Therefore, you should not invest in reliance on your ability to have any control over our company.
Our common stock has less liquidity
than many other stocks listed on the Nasdaq Capital Market.
Historically, the trading
volume of our common stock has been relatively low when compared to larger companies listed on the Nasdaq Capital Market or other
stock exchanges. While we have experienced increased liquidity in our stock during the year ended December 31, 2020, we cannot
say with certainty that a more active and liquid trading market for our common stock will continue to develop. Because of this,
it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could
sell a smaller number of shares.
If securities or industry analysts
do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations
regarding our common stock or warrants adversely, the price of our common stock or warrants and trading volume could decline.
The trading market
for our common stock or warrants may be influenced by the research and reports that securities or industry analysts may publish
about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding
our common stock or warrants adversely, or provide more favorable relative recommendations about our competitors, the price of
our common stock or warrants would likely decline. If any analyst who may cover us were to cease coverage of our company or fail
to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price of our
common stock or warrants or trading volume to decline.
The market price of our common stock
and warrants may be significantly volatile.
The market price for
our common stock and warrants may be significantly volatile and subject to wide fluctuations in response to factors including the
following:
·
actual or anticipated fluctuations in our quarterly or annual operating results;
·
changes in financial or operational estimates or projections;
·
conditions in markets generally;
·
changes in the economic performance or market valuations of companies similar to ours; and
·
general economic or political conditions in the United States or elsewhere.
41
In particular, the
market prices for securities of mHealth and medical device have historically been particularly volatile. Some of the factors that
may cause the market price of our common stock and warrants to fluctuate include:
·
any delay in or the results of our clinical trials;
·
any delay in manufacturing of our products;
·
any delay with the approval for reimbursement for the patients from their insurance companies;
·
our failure to comply with regulatory requirements;
·
the announcements of clinical trial data, and the investment community’s perception of and reaction to those data;
·
the results of clinical trials conducted by others on products that would compete with ours;
·
any delay or failure to receive clearance or approval from regulatory agencies or bodies;
·
our inability to commercially launch products or market and generate sales of our products, including Dario;
·
failure of Dario or any other products, even if approved for marketing, to achieve any level of commercial success;
·
our failure to obtain patent protection for any of our technologies and products (including those related to Dario) or the issuance of third-party patents that cover our proposed technologies or products;
·
developments or disputes concerning our product’s intellectual property rights;
·
our or our competitors’ technological innovations;
·
general and industry-specific economic conditions that may affect our expenditures;
·
changes in market valuations of similar companies;
·
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new technologies, or patents;
·
future sales of our common stock or other securities, including shares issuable upon the exercise of outstanding warrants or otherwise issued pursuant to certain contractual rights;
·
period-to-period fluctuations in our financial results; and
·
low or high trading volume of our common stock due to many factors, including the terms of our financing arrangements.
In addition, if we
fail to reach important research, development or commercialization milestone or result by a publicly expected deadline, even if
by only a small margin, there could be a significant impact on the market price of our common stock and warrants. Additionally,
as we approach the announcement of anticipated significant information and as we announce such information, we expect the price
of our common stock and warrants to be particularly volatile, and negative results would have a substantial negative impact on
the price of our common stock and warrants.
42
In some cases, following
periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities
litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management
attention and resources, which could significantly harm our business operations and reputation.
Shares eligible for future sale may
adversely affect the market for our common stock and warrants.
From time to time,
certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations.
In general, pursuant to Rule 144, after satisfying a six month holding period: (i) affiliated stockholder (or stockholders
whose shares are aggregated) may, under certain circumstances, sell within any three month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class
during the four calendar weeks prior to such sale and (ii) non-affiliated stockholders may sell without such limitations,
provided we are current in our public reporting obligations. Rule 144 also permits the sale of securities by non-affiliates
that have satisfied a one year holding period without any limitation or restriction. Any substantial sale of our common stock pursuant
to Rule 144 or pursuant to any resale report may have a material adverse effect on the market price of our securities.
Our compliance with complicated U.S.
regulations concerning corporate governance and public disclosure is expensive. Moreover, our ability to comply with all applicable
laws, rules and regulations is uncertain given our management’s relative inexperience with operating U.S. public companies.
As a publicly reporting
company, we are faced with expensive and complicated and evolving disclosure, governance and compliance laws, regulations and standards
relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd-Frank Act, and, to the extent
we complete our anticipated public offering, the rules of the Nasdaq Stock Market. New or changing laws, regulations and standards
are subject to varying interpretations in many cases due to their lack of specificity, and, as a result, their application in practice
may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result,
our efforts to comply with evolving laws, regulations and standards of a U.S. public company are likely to continue to result in
increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities
to compliance activities.
Moreover, our executive
officers have little experience in operating a U.S. public company, which makes our ability to comply with applicable laws, rules and
regulations uncertain. Our failure to company with all laws, rules and regulations applicable to U.S. public companies could
subject us or our management to regulatory scrutiny or sanction, which could harm our reputation and stock price.
If we fail to maintain effective
internal control over financial reporting, the price of our common stock may be adversely affected.
Our internal control
over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which
may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal
control over financial reporting. Failure to establish those controls, or any failure of those controls once established,
could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations.
In addition, management’s assessment of internal control over financial reporting may identify weaknesses and conditions
that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors.
Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or
disclosure of management’s assessment of our internal control over financial reporting may have an adverse impact on the
price of our common stock.
43
Anti-takeover provisions in our charter
documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price
of our common stock and warrants.
We are a Delaware corporation
and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by
prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person
becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our
certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders
may consider favorable. Our certificate of incorporation and bylaws:
·
authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to thwart a takeover attempt;
·
provide that vacancies on our Board of Directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
·
provide that special meetings of stockholders may only be called by our Chairman, Chief Executive Officer and/or President or other executive officer, our Board of Directors or a super-majority (66 2/3%) of our stockholders;
·
place restrictive requirements (including advance notification of stockholder nominations and proposals) on how special meetings of stockholders may be called by our stockholders;
·
do not provide stockholders with the ability to cumulate their votes; and
·
provide that our Board of Directors or a super-majority of our stockholders (66 2/3%) may amend our bylaws.
We do not currently intend to pay
dividends on our common stock in the foreseeable future, and consequently, your ability to achieve a return on your investment
will depend on appreciation in the price of our common stock.
We have never declared
or paid cash dividends on our common stock and do not anticipate paying any cash dividends to holders of our common stock in the
foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never
occur, as the only way to realize any future gains on their investments. There is no guarantee that shares of our common stock
will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
We
do not own any real property. Currently, we maintain offices at 8 HaTokhen St. , Caesarea
Industrial Park, 3088900, Israel . On September 8, 2016, we signed a lease agreement for these facilities for a
period of 5 years commencing upon the completion of construction of the new office building. We moved into these offices during
November 2017. The rental agreement will be extended automatically for an additional 60 months following expiration of the
initial term. The monthly rent and management services under this lease are approximately $18,500. In December 2017 we signed
a lease agreement for our new U.S. headquarters facilities in New York, New York for a monthly rent and management services of
approximately $3,733.
Item 3.
Legal Proceedings
We are currently not
a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that we believe is not
ordinary routine litigation incidental to our business or otherwise material to the financial condition of our business.
Item 4.
Mine Safety Disclosures
Not applicable.
44
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is
quoted on the Nasdaq Capital Market under the symbol “DRIO”. Our warrants to purchase common stock are quoted on the
Nasdaq Capital Market under the symbol “DRIOW”.
Record Holders
As of March 5, 2021,
we had 289 stockholders of record of our common stock.
Dividends
We have never paid
any cash dividends on our common stock. We anticipate that we will retain funds and future earnings to support operations and to
finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future.
Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend on our financial
condition, results of operations, capital requirements and other factors that our Board of Directors deems relevant. In addition,
the terms of any future debt or credit financings may preclude us from paying dividends.
Securities Authorized for Issuance Under
Equity Compensation Plans as of December 31, 2020:
The following table
provides information as of December 31, 2020, with respect to options outstanding under the Company’s Amended and Restated
2012 Equity Incentive Plan (the “2012 Equity Incentive Plan”) and the Company’s other equity compensation arrangements.
Plan category
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding
options,
warrants and rights
Number of securities
remaining available
for future issuance
Equity compensation plans approved by security holders
740,650
$ 17.53
904,795
Equity compensation plans not approved by security holders (1)
607
$ 2,522.91
-
Equity compensation plans not approved by security holders (2)
213
$ 2,502.00
-
Equity compensation plans not approved by security holders (3)
1,966
$ 115.20
-
Equity compensation plans not approved by security holders (4)
139
$ 140.40
-
Equity compensation plans not approved by security holders (5)
180,000
$ 8.41
Equity compensation plans not approved by security holders (6)
50,000
$ 5.75
Total
973,575
904,795
(1)
In March 2013, our Board adopted a non-employee director’s remuneration policy.
(2)
On May 2014, our Board approved the grant of non-plan options to the Company’s Scientific Advisory Board (“SAB”). These options have an exercise price of $2,502.00 vest in 4 quarterly installments in arrears, have a cashless exercise feature and a ten-year term.
(3)
In September 2015, our Board approved the grant of non-plan options to our Board members and members of our SAB. These options have an exercise price of $115.20 per share, one-third vesting immediately and the balance vest over 8 quarterly installments, have a cashless exercise feature and a six-year term.
(4)
In December 2015, our Board approved the grant of non-plan options to a member of the SAB. The options to the SAB member have an exercise price of $140.40 per share, and vest over a three-year period. One third vest after one year and the balance vest over 8 quarterly installments after the first anniversary; these options have a cashless exercise feature and a six-year term.
(5)
In January 2020, our Board approved the grant of non-plan options as a material inducement for employment, in accordance with Nasdaq Listing Rule 5635(c)(4), to our newly hired President and General Manager for North America. The options have an exercise price of $8.41 per share. 90,000 options are time based and vest over a three-year period. One third vests after one year and the balance vests over eight quarterly installments after the first anniversary; these options have a cashless exercise feature and a six-year term. An additional 90,000 options are performance based, and vest over a three-year period. One third vest after one year and the balance vest over eight quarterly installments after the first anniversary; these options have a cashless exercise feature and a six-year term. 22,500 options will commence vesting every calendar year for the next four years, commencing in 2021, and only if certain performance milestones were met in the immediately preceding year.
(6)
In March 2020, our Board approved the grant of non-plan options as a material inducement for employment, in accordance with Nasdaq Listing Rule 5635(c)(4), to our newly hired Chief Medical Officer. The options have an exercise price of $5.75 per share, and vest over a three-year period. One third vests after one year and the balance vests over eight quarterly installments after the first anniversary; these options have a cashless exercise feature and a six-year term.
45
On
January 23, 2012, our Board of Directors and a majority of the holders of our then outstanding shares of our common
stock adopted our 2012 Equity Incentive Plan (which includes both U.S. and Israeli sub-plans). On January 23, 2012, an
Israeli sub-plan was adopted under our 2012 Equity Incentive Plan, which sets forth the terms for the grant of stock awards
to Israeli employees or Israeli non-employees. The sub-plan was adopted in accordance with the amended sections 102 and
3(i) of Israel’s Income Tax Ordinance. The sub-plan is part of the 2012 Equity Incentive Plan and subject to the
same terms and conditions. On September 26, 2016 and November 30, 2016, respectively, our Board of Directors and
stockholders approved an amendment to the 2012 Equity Incentive Plan increasing the number of shares of common stock
available under the plan to 1,873,000 as well as amended the 2012 Equity Incentive Plan to permit grants of shares of common
stock. On February 2, 2017 and March 9, 2017, respectively, our Board of Directors and stockholders approved an
amendment to the 2012 Equity Incentive Plan increasing the number of shares of common stock available under the plan to
2,373,000. On October 9, 2017 and December 4, 2017, respectively, our Board of Directors and stockholders approved
an amendment to the 2012 Equity Incentive Plan increasing the number of shares of common stock available under the plan to
3,873,000. On March 26, 2018 and May 18, 2018, respectively, our Board of Directors and stockholders approved an
amendment to the 2012 Equity Incentive Plan increasing the number of shares of common stock available under the plan to
5,373,000. On October 7, 2018 and November 29, 2018, respectively, our Board of Directors and stockholders approved
an amendment to the 2012 Equity Incentive Plan increasing the number of shares of common stock available under the plan to
7,873,000. On September 3, 2019 and November 6, 2019, respectively, our Board of Directors and stockholders
approved an amendment to the 2012 Equity Incentive Plan increasing the number of shares of common stock available under the
plan to 618,650 on a post reverse stock split basis. On December 26, 2019 and February 5, 2020, respectively, our
Board of Directors and stockholders approved an amendment to the 2012 Equity Incentive Plan increasing the number of shares
of common stock available under the plan to 1,968,650. Following the amendments to the 2012 Equity Incentive Plan, as of
March 1, 2021, there are 115 shares of Common Stock reserved for issuance thereunder. On September 2, 2020 and
October 14, 2020, respectively, our Board of Directors and stockholders approved and adopted the Company’s 2020
Equity Incentive Plan (the “2020 Equity Incentive Plan”), reserving for issuance a pool of 900,000 shares of the
Company’s common stock under the plan. On January 1, 2021 the number of shares of common stock available under the
plan increased to 1,828,890 according to the terms thereof. As of March 1, 2021, there are 633,171 shares of Common Stock
reserved for issuance thereunder. The Company’s officers and directors are among the persons
eligible to receive awards under the 2020 Equity Incentive Plan in accordance with the terms and conditions thereunder.
46
The purpose of both
our 2012 and 2020 Equity Incentive Plans is to attract and retain directors, officers, consultants, advisors and employees whose
services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in
our development and financial achievements. Each of the 2012 and 2020 Equity Incentive Plans will be administered by the Compensation
Committee of our Board of Directors or by the full board, which may determine, among other things, the (a) terms and conditions
of any option or stock purchase right granted, including the exercise price and the vesting schedule, (b) persons who are
to receive options and stock purchase rights and (c) the number of shares to be subject to each option and stock purchase
right. The 2012 and 2020 Equity Incentive Plans will each provide for the grant of (i) ”incentive” options (qualified
under section 422 of the Internal Revenue Code of 1986, as amended) to employees of our company and (ii) non-qualified options
to directors and consultants of our company. In addition, our Board of Directors has authorized the appointment of IBI Capital
Compensation and Trusts (2004) Ltd. to act as a trustee for grants of options under the Israeli sub-plan to Israeli residents.
In connection with
the administration of our 2012 and 2020 Equity Incentive Plans, our Compensation Committee will:
· determine
which employees and other persons will be granted awards under our 2012 and 2020 Equity Incentive Plans;
· grant
the awards to those selected to participate;
· determine
the exercise price for options; and
· prescribe
any limitations, restrictions and conditions upon any awards, including the vesting conditions of awards.
Our Compensation Committee
will: (i) interpret our 2012 and 2020 Equity Incentive Plans; and (ii) make all other determinations and take all other
action that may be necessary or advisable to implement and administer our 2012 and 2020 Equity Incentive Plans.
The 2012 and 2020 Equity
Incentive Plans each provide that in the event of a change of control event, the Compensation Committee or our Board of Directors
shall have the discretion to determine whether and to what extent to accelerate the vesting, exercise or payment of an award.
In addition, our Board
of Directors may amend our 2012 or 2020 Equity Incentive Plan at any time. However, without stockholder approval, our 2012 or 2020
Equity Incentive Plan may not be amended in a manner that would:
· increase
the number of shares that may be issued under such Equity Incentive Plan;
· materially
modify the requirements for eligibility for participation in such Equity Incentive Plan;
· materially
increase the benefits to participants provided by such Equity Incentive Plan; or
· otherwise
disqualify such Equity Incentive Plan for coverage under Rule 16b-3 promulgated under the Exchange Act.
Awards previously granted
under our 2012 or 2020 Equity Incentive Plans may not be impaired or affected by any amendment of such without the consent of the
affected grantees.
47
Option Exercises
To date, no options
have been exercised by our directors or officers.
Unregistered Sales of Equity Securities
and Use of Proceeds
During the fourth quarter
of 2020, we issued an aggregate 79,368 shares of our common stock to certain of our service providers as compensation 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.
Selected Financial Data
Not applicable.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
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 the related notes and other financial information included elsewhere in this Annual Report. Some of the
information contained in this discussion and analysis or set forth elsewhere in this Annual 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
this Annual Report 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.
Overview
We are a leading global
DTx company revolutionizing the way people manage their health across the chronic condition spectrum to live a better and healthier
life. Our mission is to transform how affected individuals manage their health and chronic conditions by empowering our customers
to easily manage their conditions and take steps to improve their overall health. Most chronic conditions are driven by personal
behaviors and the actions that are or are not taken. We believe that changing these behaviors can dramatically improve our customers’
overall health and substantially reduce unnecessary health spending. However, behavioral change and habit formation are difficult,
especially in managing chronic disease and related conditions. Our digital therapeutics endeavor to produce lasting behavior changes
in our customers by applying a novel combination of AI-driven dynamic personalization and behavioral science at scale. This allows
us to engage and support our customers, and offer them a complete virtual care solution, ideally resulting in improved health outcomes
and reduced total cost of care.
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 with the name LabStyle Innovations Corp. On July 28, 2016, we changed our name to DarioHealth
Corp. We began our sales in the direct-to-consumer space, solving first for what we deemed the most difficult problems: how to
engage users and support behavior change to improve clinical outcomes in diabetes. Our most developed AI tools leverage the direct-to-consumer
experience from over 150,000 members to drive superior engagement and outcomes. In early 2020, we broadened our solutions to include
other medical conditions in addition to diabetes, and to serve business customers who seek to improve the health of their stakeholders.
Presently, we have deployed solutions for diabetes, hypertension, and pre-diabetes, and through our acquisition of Upright, we now offer solutions for musculoskeletal (“MSK”) conditions. We intend to deploy behavioral health and other
condition solutions in 2021, which conditions will also be powered by our AI-driven behavior change platform. We are currently
delivering B2B2C solutions for providers, employers, and pharmaceutical companies, and we plan to develop a full-risk health plan
business across a range of customer product lines in 2021.
48
We commenced a commercial
launch of our free application in the United Kingdom in late 2013 and commenced an initial soft launch of the full Dario solution
(including the app and the Dario Blood Glucose Monitoring System) in selected jurisdictions in March 2014. We continued to
scale up launch during 2014 in the United Kingdom, the Netherlands and New Zealand, and during 2015 in Australia, Israel and
Canada, with the goal of collecting customer feedback to refine our longer-term roll-out strategy. 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, and its subsidiary Upright, 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 DarioEngage 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 DarioEngage platform and the Dario Loop 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.
On January 26,
2021, Dario, Labstyle, Upright Technologies Ltd., an Israeli limited company, Vertex C (C.I.) Fund L.P.
(in its capacity as the representative of the Selling Shareholders), and all holders of Upright’s outstanding securities
(the “Selling Shareholders”), entered into a share purchase agreement (the “Upright Agreement”) pursuant
to which Dario, through Labstyle, acquired all of the outstanding securities of Upright. The agreement was consummated on February 1,
2021, and Upright now operates as a wholly owned subsidiary of the Company. As part of the acquisition, Dario issued the Selling
Shareholders 1,687,612 shares of the Company’s common stock, and agreed to assume options to purchase up to 100,193 shares
of the Company’s common stock, subject to certain escrow and indemnity provisions contained in the Upright Agreement (in
the aggregate, the “Consideration Shares”). In addition, the shares issued are subject to the terms of a lock-up agreement,
pursuant to which the Selling Shareholders (subject to certain exceptions) have agreed to restrict their ability to transfer their
shares as follows: (i) shares representing 20% of their respective Consideration Shares will be restricted from transfer for
a period of one hundred and eighty (180) days from the date of the closing of the acquisition (the “Closing Date”),
(ii) shares representing 30% of their respective Consideration Shares will be restricted from transfer for a period of two
hundred and seventy (270) days from the Closing Date, (iii) shares representing 30% of their respective Consideration Shares
will be restricted from transfer for a period of three hundred and sixty (360) days from the Closing Date and (iv) shares
representing 20% of their respective Consideration Shares will be restricted from transfer for a period of four hundred and fifty
(450) days from the Closing Date. The Company has also agreed to file a registration statement covering the resale of the shares
within ninety (90) days following the Closing Date. In addition, 30% of the Consideration Shares issuable to Upright’s founder,
Mr. Oded Cohen, shall be held in a specific holdback retention mechanism, of which 50% shall be released at the lapse of twelve
(12) months of retention following the Closing Date, and the balance of 50% shall be released at the lapse of eighteen (18) months
of retention following the Closing Date.
49
On February 1,
2021, the Company, through Labstyle, has also agreed to enter into an employment agreement with Mr. Cohen, pursuant to which
he will serve as General Manager of MSK. In consideration for Mr. Cohen’s duties, he will be entitled to (a) a
monthly salary of NIS 63,000, (b) an annual bonus of up to four times his monthly salary, and (c) up to 220,980 shares
of restricted stock of the Company, subject to meeting certain key performance metrics. See “Management – Employment
Agreements.”
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 June 2021 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 material alterations in our business plans, and our
business might fail.
Critical Accounting Policies
Our consolidated financial
statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”). Our fiscal year ends December 31.
This Management’s
Discussion and Analysis of Financial Condition and Results of Operations discuss our consolidated financial statements, which have
been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires making estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements, as well as the reported revenues and expenses for the reporting periods.
On an ongoing basis, we evaluate such estimates and judgments. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ (perhaps
significantly) from these estimates under different assumptions or conditions.
While all the accounting
policies impact the consolidated financial statements, certain policies may be viewed to be critical. Our management believes that
the accounting policies which involve more significant judgments and estimates used in the preparation of our consolidated financial
statements, include revenue recognition, inventories, liability related to certain warrants, and accounting for production lines
and its related useful life and impairment.
Revenue Recognition
We derive our revenue
principally from:
•
sale of our products, device-specific disposables test strip cartridges, lancets and our Dario Blood Glucose Monitoring System through distributors or directly to end users;
•
revenue from providing Remote Patient Monitoring services to healthcare providers through the DarioEngage platform; and
•
revenue from ongoing membership programs, providing our users personalized diabetes management programs, including lifestyle changes, healthy eating, advanced tracking and live coaching.
Revenue is recognized
under the five-step methodology in accordance with Accounting Standards Codification (“ASC”) - ASC 606, which requires
us to identify the contract with the customer, identify the performance obligations in the contract, determine the transaction
price, allocate the transaction price to the performance obligations identified, and recognize revenue when (or as) each performance
obligation is satisfied.
50
Revenue from product
sales is recognized in the period in which the products are provided to customers. Revenues are recognized when control of the
promised products is transferred to customers, in an amount that reflects the consideration to which we expect to receive from
patients.
Revenues from ongoing
membership programs and Remote Patient Monitoring services are recognized for each individual performance obligation when delivery
has occurred, by fulfillment of product and service to costumer. Our revenues are recognized in the period in which services and
related products are provided to customers and are recorded either at a point in time for the sale of products, or over the fixed
service period for membership. The fee paid in upfront, fixed or determinable, the allocation of the transaction price to each
performance obligations product and service based on the best estimate of selling price which is established considering several
internal factors including, but not limited to, historical sales, pricing practices and geographies in which we offer our products.
Inventories
Inventory write-down
is measured as the difference between the cost of the inventory and net realized value based upon assumptions about future demand,
and is charged to the cost of sales. At the point of the loss recognition, a new, lower-cost basis for that inventory is established,
and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
If there were to be
a sudden and significant decrease in demand for our products or if there were a higher incidence of inventory obsolescence because
of rapidly changing technology and customer requirements, we could be required to increase our inventory write-downs and our gross
margin could be adversely affected. Inventory and supply chain management remain areas of focus as we balance the need to maintain
supply chain flexibility, to help ensure competitive lead times with the risk of inventory obsolescence.
During the year ended
December 31, 2020, total inventory write-downs expenses amounted to $99,000.
Production Lines
Capitalization
of Costs . We capitalize direct incremental costs of third-party manufacturers related to the equipment in our production
lines. We cease construction cost capitalization relating to our production lines once they are ready for its intended use and
held available for occupancy. All renovations and betterments that extend the economic useful lives of assets and/or improve the
performance of the production lines are capitalized.
Useful
Lives of Assets . We are required to make subjective assessments as to the useful lives of our production lines for purposes
of determining the amount of depreciation to record on an annual basis with respect to our construction of the production lines.
These assessments have a direct impact on our net income (loss). Production lines are usually depreciated on a straight-line basis
over a period of up to seven years, except any renovations and betterments which are depreciated over the remaining life of the
production lines.
Impairment
of production lines. We are required to review our production lines for impairment in accordance with ASC 360,
“Property, Plant and Equipment,” whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of
the assets.
51
Results of Operations
Comparison of the Year Ended December 31,
2020 to Year Ended December 31, 2019
Revenues
Revenues for the year
ended December 31, 2020 amounted to $7,576,000, compared to $7,559,000 during the year ended December 31, 2019.
Revenues generated
during the year ended December 31, 2020 were derived mainly from the sales of the Dario Blood Glucose Monitoring System, through
direct sales to consumers located mainly in the United States through our on-line store and through distributors, and from the
offering of our membership services to our customers located mainly in the United States.
Cost of Revenues
During the years ended
December 31, 2020 and 2019, we recorded costs related to revenues in the amount of $5,063,000 and $4,962,000, respectively.
The increase in cost of revenues was mainly due to higher costs related to shipping products to our customers.
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 $741,000 to $4,433,000 for the year ended December 31, 2020 compared to $3,692,000 for the year ended
December 31, 2019. This increase was mainly due to increase in salaries and stock-based compensation, partially offset by
a decrease of other research and development costs relating primarily to product development. Our research and development expenses,
excluding stock-based compensation and depreciation, for the year ended December 31, 2020, were $3,584,000 compared to $3,432,000
for the year ended December 31, 2019, an increase of $152,000. This increase was due to an increase in salaries and related
expenses.
Research and development
expenses consist mainly of payroll expenses to employees involved in research and development activities, expenses related to our
Dario Smart Diabetes Management Solution, expenses related to the development of our DarioEngage platform, 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
Our sales and marketing
expenses increased by $4,100,000 to $15,227,000 for the year ended December 31, 2020 compared to $11,127,000 for the year
ended December 31, 2019. This increase was mainly due to the increase in salaries and stock-based compensation. Our sales
and marketing expenses, excluding stock-based compensation and depreciation, for the year ended December 31, 2020 were $12,452,000
compared to $10,790,000 for the year ended December 31, 2019, an increase of $1,662,000. This increase was due to an increase
in salaries and related expenses, as a result of hiring our sales and marketing team in the U.S. to lead the penetration into the
B2B2C market.
Sales and marketing
expenses consist mainly of payroll expenses, trade show expenses, customer support expenses and on-line marketing campaigns.
General and Administrative
Expenses
Our general and administrative
expenses increased by $7,273,000 to $12,756,000 for the year ended December 31, 2020 compared to $5,483,000 for the year ended
December 31, 2019. The increase was mainly due to an increase in stock-based compensation. Our general and administrative
expenses, excluding stock-based compensation and depreciation, for the year ended December 31, 2020 were $5,239,000 compared
to $3,753,000 for the year ended December 31, 2019, an increase of $1,486,000. This increase was due to an increase in insurance,
legal expenses and investor relations expenses.
52
Our general and administrative
expenses consist mainly of payroll and stock-based compensation expenses for management, employees, directors and consultants,
legal and accounting fees, patent registration, expenses related to investor relations, as well as our office rent and related
expenses.
Finance income (expenses),
net
Our finance income,
net, increased by $489,000 to $458,000 for the year ended December 31, 2020 compared to $31,000 financing expenses for the
year ended December 31, 2019. The increase from 2019 was mainly due to gains derives from currency translation differences.
Finance expenses include mainly bank charges, lease liability translation differences, and foreign currency translation adjustments.
Net loss
Net loss for the year
ended December 31, 2020 was $29,445,000. Net loss for the year ended December 31, 2019 was $17,736,000. The increase
from 2019 was mainly due to the increase in our operating expenses.
Net operating loss
carryforwards
As of December 31,
2020, we had U.S. federal net operating loss carryforwards of approximately $16,223,000, of which $7,120,000 was generated from tax
years 2011-2017 and can be carryforward and offset against taxable income and that expires during the years 2031 to 2037.
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “TCJA”) modified the rules regarding utilization
of net operating loss and net operating losses generated subsequent to the TCJA can only be used to offset 80% of taxable
income with an indefinite carryforward period for unused carryforwards (i.e., they should not expire). During 2018 - 2020,
we generated additional $9,103,000 of net operating losses carryforwards which are not subject to the annual limitation described
above.
Our Israeli subsidiary
has accumulated net operating losses for Israeli income tax purposes as of December 31, 2020 in the amount of approximately
$86,600,000. The net operating losses may be carried forward and offset against taxable income in the future for an indefinite period.
In accordance with
U.S. GAAP, it is required that a deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence
it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not
be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount which is more likely than
not to be realized. As a result, we recorded a valuation allowance with respect to our deferred tax asset. Under Sections 382 and
383 of the Internal Revenue Code, if an ownership change occurs with respect to a “loss corporation” (as defined in
the Internal Revenue Code), there are annual limitations on the amount of the net operating loss and other deductions which are
available to us.
The factors described
above resulted in net loss attributable to common stockholders of $33,103,000 and $20,891,000 for the year ended December 31,
2020 and 2019, respectively.
Non-GAAP Financial Measures
To supplement our consolidated
financial statements presented in accordance with U.S. GAAP within this Annual Report on Form 10-K, 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 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.
53
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
consolidated financial statements to understand the effects of the non-cash impact on our (U.S. GAAP) unaudited 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:
Year Ended December 31,
(in thousands)
2020
2019
$ Change
Net Loss Reconciliation
Net loss - as reported
$
(29,445
)
$
(17,736
)
$
(11,709
)
Adjustments
Depreciation expense
190
183
7
Other financial expenses (income), net
(458
)
31
(489
)
EBITDA
(29,713
)
(17,522
)
(12,191
)
Stock-based compensation expenses
11,102
2,316
8,786
Non-GAAP adjusted loss
$
(18,611
)
$
(15,206
)
$
(3,405
)
Liquidity and Capital Resources
As of December 31,
2020, we had approximately $28,590,000 in cash and cash equivalents compared to $20,395,000 at December 31, 2019.
We have experienced
cumulative losses of $143,248,000 from inception (August 11, 2011) through December 31, 2020 and have a stockholders’
equity of $35,407,000 at December 31, 2020. 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.
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 $123,974,000 as of December 31, 2020.
54
On February 28,
2018 and March 6, 2018, we closed two concurrent private placements offerings consisting of 113,110 shares of our common
stock at $28.00 per share, 61,704 shares of our Series C Convertible Preferred Stock at $56.00 per share and warrants to
purchase up to 189,218 shares of common stock for aggregate gross proceeds of approximately $6,623,000.
On September 13,
2018 and September 26, 2018, we closed two concurrent private placements offerings consisting of 213,340 shares our common
stock at $18.00 per share, 94,513 shares of our Series D Convertible Preferred Stock at $72.00 per share and warrants to purchase
up to 473,114 shares of common stock, for aggregate gross proceeds of approximately $10,645,000.
On December 13,
2018 and December 27, 2018, we closed a private placement offering of 152,504 shares of our common stock at a purchase price
of $20.00 per share and warrants to purchase up to 152,500 shares of our common stock at $25.00 per share for aggregate gross proceeds
of approximately $3,050,000.
On November 27,
2019, we entered into subscription agreements with accredited investors relating to an offering with respect to the sale of an
aggregate of 8,361 shares of newly designated Series A Convertible Preferred Stock and an aggregate of 5,200 shares of newly
designated Series A-1 Convertible Preferred Stock, at a purchase price of $1,000 for each share of Series A Preferred
Stock and Series A-1 Preferred Stock, for aggregate gross proceeds to the Company of $13,560,000. The initial closing of the
offering took place on November 27, 2019. On December 3, 2019, we entered into subscription agreements with accredited
investors relating to an offering and the sale of an aggregate of 1,915 shares of newly designated Series A-2 Preferred Stock,
at a purchase price of $1,000 per share, for aggregate gross proceeds to the Company of $1,915,000. On December 4, 2019, we
into subscription agreements with accredited investors relating to an offering and the sale of an aggregate of 3,808 shares of
newly designated Series A-3 Preferred Stock, at a purchase price of $1,000 per share, for aggregate gross proceeds to the
Company of $3,808,000. On December 5, 2019, we entered into subscription agreements with accredited investors relating to
an offering and the sale of an aggregate of 745 shares of newly designated Series A-4 Preferred Stock, at a purchase price
of $1,000 per share, for aggregate gross proceeds to the Company of $745,000. On December 19, 2019, we entered into subscription
agreements with accredited investors relating to an offering and the sale of an aggregate of 1,346 shares of newly designated Series A-3
Preferred Stock, at a purchase price of $1,000 per share, for aggregate gross proceeds to the Company of $1,346,000. The total
aggregate gross proceeds of the offering described above, together with gross proceeds from the closing of the offering of Series A
Preferred Stock, Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock and Series A-4
Preferred Stock was $21,375,000.
On July 28, 2020,
we entered into subscription agreements with accredited investors relating to an offering with respect to the sale of an aggregate
of (i) 2,969,266 shares of our common stock, at a purchase price of $7.47 per share, and (ii) pre-funded warrants to
purchase 824,689 shares of common stock, at a purchase price of $7.4699 per pre-funded warrant. In addition, on July 30, 2020,
we entered into a subscription agreement with an accredited investor for the purchase of 31,486 shares of our common stock at a
purchase price per share of $7.94 per share. The aggregate gross proceeds were approximately $28,591,000.
In September 2020,
we and an existing warrant holder entered into an agreement pursuant to which we agreed to lower the exercise price of certain
warrants issued in September 2018, from $25.00 to $13.00 per share. As a result, the warrant holder exercised warrants to
purchase 88,889 shares of our common stock, resulting in aggregate gross proceeds of approximately $1,156,000.
On January 26,
2021, we entered into securities purchase agreements with institutional accredited investors relating to an offering with respect
to the sale of an aggregate of 3,278,688 shares of the Company’s common stock at a purchase price of $21.35 per share, for
aggregate gross proceeds of $70,000,000. The closing of the offering was consummated on February 1, 2021. The purchase price
per share represents the “Minimum Price” of the Company’s Common Stock pursuant to Nasdaq Rule 5635(d) as
of the date of execution of each respective securities purchase agreement. The Company and the investors participating in the offering
also executed a registration rights agreement pursuant to which the Company agreed to file a registration statement covering the
resale of the shares within sixty (60) days following the final closing of the offering.
55
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 (2) expenses which will be required in order to expand manufacturing of our products, (3) sales
and marketing efforts and (4) 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 distribute our products and services
in the jurisdictions and in the timeframes we expect.
Cash Flows
The following tables
sets forth selected cash flow information for the periods indicated:
December 31,
2020
2019
$
$
Cash used in operating activities:
(17,736,000 )
(15,725,000 )
Cash used in investing activities:
(1,622,000 )
(113,000 )
Cash provided by financing activities:
27,548,000
25,247,000
Net cash used in
operating activities
Net cash used in operating
activities was $17,736,000 for the year ended December 31, 2020 compared to $15,725,000 used in operations for the same period
in 2019. Cash used in operations increased mainly due to an increase in our operating expenses.
Net cash used in
investing activities
Net cash used for
investing activities was $1,622,000 for the year ended December 31, 2020 compared to cash used in investing activities
of $113,000 for the year ended December 31, 2019. Cash used in investing activities increased mainly due to a
convertible bridge loan extended to Upright and higher investments in fixed assets.
Net cash provided
by financing activities
Net cash provided by
financing activities was $27,548,000 for the year ended December 31, 2020 compared to $25,247,000 for the year ended December 31,
2019. During the year ended December 31, 2020, we raised net proceeds in an amount of approximately $27,548,000 mainly through
our July 2020 offering.
Contractual Obligations
Set forth below is
a summary of our current obligations as of December 31, 2020 to make future payments due by the period indicated below, excluding
payables and accruals. We expect to be able to meet our obligations in the ordinary course. Operating lease obligations are for motor
vehicle and real property leases which we use in our business. Purchasing obligations consists of outstanding purchase orders for
materials and services from our vendors.
Payments due by period
(In U.S. dollars thousands)
Contractual Obligations
Total
Less than 1 year
1-5 years
Operating Lease Obligations
$
691
$
411
$
280
Purchasing Obligations
2,881
2,881
-
Total contractual cash obligations
$
3,572
$
3,292
$
280
Off-Balance Sheet Arrangements
We did not have during
the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under Securities and Exchange
Commission rules.
56
Contingencies
We account for our
contingent liabilities in accordance with ASC 450 “Contingencies“. A provision is recorded when it is both probable
that a liability has been incurred and the amount of the loss can be reasonably estimated.
With respect to legal
matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice
of legal counsel and other information and events pertaining to a particular matter. Currently, we are not a party to any ligation
that we believe could have a material adverse effect on our business, financial position, results of operations or cash flows.
Recently Issued and Adopted Accounting
Pronouncements
In September 2016,
the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13,
“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. For trade and
other receivables, held-to-maturity debt securities, loans, and other instruments, entities will be required to use a new forward-looking
“expected loss” model that generally will result in the earlier recognition of allowances for losses. The guidance
also requires increased disclosures. For the Company, the amendments in the update were originally effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. In November 2019, the FASB issued
ASU No. 2019-10 which delayed the effective date of ASU 2016-13 for smaller reporting companies (as defined by the U.S. Securities
and Exchange Commission) and other non-SEC reporting entities to fiscal years beginning after December 15, 2022, including
interim periods within those fiscal periods. Early adoption is permitted. The Company is currently assessing the impact the guidance
will have on its consolidated financial statements.
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8.
Financial Statements and Supplementary Data
Our
consolidated financial statements and notes thereto and the report of Kost Forer Gabbay & Kasierer, a member of
Ernst & Young Global , our independent registered public accounting firm, are set
forth on pages F-1 through F-31 of this Annual Report.
57
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer,
we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that, at December 31, 2020, such disclosure controls and procedures were effective.
Disclosure
controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act
is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing
similar functions, as appropriate, to allow timely decisions regarding required disclosure.
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.
Changes in Internal Control over Financial
Reporting
There
were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal
Control Over Financial Reporting
As
required by the SEC rules and regulations, our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes
in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:
(1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company;
(2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect errors or misstatements in our
consolidated financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures
may deteriorate. Management assessed the effectiveness of our internal control over financial reporting at December 31, 2020.
In making these assessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 Framework). Based on our assessments and those criteria, management determined that we maintained effective internal
control over financial reporting at December 31, 2020.
58
Item 9B.
Other Information
2020 Bonuses
On March 4, 2021, the
Compensation Committee of the Board of Directors approved annual bonuses to the Company’s management team for the achievement
of certain milestones in the 2020 fiscal year. In that regard, Mr. Erez Raphael was awarded a cash bonus of $350,000, Mr. Richard
Anderson was awarded a cash bonus of $212,500, and each of Mr. Zvi Ben-David and Mr. Dror Bacher were awarded cash bonuses of $120,000.In
addition, the Compensation Committee of the Board of Directors approved a one-time bonus to the Mr. Yoav Shaked, Chairman of the
Board of Directors, of $100,000.
Oded Cohen
Employment Agreement
On March 4, 2021, the Company, through Upright, executed an
Employment Agreement with Oded Cohen (the “Employment Agreement”) pursuant to which he will serve as General Manager
of Musculoskeletal (MSK), effective as of February 1, 2021. The Employment Agreement supersedes the agreement entered into by and
between the Company, through LabStyle Innovation Ltd., and Mr. Cohen dated February 1, 2021. Pursuant to the Employment Agreement,
Mr. Cohen will earn a monthly salary of NIS 63,000 and shall be eligible for an annual bonus equal to up to four times his monthly
salary. The Employment Agreement is an at-will employment arrangement, with a four month notice period, unless it is terminated
for cause. In addition, Mr. Cohen will be entitled to severance payment pursuant to applicable Israeli severance law. In the event
the Employment Agreement is terminated by us for cause, Mr. Cohen will only be entitled to a severance pay under applicable Israeli
severance law. Mr. Cohen’s Employment Agreement also includes a one-year non-competition and non-solicitation provision,
certain confidentiality covenants and assignment of any of his company-related inventions. Under the terms of the Employment Agreement,
Mr. Cohen is entitled to certain expense reimbursements and other standard benefits, including vacation, sick leave, contributions
to a manager’s insurance policy and study fund and car and mobile phone allowances. In addition, Mr. Cohen will be entitled
to receive a restricted stock unit award to receive up to 73,660 shares of the Company’s common stock and, subject to the
meeting of certain milestones, subject to the meeting of certain milestones an additional restricted stock unit award to receive
up to 73,660 shares of the Company’s common stock on March 1, 2022, and subject to the meeting of certain milestones an additional
restricted stock unit award to receive up to 73,660 shares of the Company’s common stock on March 1, 2023.
59
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The following sets
forth information regarding our executive officers and the members of our Board of Directors as of the date of this Annual Report.
All directors hold office for one-year terms until the election and qualification of their successors. Officers are appointed by
our Board of Directors and serve at the discretion of our Board of Directors, subject to applicable employment agreements.
Name
Age
Position(s)
Erez Raphael
47
Chief Executive Officer and Director
Zvi Ben David
60
Chief Financial Officer, Treasurer and Secretary
Dror Bacher
46
Chief Operating Officer
Richard Anderson
51
President and General Manager of North America
Oded Cohen
50
General Manager of MSK
Yoav Shaked
49
Chairman of the Board of Directors
Dennis Matheis
60
Director
Hila Karah
52
Director
Dennis M. McGrath
64
Director
Adam Stern
56
Director
Prof. Richard B. Stone
78
Director
Erez
Raphael has served as our Chief Executive Officer since August 9, 2013 and as a director of our company
since December 2013. Mr. Raphael served as Chairman of the Board of Directors from November 2014 to July 2018,
and as a director from November 2014 to the present. He previously and until October 2012 served as our Vice President
of Research and Development. Mr. Raphael has over 17 years of industry experience, having been responsible in his career for
product delivery, technology and business development. Prior to joining us, from 2010 to 2012, Mr. Raphael served as Head
of Business Operations for Nokia Siemens Networks, where he was responsible for establishing and implementing a new portfolio business
unit directed towards marketing and sales of complimentary products. Prior to that, from 1998 to 2010, he held increasingly senior
positions at Amdocs Limited (Nasdaq:DOX) where he was ultimately responsible for advising the Chief Technology Officer and implementing
matters of overall business strategy. Mr. Raphael holds a B.A. in economics and business management from Haifa University.
We believe Mr. Raphael is qualified to serve on our Board of Directors because of his extensive experience with technology
companies and in sales and marketing.
Zvi
Ben David has served as our Chief Financial Officer, Treasurer and Secretary since January 7, 2015. Mr. Ben
David has over 25 years of experience in corporate and international financial management, including at both publicly-listed and
private companies. Since 2012, he has acted as an independent entrepreneur with, and investor in, various medical device ventures.
From 2005 to 2012, Mr. Ben David served as the Chief Financial Officer of UltraShape Medical Ltd., a developer, manufacturer
and marketer of innovative non-invasive technologies for fat cell destruction and body sculpting. While with UltraShape, he helped
lead the company through $35 million in private financing, followed by the company’s merger with a Tel Aviv Stock Exchange
company and ultimately the company’s sale to Syneron Medical Ltd. From 2000 to 2005, he
served as Vice President and Chief Financial Officer of Given Imaging Ltd., where he was part of the management team that led that
company’s 2001 initial public offering and 2004 follow-on offering, and served as a director of that company from its establishment
in 1998 to 2000. From 1995 to June 2000, Mr. Ben David served as Vice President and Chief Financial Officer of RDC Rafael
Development Corporation, one of Given Imaging Ltd.’s principal shareholders. From 1994 to 1995, Mr. Ben David served
as manager of the finance division of Electrochemical Industries (Frutarom) Ltd., an Israeli company traded on the Tel-Aviv Stock
Exchange and the American Stock Exchange, and from 1989 to 1993, Mr. Ben David served as the manager of that company’s
economy and control department. From 1984 to 1988, Mr. Ben David worked at Avigosh & Kerbs, an accounting firm in
Haifa, Israel. Mr. Ben David is a certified public accountant in Israel and holds a B.A. in economics and accounting
from Haifa University.
60
Dror
Bacher has served as our Chief Operating Officer since July 25, 2017. Mr. Bacher previously served
as our Vice President of Research and Development as well as Vice President of Operations since 2013 where he worked on product
development as well as building a scalable supply chain. Mr. Bacher has over 18 years of experience in various technological
companies and his expertise includes product management, product development and business operations in multi disciplinary environments.
Between 2008 and 2013, Mr. Bacher Served in several leadership roles at Amdocs Limited (Nasdaq:DOX), including working as
a part of the Chief Technology Office, managing enterprise development programs for a variety of software products associated with
service delivery, as well as serving as head of process Prior to Amdocs, Mr. Bacher served in a senior role at Tower Semiconductor
(Nasdaq:TSEM), the global specialty foundry leader for IC manufacturing, where he was responsible for business operations and commercialization
expansion. Mr. Bacher holds a B.Sc. in computer science and an MBA degree from Haifa University.
Richard
Anderson has served as our President and General Manager of North America since January 7, 2020.. From November 2003
to December 2019, Mr. Anderson worked for Catasys, Inc. (Nasdaq: CATS), where he served as President and Chief Operating
Officer from July 2008 to December 2019, and as a member of its board of directors from November 2003 to July 2019.
Prior to Catasys, Inc., Mr. Anderson served as Senior Executive Vice President of Hythiam, Inc., a predecessor company
of Catasys, Inc., from 2005 to 2008. From 1999 to 2005, he also served as Chief Financial Officer and Secretary of Clearant, Inc.,
a biotechnology company. Prior to Clearant, from 1999 to 2001, he served as the Chief Financial Officer and Managing Director of
Intellect Capital Group, a venture consulting firm. Earlier in his career, Mr. Anderson was a Senior Manager/Director for
PricewaterhouseCoopers. Mr. Anderson holds a B.A. in Business Economics from the University of California at Santa Barbara.
Oded
Cohen has served as our General Manager of MSK since February 1, 2021. From May 2012 to February 2021,
Mr. Cohen served as the founder and CEO of Upright and was Managing Director of Hire Pacific International from
May 2006 to December 2014. Prior to HPI, Mr. Cohen served as Sales Director at Comverse from April 2001 to
February 2006, and as Accelerator Manager from January 2000 to March 2001. Prior to the Accelerator, Mr. Cohen
served as an Avionics Engineer at Elbit Systems. Ltd. Mr. Cohen holds a B.A. in Political Science and Government from the
Haifa University, and an EMBA degree from Tel Aviv University.
Yoav
Shaked has served as the Chairman of our Board of Directors since July 5, 2018. Since 2011, Mr. Shaked
has served as a partner at Sequoia Capital, a leading global venture capital firm. In 2005, he co-founded Medpoint Ltd., a private
medical device distribution company offering a wide range of medical products. Previously, he founded and served as Chief Executive
Officer of Y-Med Inc. from May 2004 through November 2009, until its sale to C.R. Bard, Inc. After the sale of Y-Med
Inc., Mr. Shaked served as the director of research at ThermopeutiX, a developer of innovative products for strokes and peripheral
artery disease. Mr. Shaked currently serves on the board of directors of several biotechnology companies, including Endospan,
Vibrant Gastro, B-Lite (G&G Biotechnology) and Orasis Pharmaceuticals, the latter of which he serves as Chairman of the Board.
Mr. Shaked has a B.A. in biology from The Hebrew University of Jerusalem. We believe that Mr. Shaked is qualified to
serve as Chairman of the Board because of his extensive experience both in biotechnology companies and in the venture capital realm.
Dennis
Matheis has been a director of our company since July 2, 2020. Mr. Matheis spent nearly 30 years in various
senior leadership roles in health insurance and healthcare. Since October 2017, he has served as the President and Chief Executive
Officer of Optima Health, Inc. and the Executive Vice President of Sentara Healthcare Plans, Inc. Prior to that, he spent
13 years in leadership roles at Anthem, Inc., serving as President of Central Region and Exchanges encompassing six states
and representing $12 billion in annual revenue. Mr. Matheis also served in senior leadership roles at Anthem Blue Cross and
Blue Shield of Missouri, CIGNA Healthcare and Humana Health Plan, as well as Advocate Health Care in Chicago. Mr. Matheis
has a B.S. in Accounting from the University of Kentucky and practiced as a Certified Public Accountant before entering the healthcare
industry. We believe that Mr. Matheis is qualified to serve on our Board of Directors because of his experience in the healthcare
business.
Hila
Karah has been a director of our company since November 23, 2014. Ms. Karah is an independent business
consultant and an investor in several high-tech, biotech and internet companies. From 2006 to 2013, she served as a partner
and Chief Investment Officer of Eurotrust Ltd., a family office. From 2002 to 2005, she served as a research analyst at Perceptive
Life Sciences Ltd., a New York-based hedge fund. Prior to that, Ms. Karah served as research analyst at Oracle Partners
Ltd., a health care-focused hedge fund. Ms. Karah has served as a director in several private and public companies including
Intec Pharma, since 2009 and Cyren Ltd since 2008. Ms. Karah holds a B.A. in Molecular and Cell Biology from the University
of California, Berkeley, and studied at the University of California, Berkeley-University of California, San Francisco Joint Medical
Program. We believe Ms. Karah is qualified to serve on our Board of Directors because of her experience as an investor
in and advisor to high-tech, biotech and internet companies.
61
Dennis
M. McGrath has been a director of our company since November 12, 2013. Mr. McGrath is a seasoned
medical device industry executive with extensive public company leadership experience possessing a broad range of skills in corporate
finance, business development, corporate strategy, operations and administration. After an 18 year career at PhotoMedex, Inc.
(Nasdaq: PHMD), he recently joined PAVmed, Inc (Nasdaq: PAVM, PAVMW) as the its Executive Vice President and Chief Financial
Officer. Previously, from 2000 to 2017 Mr. McGrath served in several senior level positions of PhotoMedex, Inc. (Nasdaq:
PHMD), a global manufacturer and distributor of medical device equipment and services, including from 2011 to 2017 as director,
President, and Chief Financial Officer. Prior to PhotoMedex’s reverse merger with Radiancy, Inc. in December 2011,
he also served as Chief Executive Officer from 2009 to 2011 and served as Vice President of Finance and Chief Financial Officer
from 2000 to 2009. He received honors as a P.A.C.T. (Philadelphia Alliance for Capital and Technology) finalist for the 2011 Investment
Deal of the Year, award winner for the SmartCEO Magazine 2012 CEO of the Year for Turnaround Company, and finalist for the Ernst &
Young 2013 Entrepreneur of the Year. He has extensive experience in mergers and acquisitions, both domestically and internationally,
and particularly involving public company acquisitions, including Surgical Laser Technologies, Inc, (formerly, Nasdaq: SLTI),
ProCyte Corporation (formerly, Nasdaq: PRCY), LCA Vision, Inc. (formerly, Nasdaq: LCAV) and Think New Ideas, Inc. (formerly,
Nasdaq: THNK). Prior to PhotoMedex, he served in several senior level positions of AnswerThink Consulting Group, Inc. (then,
Nasdaq: ANSR, now, The Hackett Group, Nasdaq: HCKT), a business consulting and technology integration company, including from 1999
to 2000 as Chief Operating Officer of the Internet Practice, the largest division of AnswerThink Consulting Group, Inc., while
concurrently during the merger of the companies, serving as the acting Chief Financial Officer of Think New Ideas, Inc. (then,
Nasdaq: THNK, now, Nasdaq: HCKT), an interactive marketing services and business solutions company. Mr. McGrath also served
from 1996 until 1999 as Chief Financial Officer, Executive Vice President and director of TriSpan, Inc., an internet commerce
solutions and technology consulting company, which was acquired by AnswerThink Consulting Group, Inc. in 1999. During his
tenure at Arthur Andersen & Co., where he began his career, he became a Certified Public Accountant in 1981 and he holds
a B.S., maxima cum laude, in accounting from LaSalle University. In addition to serving as a director of PhotoMedex, he serves
as the audit chair and a director of several medical device companies, including Noninvasive Medical Technologies, Inc. and
Cagent Vascular, LLC, and as an advisor to the board of an orphan drug company, Palvella Therapeutics, LLC. Formerly from 2007
to 2009, Mr. McGrath served as a director of Embrella Cardiovascular, Inc. (sold to Edwards Lifesciences Corporation,
NYSE: EW). He also serves on the Board of Trustees for Manor College and the Board of Visitors for Taylor University. We believe
Mr. McGrath is qualified to serve on our Board of Directors because of his accounting expertise and his experiences serving
as an officer and director of public and private companies.
Adam
Stern has been a director of our company since March 1, 2020. Mr. Stern, age 55, has been the head Private
Equity Banking at Aegis Capital Corp. and CEO of SternAegis Ventures since 2012 and was a member of our board of directors between
October 2011 and May 2014. Prior to Aegis, from 1997 to November 2012, he was with Spencer Trask Ventures, Inc.,
most recently as a Senior Managing Director, where he managed the structured finance group focusing primarily on the technology
and life science sectors. Mr. Stern held increasingly responsible positions from 1989 to 1997 with Josephthal & Co., Inc.,
members of the New York Stock Exchange, where he served as Senior Vice President and Managing Director of Private Equity Marketing.
He has been a FINRA licensed securities broker since 1987 and a General Securities Principal since 1991. Mr. Stern is a director
of Aerami Therapeutics Holdings (formerly Dance Biopharm, Inc.), Matinas BioPharma Holdings, Inc. Adgero Biopharmaceuticals
Holdings and Hydrofarm Holdings Group, Inc. Mr. Stern is a former director of InVivo Therapeutics Holdings Corp. (OTCQB:
NVIV), Organovo Holdings, Inc. (NYSE MKT: ONVO) and PROLOR Biotech Ltd., which was sold to Opko Health, Inc. (NYSE: OPK)
for approximately $600 million in 2013. Mr. Stern holds a Bachelor of Arts degree with honors from The University of South
Florida in Tampa. We believe Mr. Stern is qualified to serve on our Board of Directors because of his experience in the capital
markets, his experiences serving as a director of public and private companies and his experience with life sciences companies.
62
Prof.
Richard B. Stone has been a director of our company since July 7, 2014. For more than twenty-five years, Prof.
Stone has been active participant in early stage business enterprises as a director or investor, including technology and biotechnology
companies. He currently serves on the board of directors of multiple technology companies, including Powermat, Espro-Accoustiguide
Group, Wellsense Technologies, NanoX Imaging Plc, Illumigyn Ltd, Cardiologic Innovations, Quality Inflow Ltd., and Check-Cap.
Since 1974, Prof. Stone has been a member of the faculty of Columbia Law School, where he held the Wilbur Friedman Chair in Tax
Law for twenty years. In addition to basic and advanced tax courses, Prof. Stone has taught in the areas of contracts, business
planning and real estate planning. Among other not-for-profit organizations he has been associated with, from 2011 to 2013, Prof.
Stone served as Chairman of the Conference of Presidents of Major American Jewish Organizations. Prof. Stone began his career
in 1967 in private practice in Washington, D.C, and thereafter joined the staff of the Solicitor General of the United States,
where from 1969 to 1973 he was Assistant to the Solicitor General. He is a graduate of Harvard College and Harvard Law School.
We believe Prof. Stone is qualified to serve on our Board of Directors because of his legal expertise and experience with life
sciences companies.
Scientific Advisory Board
We have established
a Scientific Advisory Board (SAB), whose members will be available to us to advise on our scientific and business plans and operational
strategies. Below is the biography of our current SAB member.
Eric
Miledge - Chairman of our Advisory Board , has worked in the healthcare field for his entire career, with a focus
on pharmaceuticals and medical devices. With more than 34 years at Johnson & Johnson (JNJ) in roles of increasing responsibility,
he built a vast network of relationships across the healthcare landscape. As president of Ortho McNeil Pharmaceutical, Eric led
in the licensing and successful introduction of levofloxacin (antibiotic), tramadol (analgesic) and the commercialization of Topamax
(anticonvulsant), building a multi-billion dollar U.S. pharmaceutical business. Eric also served as Company Group Chairman for
Johnson & Johnson Healthcare Systems which oversaw the negotiation and management of JNJ’s medical device, diagnostic
and pharmaceutical U.S. hospital contracts. Eric also served as Company Group Chairman of LifeScan Inc., the blood glucose division
of JNJ. Under Eric’s leadership, LifeScan Global Diabetes franchise experienced rapid organic and inorganic growth, including
the acquisition of Inverness Medical Technology’s Diabetes Care Products business. His leadership helped transform LifeScan
into a global organization with thousands of employees and billions in annual revenues. After retiring from JNJ, Eric served as
chairman for a number of medical device startup companies including chairman of Nfocus Neuromedical, Symetis SA and CeQur SA. Eric
also served as an operating partner for Geneva based Endeavour Vision Growth, a medical device growth fund.
Dr. David
Horwitz – Advisory Board M ember , is presently a Senior Consultant with Numerof & Associates and also
President of DLH Biomedical Consulting. He previously served as the Global Chief Medical Officer of the Johnson and Johnson Diabetes
Institute. Prior to this, he was Vice President, Worldwide Clinical Affairs & Evidence-Based Medicine at LifeScan, Inc.,
a Johnson & Johnson company. During his time at LifeScan, Dr. Horwitz had, at various times, been responsible for
Clinical Research, Medical Affairs, Regulatory Affairs, and Advocacy & Professional Affairs. Dr. Horwitz has previously
held faculty positions in the medical schools at the University of Chicago and the University of Illinois, where he was a clinical
professor of medicine. He is a Board-Certified internist and endocrinologist, and a Fellow of the American College of Physicians.
He has published over 100 articles in scientific and clinical journals, primarily in the areas of diabetes and metabolism. He has
completed a term as an industry representative on the Clinical Chemistry and Toxicology advisory panel of the U.S. Food and Drug
Administration. He is presently serving as a volunteer physician for a charity-supported clinic.
Dr. Marilyn
Ritholz –Advisory Board Member , is a Senior Psychologist at the Joslin Diabetes Center and treats both adults
and adolescents with diabetes. In addition, she is on the faculty at Beth Israel Deaconess
Medical Center (BIDMC) and is an Assistant Professor of Psychology at Harvard Medical School . Dr. Ritholz is an experienced
qualitative researcher. In collaboration with colleagues, she has explored qualitative aspects of healthcare regarding the patient-provider
relationship, provider communication about diabetes complications, and psychosocial factors associated with diabetes technology,
including continuous glucose monitoring. She has published more than 20 qualitative articles on these topics.
63
Board Composition
Our business is managed
under the direction of our Board of Directors. Our Board of Directors currently consists of seven members.
Pursuant to the terms
of the placement agency agreement between us and Aegis Capital Corp., dated October 22, 2019, we granted Aegis the right to
nominate an individual to the Board of Directors for a period of three years, which resulted in the appointment of Mr. Stern
to serve on our Board of Directors.
There are no arrangements
between our directors and any other person pursuant to which our directors were nominated or elected for their positions.
Board Committees
Our Board of Directors
has three standing committees: An Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee.
Audit Committee
Our Audit Committee
is comprised of Messrs. Shaked, McGrath and Stone, each of whom is an independent director. Mr. McGrath is the Chairman
of the Audit Committee. Mr. McGrath is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of
Regulation S-K.
Our Audit Committee
oversees our corporate accounting, financial reporting practices and the audits of financial statements. For this purpose,
the Audit Committee has a charter (which is reviewed annually) and performs several functions. The Audit Committee charter
is available on our website at www.mydario.com under the Investors / Governance section. The Audit Committee:
•
evaluates the independence and performance of, and assesses the qualifications of, our independent auditor and engage such independent auditor;
•
approves the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services and approve in advance any non-audit service to be provided by our independent auditor;
•
monitors the independence of our independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
•
reviews the financial statements to be included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and reviews with management and our independent auditor the results of the annual audit and reviews of our quarterly financial statements; and
•
oversees all aspects our systems of internal accounting control and corporate governance functions on behalf of the Board of Directors.
Compensation Committee
Our Compensation Committee
is comprised of Messrs. Shaked, McGrath and Ms. Karah. Mr. McGrath is the Chairman of the Compensation Committee.
The Compensation Committee
reviews or recommends the compensation arrangements for our management and employees and also assists our Board of Directors in
reviewing and approving matters such as company benefit and insurance plans, including monitoring the performance thereof. The
Compensation Committee has a charter (which is reviewed annually) and performs several functions. The Compensation Committee charter
is available on our website at www.mydario.com under the Investors / Governance section.
64
The Compensation Committee
has the authority to directly engage, at our expense, any compensation consultants or other advisers as it deems necessary to
carry out its responsibilities in determining the amount and form of employee, executive and director compensation.
Nominating and Corporate Governance Committee
Our Nominating and
Corporate Governance Committee is currently comprised of Prof. Stone and Mr. Shaked. Prof. Stone is the Chairman of the Nominating
and Corporate Governance Committee.
The Nominating and
Corporate Governance Committee is charged with the responsibility of reviewing our corporate governance policies and with proposing
potential director nominees to the Board of Directors for consideration. This committee also has the authority to oversee the hiring
of potential executive positions in our company. The Nominating and Corporate Governance Committee operates under a written charter,
which will be reviewed and evaluated at least annually.
Director Independence
Our Board of Directors
has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on
this review, our Board of Directors has determined that Prof. Stone, Messrs. Shaked, Matheis and McGrath, and Ms. Karah
are “independent directors” as defined in the Nasdaq Listing Rules and Rule 10A-3 promulgated under the Exchange
Act.
Code of Ethics
On March 5, 2013,
our Board of Directors adopted a Code of Business Conduct and Ethics and Insider Trading Policy. Our Code of Business Conduct and
Ethics is available on our website at www.mydario.com under the Investors/Governance section. The information on our website
is not incorporated by reference into this Report. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K
regarding amendment to, or waiver from, a provision of our Code of Ethics by posting such information on the website address specified
above.
Limitation of Directors Liability and
Indemnification
The Delaware General
Corporation Law authorizes corporations to limit or eliminate, subject to certain conditions, the personal liability of directors
to corporations and their stockholders for monetary damages for breach of their fiduciary duties. Our certificate of incorporation
limits the liability of our directors to the fullest extent permitted by Delaware law.
We have director and
officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us,
including matters arising under the Securities Act. Our certificate of incorporation and bylaws also provide that we will indemnify
our directors and officers who, by reason of the fact that he or she is one of our officers or directors, is involved in a legal
proceeding of any nature.
We have entered into
indemnification agreements with our directors and officers pursuant to which we agreed to indemnify each director and officer for
any liability he or she may incur by reason of the fact that he or she serves as our director or officer, to the maximum extent
permitted by law.
There is no pending
litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification will be required
or permitted. We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.
Item 11.
Executive Compensation
The following table summarizes compensation
of our named executive officers, as of December 31, 2020 and 2019.
65
Summary Compensation Table
Option
Non-equity
Non-
qualified
All Other
Name and
Awards
incentive plan
incentive plan
Compensation
Total
Principal Position
Year
Salary ($)*
Bonus ($)
Stock Awards
($)**
compensation
compensation
($)
($)
Erez
Raphael
(Chief Executive Officer)
2020
2019
$
$
284,062
249,094
(1)
(1)
$
$
251,313
361,164
(2 )
(2)
$
$
2,484,049
660,819
(3)
(3)
$
$
$
$
130,482
111,120
(4)
(4)
$
$
3,149,906
1,382,197
Zvi
Ben David
(Chief Financial Officer)
2020
2019
$
$
137,202
133,172
(5)
(5)
$
$
559,112
120,294
(6)
(6)
$
$
172,221
(7)
$
$
33,446
42,128
(8)
(8)
$
$
901,981
295,594
Dror
Bacher
(Chief Operating Officer)
2020
2019
$
$
181,917
153,759
(9)
(9)
$
$
28,882
(10 )
$
$
463,874
67,929
(11)
(11)
$
$
177,401
(12)
$
$
66,712
66,796
(13)
(13)
$
$
889,905
317,366
Richard
Anderson
(President and
General Manager of North America)
2020
$ 308,098 (14)
100,000
(15 )
$ 163,433 (16)
$ 479,160 (17)
$ 16,328 (18)
$ 1,067,019
*
Certain compensation paid by the company is denominated in New Israeli Shekel (or the NIS). Such compensation is calculated for purposes of this table based on the annual average currency exchange for such period.
**
Amount shown does not reflect dollar amount actually received. Instead, this amount reflects the aggregate grant date fair value of each stock option granted in the fiscal years ended December 31, 2020 and December 31, 2019, computed in accordance with the provisions of ASC 718 “Compensation-Stock Compensation,” or ASC 718. Assumptions used in accordance with ASC 718 are included in Note 9 to our consolidated financial statements included in this Annual Report.
(1)
In accordance with his second amendment to the employment agreement with our company effective August 11, 2013, Mr. Raphael was entitled to a monthly salary of NIS 44,000, commencing April 1, 2016, his monthly salary was increased to NIS 80,000 (approximately $24,691 per month). On June 1, 2018, his monthly salary was increased to NIS 134,167 (approximately $41,410). During 2019 and 2020, Mr. Raphael agreed to a waiver of 45% and 36.4% of his cash salary according to our salary program (see further details in “Employment and Related Agreements” below).
(2)
On June 2019, Mr. Raphael was paid a bonus of $110,006 for his performance during 2018 and on December 2019 Mr. Raphael was paid a bonus of $251,157 for the successful completion of the December 2019 Private Placement. On September 2020, Mr. Raphael was paid a bonus of $251,313 for the successful completion of the July 2020 private placement.
(3) On January 27, 2019, Mr. Raphael was granted
3,098 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period from January to
March 2019. On July 9, 2019, Mr. Raphael was granted 10,749 shares of our common stock under our 2012 Equity Incentive
plan against waiver of cash salary for the period from April to September 2019. On December 23, 2019, Mr. Raphael
was granted 15,454 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period
from October to December 2019. On April 29, 2019, Mr. Raphael was granted 20,379 shares of our common stock
under our 2012 Equity Incentive Plan, and 4,472 shares of our common stock under our 2012 Equity Incentive Plan, as a bonus, in
lieu of cash, for the 2018 achievements of the Company.
66
On January 28, 2020, Mr. Raphael was granted 15,602 shares of our common stock
under our 2012 Equity Incentive plan against waiver of cash salary for the period from January to March 2020. On
April 3, 2020, Mr. Raphael was granted 15,146 shares of our common stock under our 2012 Equity Incentive plan
against waiver of cash salary for the period from April to June 2020. On July 20, 2020, Mr. Raphael was
granted 15,593 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period
from July to September 2020. On October 16, 2020, Mr. Raphael was granted 2,127 shares of our common
stock under our 2012 Equity Incentive plan against waiver of cash salary for the period from October to
December 2020, and 5,060 shares of our common stock under our 2012 Equity Incentive plan against an additional cash
waiver during the period April – July 2020. On February 12, 2020, Mr. Raphael was granted 351,546
shares of our common stock under our 2012 Equity Incentive Plan.
(4) In
addition to his salary, Mr. Raphael is entitled to receive a leased automobile and mobile phone during his employment as
well as reimbursements for expenses accrued. These benefits, as well as other social benefits under Israeli law, are included
as part of his “All Other Compensation.”
(5) In
accordance with his employment agreement with our company effective January 8, 2015, Mr. Ben David was initially entitled
to a monthly salary and additional compensation (excluding social benefits under applicable Israeli law) of NIS 31,200 (approximately
$9,630) for providing eighty percent of his working time to our company. Beginning on March 1, 2015, Mr. Ben David began
working for us on a full-time basis pursuant to the terms of his employment agreement at which point Mr. Ben David’s
salary was increased to NIS 39,000 (approximately $12,037 per month, commencing April 1, 2016, his monthly salary was updated
to NIS 60,000 (approximately $18,519), and commencing June 1, 2018, his monthly salary was updated to NIS 67,200 (approximately
$20,741). During 2019 and 2020, Mr. Ben David agreed to a waiver of 42% of his cash salary according to our salary program
(see further details in “Employment and Related Agreements” below).
(6) On January 27, 2019, Mr. Ben David was granted
1,447 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period from January to
March 2019. On July 9, 2019, Mr. Ben David was granted 5,021 shares of our common stock under our 2012 Equity Incentive
plan against waiver of cash salary for the period from April to September 2019. On December 23, 2019 Mr. Ben
David was granted 7,218 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the
period from October to December 2019. On April 29, 2019, Mr. Ben David was granted 4,889 shares of our common
stock under our 2012 Equity Incentive Plan, and 2,074 shares of our common stock under our 2012 Equity Incentive Plan, as a bonus,
in lieu of cash, for the 2018 achievements of the Company.
On January 28, 2020, Mr. Ben David was granted 7,287 shares of our common stock
under our 2012 Equity Incentive plan against waiver of cash salary for the period from January to March 2020. On
April 3, 2020, Mr. Ben David was granted 7,074 shares of our common stock under our 2012 Equity Incentive plan
against waiver of cash salary for the period from April to June 2020. On July 20, 2020, Mr. Ben David was
granted 7,283 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period
from July to September 2020. On October 16, 2020 Mr. Ben David was granted 4,235 shares of our common
stock under our 2012 Equity Incentive plan against waiver of cash salary for the period from October to
December 2020, and 2,006 shares of our common stock under our 2012 Equity Incentive plan against an additional cash
waiver during the period of April through July 2020. On February 12, 2020, Mr. Ben David was granted
45,000 shares of our common stock under our 2012 Equity Incentive Plan. On September 9, 2020, Mr. Ben David was
granted 10,000 shares of our common stock under our 2012 Equity Incentive Plan.
(7) On
February 12, 2020, Mr. Ben David was granted 27,827 options to purchase shares of our common stock under our 2012 Equity
Incentive Plan, at an exercise price of $7.736 per share.
(8) In
addition to his salary, Mr. Ben David is entitled to receive a mobile phone during his employment as well as reimbursements
for expenses accrued. These benefits, as well as other social benefits under Israeli law, are included as part of his “All
Other Compensation.”
(9)
In accordance with his second amendment to the employment agreement with our company effective April 2016, Mr. Bacher was entitled to a monthly salary of NIS 48,000 (approximately $14,815 per month), commencing July 1, 2017, Mr. Dror was appointed as our Chief Operating Officer and his monthly salary was increased to NIS 55,000 (approximately $16,975 per month) and commencing June 1, 2018 his monthly salary was increased to NIS 61,490 (approximately $18,978 per month). During 2019 and 2020, Mr. Bacher agreed to a waiver of 26% and 10.6% of his cash salary respectively, according to our salary program (see further details in “Employment and Related Agreements” below).
67
(10) In
June 2019, Mr. Bacher was paid a bonus of $28,882 for his performance during 2018.
(11) On January 27, 2019, Mr. Bacher was granted
918 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period from January to
March 2019. On July 9, 2019, Mr. Bacher was granted 3,186 shares of our common stock under our 2012 Equity Incentive
plan against waiver of cash salary for the period from April to September 2019. On December 23, 2019, Mr. Bacher
was granted 2,633 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period
from October to December 2019. On April 29, 2019, Mr. Bacher was granted 4,102 shares of our common stock
under our 2012 Equity Incentive Plan, and 587 shares of our common stock under our 2012 Equity Incentive Plan, as a bonus, in
lieu of cash, for the 2018 achievements of the Company.
On January 28, 2020, Mr. Bacher was granted 1,677 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period from January to March 2020. On April 3, 2020, Mr. Bacher was granted 1,628 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period from April to June 2020. On July 20, 2020, Mr. Bacher was granted 1,676 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period from July to September 2020. On October 16, 2020, Mr. Bacher was granted 974 shares of our common stock under our 2012 Equity Incentive plan against waiver of cash salary for the period from October to December 2020, and 3,772 shares of our common stock under our 2012 Equity Incentive plan against an additional cash waiver during the period from April through July 2020. On February 12, 2020, Mr. Bacher was granted 45,000 shares of our common stock under our 2012 Equity Incentive Plan. On September 9, 2020, Mr. Bacher was granted 10,000 shares of our common stock under our 2012 Equity Incentive Plan.
(12) On
February 12, 2020, Mr. Bacher was granted 28,664 options to purchase shares of our common stock under our 2012 Equity Incentive
Plan, at an exercise price of $7.736 per share.
(13) In
addition to his salary, Mr. Bacher is entitled to receive a leased automobile and mobile phone during his employment as well as
reimbursements for expenses accrued. These benefits, as well as other social benefits under Israeli law, are included as part
of his “All Other Compensation.”
(14) In
accordance with his employment agreement, effective in January 2020, Mr. Anderson was entitled to a monthly salary of
$27,916.67.
(15) On September 2020, Mr. Anderson was paid a
bonus of $100,000 for the successful completion of the July 2020 private placement.
(16)
On October 16, 2020, Mr. Anderson was granted 5,182 shares of our common stock under our 2012 Equity Incentive plan against a cash salary waiver during the period from April through July 2020. On September 9, 2020, Mr. Anderson was granted 10,000 shares of our common stock under our 2012 Equity Incentive Plan.
(17) On
January 30, 2020, Mr. Anderson was granted 90,000 options to purchase shares of our common stock as an inducement grant
pursuant to Nasdaq Listing Rule 5635 (c)(4), at an exercise price of $8.41 per share.
(18) In
addition to his salary, Mr. Anderson is entitled to participate in any and other benefit plans and programs that the Company
may offer to its employees from time to time according to the terms of such plans and the Company’s practices and policies
as well as reimbursements for expenses accrued. These benefits are included as part of his “All Other Compensation.”
All compensation awarded
to our executive officers was independently reviewed by our Compensation Committee.
68
Employment and Related Agreements
Except as set forth
below, we currently have no other written employment agreements with any of our officers and directors. The following is a description
of our current executive employment agreements:
Erez
Raphael , Chief Executive Officer and a Member of the Board of Directors – On August 30, 2013, LabStyle
Innovation Ltd., our Israeli subsidiary, entered into an amendment to a Personal Employment Agreement with Mr. Raphael in
connection with his August 2013 appointment as our President and Chief Executive Officer. Pursuant to the terms of his employment
agreement as amended, Mr. Raphael is entitled to a monthly salary of NIS 134,167 (approximately $37,730 per month). During
2018 and 2019, Mr. Raphael agreed to a waiver of 45% of his cash salary according to our salary program pursuant to which
Mr. Raphael received compensation shares of restricted common stock as consideration for cash salary waived.
On July 25, 2017,
we, through our Israeli subsidiary, LabStyle Innovation Ltd., executed an Amended and Restated Employment Agreement with Mr. Raphael.
Pursuant to the agreement, Mr. Raphael kept his monthly salary and shall be eligible for an annual bonus equal to up to 60%
of his annual base salary. Mr. Raphael’s employment agreement expires on December 31, 2020. In the event Mr. Raphael’s
employment agreement is terminated by us at will, by Mr. Raphael for good reason as provided thereby, or in conjunction with
a change of control, Mr. Raphael shall be entitled to receive 24 months base salary and severance payment pursuant to applicable
Israeli severance law, provided, however, that in the event such termination occurs during the final year of the term, or within
the last 6 months of a renewal period of the term, Mr. Raphael shall be entitled to receive 12 months base salary and severance
payment pursuant to applicable Israeli severance law. In the event the employment agreement is terminated by us for cause, Mr. Raphael
will only be entitled to a severance pay under applicable Israeli severance law. Mr. Raphael’s employment agreement
also includes a one-year non-competition and non-solicitation provision, certain confidentiality covenants and assignment of any
of his company-related inventions. Under the terms of the agreement, Mr. Raphael is entitled to certain expense reimbursements
and other standard benefits, including vacation, sick leave, contributions to a manager’s insurance policy and study fund
and car and mobile phone allowances. On February 12, 2020, we extended the term of Mr. Raphael’s employment to
expire on December 31, 2022.
On January 27,
2019, the Compensation Committee of our Board of Directors approved the issuance to Mr. Raphael of 3,098 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $61,969 in salary otherwise payable
to Mr. Raphael from January to March 2019.
On July 9, 2019,
the Compensation Committee of our Board of Directors approved the issuance to Mr. Raphael of 10,749 shares of our common stock
under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $128,972 of salary otherwise payable to
Mr. Raphael from April to September 2019.
On December 23,
2019, the Compensation Committee of our Board of Directors approved the issuance to Mr. Raphael of 15,454 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $66,610 of salary otherwise payable
to Mr. Raphael from October to December 2019.
On January 28,
2020, the Compensation Committee of our Board of Directors approved the issuance to Mr. Raphael of 15,602 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $67,247 of salary otherwise payable
to Mr. Raphael from January to March 2020.
On April 3, 2020,
the Compensation Committee of our Board of Directors approved the issuance to Mr. Raphael of 15,146 shares of our common stock
under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $65,280 of salary otherwise payable to Mr. Raphael
from April to June 2020.
On July 20, 2020,
the Compensation Committee of our Board of Directors approved the issuance to Mr. Raphael of 15,593 shares of our common stock
under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $67,208 of salary otherwise payable to Mr. Raphael
from July to September 2020.
On October 16,
2020, the Compensation Committee of our Board of Directors approved the issuance to Mr. Raphael of 2,127 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $15,894 of salary otherwise payable
to Mr. Raphael from October to December 2020, and 5,060 shares of our common stock under our 2012 Equity Incentive
Plan. Such shares were issued in lieu of the waiver of $21,809 of salary otherwise payable to Mr. Raphael from April to
July 2020.
69
Zvi
Ben David , Chief Financial Officer, Treasurer and Secretary – On January 8, 2015, LabStyle Innovation
Ltd., our Israeli subsidiary, entered into a Personal Employment Agreement with Mr. Ben David. Pursuant to his employment
agreement, Mr. Ben David was initially entitled to a monthly salary and additional compensation (excluding social benefits
under applicable Israeli law) of NIS 31,200 (approximately $8,774) for providing eighty percent of his working time to our company.
Beginning on March 1, 2015, Mr. Ben David began working for us on a full-time basis pursuant to the terms of his employment
agreement at which point Mr. Ben David’s salary was increased to NIS 39,000 (approximately $10,967). Commencing April 1,
2016, Mr. Ben David’s Salary was updated to NIS 60,000 (approximately $16,873) per month and commencing June 1,
2018, his monthly salary was updated to NIS 67,200 (approximately $18,898). During 2018 and 2019, Mr. Ben David agreed to
a waiver of 39% and 42% respectively of his cash salary according to our salary program pursuant to which Mr. Ben David received
compensation shares of restricted common stock as consideration for cash salary waived.
Mr. Ben David's
employment agreement may be terminated by either party at will upon 90 days prior written notice or terminated by us for cause,
as defined under the employment agreement. In the event the employment agreement is terminated by us at will, Mr. Ben
David shall be entitled to receive 90 days of severance plus any required severance payment pursuant to applicable Israeli severance
law. In the event the employment agreement is terminated by us for cause, Mr. Ben David will only be entitled to a severance
pay under applicable Israeli severance law. The employment agreement also includes a twelve-month non-competition and non-solicitation
provision, certain confidentiality covenants and assignment of any of his company-related inventions to the company. Under the
terms of the employment agreement, Mr. Ben David is entitled to certain expense reimbursements and other standard benefits,
including vacation, sick leave, contributions to a manager’s insurance policy and study fund and mobile phone allowances.
On January 27,
2019, the Compensation Committee of our Board of Directors approved the issuance to Mr. Ben David of 1,447 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $28,944 of salary otherwise payable
to Mr. Ben David from January to March 2019.
On July 9, 2019,
the Compensation Committee of our Board of Directors approved the issuance to Mr. Ben David of 5,021 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $60,238 of salary otherwise payable
to Mr. Ben David from April to September 2019.
On December 23,
2019, the Compensation Committee of our Board of Directors approved the issuance to Mr. Ben David of 7,218 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $31,111 of salary otherwise payable
to Mr. Ben David from October to December 2019.
On January 28,
2020, the Compensation Committee of our Board of Directors approved the issuance to Mr. Ben David of 7,287 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $31,409 of salary otherwise payable
to Mr. Ben David from January to March 2020.
On April 3, 2020,
the Compensation Committee of our Board of Directors approved the issuance to Mr. Ben David of 7,074 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $30,490 of salary otherwise payable
to Mr. Ben David from April to June 2020.
On July 20, 2020,
the Compensation Committee of our Board of Directors approved the issuance to Mr. Ben David of 7,283 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $31,391 of salary otherwise payable
to Mr. Ben David from July to September 2020.
On October 16,
2020, the Compensation Committee of our Board of Directors approved the issuance to Mr. Ben David of 4,235 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $31,638 of salary otherwise payable
to Mr. Ben David from October to December 2020, and 2,006 shares of our common stock under our 2012 Equity Incentive
Plan. Such shares were issued in lieu of the waiver of $8,645 of salary otherwise payable to Mr. Ben David from April to
July 2020.
70
Dror
Bacher, Chief Operating Officer – On August 30, 2013, LabStyle Innovation Ltd., our Israeli subsidiary, entered
into an employment agreement with Mr. Bacher, pursuant to which Mr. Bacher receives an annual base salary of NIS 55,000
(approximately $15,467), effective as of July 2017, and commencing June 1, 2018 his monthly salary was increased to NIS
61,490 (approximately $17,292 per month). Pursuant to Mr. Bacher’s existing personal employment agreement as amended,
either Mr. Bacher or we may terminate his employment agreement upon four months’ notice, provided, however, that in
the event of a termination for cause, Mr. Bacher’s employment may be terminated immediately. Mr. Bacher’s
employment agreement also includes a twelve (12) month non-competition and non-solicitation provision, certain confidentiality
covenants and assignment of any of his company-related inventions. Under the terms of Mr. Bacher’s employment agreement,
Mr. Bacher is entitled to certain expense reimbursements and other standard benefits, including vacation, sick leave, life,
and disability insurance and car and mobile phone allowances. In addition, in conjunction with his appointment as Chief Operating
Officer, we issued Mr. Bacher 500 shares of common stock, and 500 options that will vest in 12 equal quarterly installments
over a three-year period with an exercise price of $49.20 per share, all issued pursuant to the Registrant’s Amended and
Restated 2012 Equity Incentive Plan.
On January 27,
2019, the Compensation Committee of our Board of Directors approved the issuance to Mr. Bacher of 918 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $18,362 of salary otherwise payable
to Mr. Bacher from January to March 2019.
On July 9, 2019,
the Compensation Committee of our Board of Directors approved the issuance to Mr. Bacher of 3,186 shares of our common stock
under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $38,215 of salary otherwise payable to Mr. Bacher
from April to September 2019.
On December 23,
2019, the Compensation Committee of our Board of Directors approved the issuance to Mr. Bacher of 2,633 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $11,352 of salary otherwise payable
to Mr. Bacher from October to December 2019.
On January 28,
2020, the Compensation Committee of our Board of Directors approved the issuance to Mr. Bacher of 1,677 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $7,228 of salary otherwise payable
to Mr. Bacher from January to March 2020.
On April 3, 2020,
the Compensation Committee of our Board of Directors approved the issuance to Mr. Bacher of 1,628 shares of our common stock
under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $7,017 of salary otherwise payable to Mr. Bacher
from April to June 2020.
On July 20, 2020,
the Compensation Committee of our Board of Directors approved the issuance to Mr. Bacher of 1,676 shares of our common stock
under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $7,224 of salary otherwise payable to Mr. Bacher
from July to September 2020.
On October 16,
2020, the Compensation Committee of our Board of Directors approved the issuance to Mr. Bacher of 974 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $7,281 of salary otherwise payable
to Mr. Bacher from October to December 2020, and 3,772 shares of our common stock under our 2012 Equity Incentive
Plan. Such shares were issued in lieu of the waiver of $16,256 of salary otherwise payable to Mr. Bacher from April to
July 2020.
Richard
Anderson, President and General Manager of North America – On January 7,
2020, we appointed Mr. Anderson as our President and General Manager of North America. In connection with Mr. Anderson’s
appointment, the Company agreed to pay Mr. Anderson an annual base salary of $335,000. Mr. Anderson shall also be subject
to a six-month non-competition and one-year non-solicitation provision, certain confidentiality covenants and assignment of any
of his company-related inventions. Mr. Anderson will also be entitled to certain expense reimbursements and other standard
benefits, including vacation and sick leave. In addition, Mr. Anderson will be entitled to receive an annual incentive bonus
of up to $250,000, subject to certain milestones and performance targets. In addition, and in conjunction with his appointment
as President and General Manager of North America, the Company agreed to issue Mr. Anderson a stock option to purchase up
to 90,000 shares of common stock at an exercise price of $8.41 per share, subject to vesting. Mr. Anderson was also issued
a stock option to purchase up to 90,000 shares of common stock at an exercise price of $8.41 per share, subject to vesting and
the achievement of certain business revenue targets. In that regard, Mr. Anderson’s option will vest as follows: (i) 22,500
shares shall vest following fiscal year 2020 if our business-to-business revenues reach or exceed $6 million in the aggregate,
or a pro-rated amount equal to the percentage achievement of such target, assuming the Company’s GAAP revenues in 2020 will
reach at least $11 million in the aggregate; (ii) 22,500 shares shall vest following fiscal year 2021 if our business-to-business
revenues reach or exceed $15 million in the aggregate, or a pro-rated amount equal to the percentage achievement of such target,
assuming the Company’s GAAP revenues in 2021 will reach at least $19.5 million in the aggregate; (iii) 22,500 shares
shall vest following fiscal year 2022 if our business-to-business revenues reach or exceed $40 million in the aggregate, or a pro-rated
amount equal to the percentage achievement of such target, assuming the Company’s GAAP revenues in 2022 will reach at least
$38 million in the aggregate; and (iv) 22,500 shares shall vest following fiscal year 2023 if our business-to-business revenues
reach or exceed $80 million in the aggregate, or a pro-rated amount equal to the percentage achievement of such target, assuming
the Company’s GAAP revenues in 2023 will reach at least $62 million in the aggregate.
71
On October 16,
2020, the Compensation Committee of our Board of Directors approved the issuance to Mr. Anderson of 5,182 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of the waiver of $23,333 of salary otherwise payable
to Mr. Anderson from April to July 2020.
Oded
Cohen, General Manager of MSK – Effective February 1, 2021, Upright entered into an employment
agreement with Mr. Cohen, pursuant to which Mr. Cohen will earn a monthly salary of NIS 63,000 and is eligible for
an annual bonus equal to up to four times his monthly salary. The employment agreement is an at-will employment arrangement,
with a four months’ notice period, unless it is terminated for cause. In addition, Mr. Cohen will be entitled to
severance payment pursuant to applicable Israeli severance law. In the event the employment agreement is terminated by us for
cause, Mr. Cohen will only be entitled to a severance pay under applicable Israeli severance law. Mr. Cohen’s
employment agreement also includes a one-year non-competition and non-solicitation provision, certain confidentiality
covenants and assignment of any of his company-related inventions. Under the terms of the employment agreement,
Mr. Cohen is entitled to certain expense reimbursements and other standard benefits, including vacation, sick leave,
contributions to a manager’s insurance policy and study fund and car and mobile phone allowances. In addition,
Mr. Cohen will be entitled to receive, subject to the approval of the Board of Directors, a restricted stock unit award
to receive, subject to vesting, up to 73,660 shares of the Company’s common stock and, subject to the meeting of
certain milestones an additional restricted stock unit award to receive up to 73,660 shares of the Company’s common
stock on March 1, 2022, and subject to the meeting of certain milestones an additional restricted stock unit award to
receive up to 73,660 shares of the Company’s common stock on March 1, 2023. All the restricted stock units will be
subject to a three-year vesting period.
72
Outstanding Equity Awards at December 31,
2020
Name
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of
securities
underlying
unexercised
options (#)
unexercisable
Equity
incentive
plan awards:
Number of
securities
underlying
unexercised
unearned
options (#)
Option
exercise
price ($)
Option
expiration
date
Erez Raphael
101
-
-
$ 2,430
March 14, 2023
(Chief Executive Officer)
12
-
-
$ 5,400
June 5, 2023
167
-
-
$ 4,806
August 28, 2023
45
-
-
$ 3,330
January 6, 2024
234
-
-
$ 1,764
July 6, 2024
8,446
-
-
$ 115.20
September 3, 2021
7,159
-
-
$ 64.04
January 30, 2023
Zvi Ben David
2,154
-
-
$ 115.20
September 3, 2021
(Chief Financial Officer, Secretary and Treasurer)
1,592
-
-
$ 64.04
January 30, 2023
9,275
18,552 (1)
$ 7.736
February 12, 2026
Dror Bacher
67
-
-
$ 3,330
January 6, 2024
(Chief Operating Officer)
67
-
-
$ 1,764
July 6, 2024
1267
-
-
$ 115.20
September 3, 2021
480
-
-
$ 140.40
December 17, 2021
1,375
-
-
$ 64.04
January 30, 2023
500
-
-
$ 49.20
July 25, 2023
9,554
19,110 (1)
$ 7.736
February 12, 2026
Richard Anderson
30,000
60,000
$ 8.41
January 30, 2026
(President and General Manager of North America)
Total Option Shares
72,495
97,662
-
$ -
-
(1)
Vests in 12 equal quarterly installments over a three-year period.
Non-Employee Director Remuneration Policy
In March 2013, our Board of Directors
adopted the following non-employee director remuneration policy:
Cash Awards
Our non-employee directors
(currently Messrs. Shaked, Matheis, McGrath, Prof. Stone and Ms. Karah) will receive the following cash payments for
each fiscal year: (i) $25,000 per year, to be paid quarterly in arrears and (ii) $16,000 for Board committee service,
to be paid quarterly in arrears.
Stock and Option Awards
On January 27,
2019, the Compensation Committee of our Board of Directors approved the issuance to each of Prof. Stone, Mr. Shaked, Mr. McGrath,
and Ms. Karah of 513 shares of our common stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of $10,250
in fees otherwise payable to each of Prof. Stone, Mr. Shaked, Mr. McGrath, and Ms. Karah for the period from October 1,
2018, to December 31, 2018. The Compensation Committee of our Board of Directors also approved the issuance to each of Mr. Yalon
Farhi, a former member of our Board of Directors, and Mr. Allen Kamer, a former member of our Board of Directors, of 313 shares
of our common stock under the 2012 Equity Incentive Plan. Such shares were issued in lieu of $6,250 in fees otherwise payable to
Mr. Farhi and Mr. Kamer for the period October 1, 2018, to December 31, 2018. In addition, the Compensation
Committee of our Board of Directors approved the issuance to Mr. Glen Moller, a former member of our Board of Directors, of
262 shares of our common stock under the 2012 Equity Incentive Plan. Such shares were issued in lieu of $5,231 in fees otherwise
payable to Mr. Moller for the period October 16, 2018, to December 31, 2018.
73
On April 29, 2019,
the Compensation Committee of our Board of Directors approved a grant of 1,475 options to Mr. Moller. These options have an
exercise price of $15.40 per share. One third of the options will become fully vested and exercisable on the first anniversary
elapsed from the grant date, and the balance will vest in eight equal quarterly installments following the first anniversary of
the grant date, subject to Mr. Moller’s continued membership on the Company’s Board of Directors. In January 2020
Mr. Moller resigned from the Board of Directors and his options were forfeited.
On April 29, 2019,
the Compensation Committee of our Board of Directors approved the following issuances under our 2012 Equity Incentive Plan: (i) 15,038
shares of our common stock to Mr. Shaked; (ii) 1,255 shares of our common stock to Ms. Karah; (iii) 753 shares
of our common stock to Mr. Farhi; (iv) 753 shares of our common stock to Mr. Kamer; (v) 862 shares of our common
stock to Prof. Stone; and (vi) 1,649 shares of our common stock to Mr. McGrath.
On July 9, 2019,
the Compensation Committee of our Board of Directors approved the issuance to each of Prof. Stone, Mr. Shaked, Mr. McGrath,
and Ms. Karah of 854 shares of our common stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of $10,250
in fees otherwise payable to each of Prof. Stone, Mr. Shaked, Mr. McGrath, and Ms. Karah for the period from January 1,
2019, to March 31, 2019. The Compensation Committee of our Board of Directors also approved the issuance to each of Prof.
Stone, Mr. Shaked, Mr. McGrath, and Ms. Karah of 854 shares of our common stock under our 2012 Equity Incentive
Plan. Such shares were issued in lieu of $10,250 in fees otherwise payable to each of Prof. Stone, Mr. Shaked, Mr. McGrath,
and Ms. Karah for the period from April 1, 2019, to June 30, 2019. The Compensation Committee of our Board of Directors
also approved the issuance to each of Mr. Farhi, Mr. Kamer and Mr. Moller of 521 shares of our common stock under
the 2012 Equity Incentive Plan. Such shares were issued in lieu of $6,250 in fees otherwise payable to each of Mr. Farhi,
Mr. Kamer and Mr. Moller for the period January 1, 2019, to March 31, 2019. In addition, the Compensation Committee
of our Board of Directors approved the issuance to each of Mr. Farhi, Mr. Kamer and Mr. Moller of 521 shares of
our common stock under the 2012 Equity Incentive Plan. Such shares were issued in lieu of $6,250 in fees otherwise payable to each
of Mr. Farhi, Mr. Kamer and Mr. Moller for the period April 1, 2019, to June 30, 2019.
On December 23,
2019, the Compensation Committee of our Board of Directors approved the issuance to each of Prof. Stone, Mr. Shaked, Mr. McGrath,
and Ms. Karah of 2,378 shares of our common stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of
$10,250 in fees otherwise payable to each of Prof. Stone, Mr. Shaked, Mr. McGrath, and Ms. Karah for the period
from July 1, 2019, to September 30, 2019. The Compensation Committee of our Board of Directors also approved the issuance
to each of Mr. Farhi and Mr. Kamer of 1,450 shares of our common stock under the 2012 Equity Incentive Plan. Such shares
were issued in lieu of $6,250 in fees otherwise payable to Mr. Farhi and Mr. Kamer for the period July 1, 2019,
to September 30, 2019.
On January 28,
2020, the Compensation Committee of our Board of Directors approved the issuance to each of Prof. Stone, Mr. Shaked, Mr. McGrath,
and Ms. Karah of 2,378 shares of our common stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of
$10,250 in fees otherwise payable to each of Prof. Stone, Mr. Shaked, Mr. McGrath, and Ms. Karah for the period
from October 1, 2019, to December 31, 2019. The Compensation Committee of our Board of Directors also approved the issuance
to each of Mr. Farhi, Mr. Moller and Mr. Kamer of 1,450 shares of our common stock under the 2012 Equity Incentive
Plan. Such shares were issued in lieu of $6,250 in fees otherwise payable to each of Mr. Farhi, Mr. Moller and Mr. Kamer
for the period October 1, 2019, to December 31, 2019. In addition, the Compensation Committee of our Board of Directors
approved the issuance to Mr. Moller 396 shares of our common stock under the 2012 Equity Incentive Plan. Such shares were
issued to Mr. Moller upon his resignation from the Board of Directors.
On February 12,
2020, the Compensation Committee of our Board of Directors approved the following issuances, each was done under our 2012 Equity
Incentive Plan: (i) 60,000 shares of our common stock to Mr. Shaked; (ii) 30,000 shares of our common stock to Ms. Karah;
(iii) 7,000 shares of our common stock to Mr. Farhi; (iv) 7,000 shares of our common stock to Mr. Kamer; (v) 13,000
shares of our common stock to Prof. Stone; and (vi) 50,000 shares of our common stock to Mr. McGrath.
74
On April 3, 2020,
the Compensation Committee of our Board of Directors approved the issuance to each of Prof. Stone, Mr. Shaked, Mr. McGrath,
and Ms. Karah of 2,378 shares of our common stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of
$10,250 in fees otherwise payable to each of Prof. Stone, Mr. Shaked, Mr. McGrath, and Ms. Karah for the period
from January 1, 2020, to March 31, 2020. The Compensation Committee of our Board of Directors also approved the issuance
to each of Mr. Farhi and Mr. Kamer of 1,450 shares of our common stock under the 2012 Equity Incentive Plan. Such shares
were issued in lieu of $6,250 in fees otherwise payable to Mr. Farhi and Mr. Kamer for the period January 1, 2020,
to March 31, 2020. In addition, the Compensation Committee of our Board of Directors approved the issuance to Mr. Stern
493 shares of our common stock under the 2012 Equity Incentive Plan. Such shares were issued in lieu of $2,129 in fees otherwise
payable to Mr. Stern for March 2020. In addition, the Compensation Committee of our Board of Directors approved the issuance
to Mr. Farhi 4,638 shares of our common stock under the 2012 Equity Incentive Plan. Such shares were issued to Mr. Farhi
upon his voluntary resignation from the Board of Directors in April 2020.
On July 20, 2020,
the Compensation Committee of our Board of Directors approved the issuance to each of Prof. Stone, Mr. Shaked, Mr. McGrath,
and Ms. Karah of 2,378 shares of our common stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of
$10,250 in fees otherwise payable to each of Prof. Stone, Mr. Shaked, Mr. McGrath, and Ms. Karah for the period
from April 1, 2020, to June 30, 2020. The Compensation Committee of our Board of Directors also approved the issuance
to each of Mr. Stern and Mr. Kamer of 1,450 shares of our common stock under the 2012 Equity Incentive Plan. Such shares
were issued in lieu of $6,250 in fees otherwise payable to Mr. Farhi and Mr. Kamer for the period April 1, 2020,
to June 30, 2020.
On August 18,
2020, the Compensation Committee of our Board of Directors approved the issuance to Mr. Matheis 15,000 shares of our common
stock under our 2012 Equity Incentive Plan, and the grant of 20,000 options. These options have an exercise price of $18.68 per
share. One third of the options will become fully vested and exercisable on the first anniversary of the grant date, and the balance
will vest in eight equal quarterly installments following the first anniversary of the grant date, subject to Mr. Matheis’s
continued membership on the Company’s Board of Directors.
On October 9,
2020, the Compensation Committee of our Board of Directors approved the issuance to Mr. Kamer of 10,000 shares of our common
stock under the 2012 Equity Incentive Plan. Such shares were issued to Mr. Kamer upon his withdrawal from the Board of Directors
in October 2020.
On October 16,
2020, the Compensation Committee of our Board of Directors approved the issuance to Ms. Karah of 1,372 shares of our common
stock under our 2012 Equity Incentive Plan. Such shares were issued in lieu of $10,250 in fees otherwise payable to Ms. Karah
for the period from July 1, 2020, to September 30, 2020.
On April 3, 2020,
the Audit and Compensation Committees of the Board of Directors approved the monthly grant of 1,500 shares of the Company’s
Common Stock, to be granted monthly over a 12 month period pursuant to a certain consulting agreement with said service providers.
During the fiscal year ended December 31, 2020, a total of 5,691 shares of the Company’s common stock were issued under
the said approval to Mr. Adam Stern, a member of our Board.
Compensation Committee Review
The Compensation Committee
shall, if it deems necessary or prudent in its discretion, reevaluate and approve in January of each such year (or in any
event prior to the first board meeting of such fiscal year) the cash and equity awards (amount and manner or method of payment)
to be made to non-employee directors for such fiscal year. In making this determination, the Compensation Committee shall utilize
such market standard metrics as it deems appropriate, including, without limitation, an analysis of cash compensation paid to independent
directors of our peer group.
The Compensation Committee
shall also have the power and discretion to determine in the future whether non-employee directors should receive annual or other
grants of options to purchase shares of common stock or other equity incentive awards in such amounts and pursuant to such policies
as the Compensation Committee may determine utilizing such market standard metrics as it deems appropriate, including, without
limitation, an analysis of equity awards granted to independent directors of our peer group.
Participation of Employee Directors;
New Directors
Unless separately and
specifically approved by the Compensation Committee in its discretion, no employee director of our company shall be entitled to
receive any remuneration for service as a director (other than expense reimbursement as per prevailing policy).
75
New directors joining
our Board of Directors shall be entitled to a pro-rated portion (based on months to be served in the fiscal year in which they
join) of cash and stock option or other equity incentive awards (if applicable) for the applicable fiscal year at the time they
join the board.
Summary Director Compensation Table
The following table
summarizes the annual compensation paid to our non-employee directors for the fiscal year ended December 31, 2020:
Name and
Principal
Position
Year
Fees Paid
or
Earned in
Cash
($)
Stock
Awards
Option
Awards
($)*
Non-equity
incentive
plan
compensation
Non-
qualified
deferred
compensation
earnings
All other
compensation
($)
Total
($)
Dennis
McGrath
2020
$
20,500-
$
346,135
(1)
$
(2)
$
-
$
-
$
-
$
366,635
Prof.
Richard B. Stone
2020
$
20,500-
$
115,602
(3)
$
(4)
$
-
$
-
$
-
$
136,102
Dennis
Matheis
2020
$
12,500-
$
200,700
(5)
$
251,280
(6)
$
-
$
-
$
-
$
464,480
Hila
Karah
2020
$
10,250-
$
234,584
(7)
$
-
(8)
$
-
$
-
$
-
$
244,834
Allen
Kamer (19)
2020
$
6,250-
$
159,914
(9)
$
(10)
$
-
$
-
$
-
$
166,164
Yoav
Shaked
2020
$
20,500-
$
408,441
(11)
$
(12)
$
-
$
-
$
-
$
428,941
Adam
Stern
2020
$
12,500-
$
9,084
(13)
$
(14)
$
$
$
$
21,584
Yalon
Farhi (20)
2020
$
--
$
74,871
(15)
$
(16)
$
$
$
$
74,871
Yadin
Shemmer (21)
2020
$
37,500-
$
-
(17)
$
416,160
(18)
$
$
$
$
453,660
Glen
Moller (22)
2020
$
-
$
10,729-
$
$
$
$
$
10,729
*
Amount shown does
not reflect dollar amount actually received. Instead, this amount reflects the aggregate grant date fair value of each stock
option granted in the fiscal year ended December 31, 2020, computed in accordance with the provisions of ASC 718.
Assumptions used in accordance with ASC 718 are included in Note 9 to our consolidated financial statements included in this
Annual Report.
(1) 67,787 stock awards
are outstanding as of December 31, 2020.
(2) 1,659 option awards
are outstanding as of December 31, 2020.
(3) 29,999 stock awards
are outstanding as of December 31, 2020.
(4) 1,645 option awards
are outstanding as of December 31, 2020.
(5) 15,000 stock awards
are outstanding as of December 31, 2020.
(6) 20,000 option awards
are outstanding as of December 31, 2020.
(7) 48,604 stock awards
are outstanding as of December 31, 2020.
(8) 1,561 option awards
are outstanding as of December 31, 2020.
(9) 27,464 stock awards
are outstanding as of December 31, 2020.
76
(10) No option awards
are outstanding as of December 31, 2020.
(11) 87,287 stock awards
are outstanding as of December 31, 2020.
(12) No option awards
are outstanding as of December 31, 2020.
(13) 87,287
stock awards are outstanding as of December 31, 2020.
(14) No
option awards are outstanding as of December 31, 2020.
(15) No stock awards
are outstanding as of December 31, 2020.
(16) No option stock
awards are outstanding as of December 31, 2020.
(17) No stock awards
are outstanding as of December 31, 2020.
(18) 90,000 option
awards are outstanding as of December 31, 2020.
(19) Mr. Kamer was not
re-nominated to serve on the Board at the 2020 Annual Stockholder’s Meeting.
(20) On April 7,
2020, Mr. Farhi resigned from the Board.
(21) Mr. Shemmer
was not re-nominated to serve on the Board at the 2020 Annual Stockholder’s Meeting.
(22) On
January 22, 2020, Mr. Moller resigned from the Board.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table
sets forth information regarding the beneficial ownership of our common stock as of March 13, 2020 by:
·
each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock;
·
each of our named executive officers and directors; and
·
all our executive officers and directors as a group.
Beneficial ownership
is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities.
Except as otherwise indicated, each person or entity named in the table has sole voting and investment power with respect to all
shares of our capital shown as beneficially owned, subject to applicable community property laws.
In computing the number
and percentage of shares beneficially owned by a person, shares that may be acquired by such person within 60 days of the date
of this Annual Report are counted as outstanding, while these shares are not counted as outstanding for computing the percentage
ownership of any other person. Unless otherwise indicated, the address of each person listed below is c/o DarioHealth Corp., 142
W. 57th St., 8 th Floor, New York, New York 10019.
77
Percent of
Shares of
Common
Common
Stock
Beneficially
Beneficially
Name of Beneficial Owner
Stock Owned
Owned (1)
Officers and Directors
Erez Raphael (2)
619,238
4.1
%
Zvi Ben David (3)
162,793
1.1
%
Dror Bacher (4)
118,066
*
%
Richard Anderson (5)
67,958
*
%
Oded Cohen (6)
383,243
2.5
%
Dennis M. McGrath (7)
71,914
*
%
Prof. Richard B. Stone (8)
40,029
*
%
Hila Karah (9)
52,383
*
%
Yoav Shaked (10)
93,970
*
%
Adam Stern (11)
528,281
3.4
%
Dennis Mathies (12)
66,469
*
%
All Executive Officers and Directors as a group (11 persons)**
2,204,344
14.3
%
5% Stockholders
Nantahala Capital Partners SI, LP (13)
1,612,157
9.9
%
Nantahala Capital Management, LLC (14)
1,582,037
9.9
%
* less than 1%.
(1)
Percentage
ownership is based on 15,273,389 shares of our common stock outstanding as of March 5, 2020 and, for each person or entity
listed above, warrants or options to purchase shares of our common stock which exercisable within 60 days of the such
date.
(2)
Includes 16,164 vested options to purchase common stock and 34,430 vested restricted shares. Also includes 37,876 shares of our common stock, held by Dicilyon Consulting and Investment Ltd. Erez Raphael is the natural person with voting and dispositive power over our securities held by Dicilyon Consulting and Investment Ltd. The address of Dicilyon Consulting and Investment Ltd. is 10 Nataf St., Ramat Hasharon 4704063, Israel.
(3)
Includes 13,022 vested options to purchase common stock and 9,269 vested restricted shares. Excludes 18,551 options which are not vested. Includes 1,786 shares owned by his spouse, for which Mr. Ben David disclaims beneficial ownership except to the extent of his pecuniary interest therein.
(4)
Includes 13,311 vested options to purchase common stock and 8,382 vested restricted shares. Excludes 19,109 options which are not vested.
(5)
Includes 45,138 vested options to purchase common stock and 7,638 vested restricted shares. Excludes 91,376 options which are not vested.
(6)
Includes 6,139 vested restricted shares.
(7)
Includes 1,659 vested options to purchase common stock and 2,468 vested restricted shares.
(8)
Includes 1,645 vested options to purchase common stock and 1,667 vested restricted shares.
(9)
Includes 1,561 vested options to purchase common stock and 1,679 vested restricted shares.
(10)
Includes 1,385 vested restricted shares. Includes 1,667 shares, and 1,334 warrants owned by his spouse, for which Mr. Shaked disclaims beneficial ownership except to the extent of his pecuniary interest therein.
(11)
Includes 3,655 vested restricted shares and 300 Series A Preferred Shares convertible into 74,100 shares of common stock. Includes warrants exercisable into 409,535 shares of common stock, subject to a contractual beneficial ownership limitation of 4.99%.
(12)
Includes 1,469 vested restricted shares. Excludes 20,000 options which have not vested.
78
(13)
Based solely on information contained in Form S-3 filed with the SEC on September 8, 2020 and data provided by the holder Includes warrants to purchase 82,677 shares of common stock, pre-funded warrants to purchase 125,102 shares of common stock issued in May, 2019, preferred shares convertible into 652,327 shares of common stock, and additional 150,926 pre-funded warrants issued on July 21, 2020, subject to a contractual beneficial ownership limitation of 9.9% and excludes 579,275 pre-funded warrants issued on July 31, 2020.
(14)
Based solely on information contained in Form 13G/A filed with the SEC on February 16, 2021, and data provided by the holder. Includes warrants to purchase 150,004 shares of common stock, 358,779 pre-funded warrants to purchase common stock issued in May 2019 and preferred shares convertible into 198,002 shares of common stock, subject to a contractual beneficial ownership limitation of 9.9% and excludes preferred shares convertible into 1,086,398 shares of common stock and 824,689 pre-funded warrants issued on July 31, 2020.
Item 13.
Certain Relationships and Related Party Transactions
Executive Officers and Directors
We have entered into
employment and consulting agreements and granted stock awards to our executive officers and directors as more fully described in
“Executive Compensation” above.
Executive Officers and Directors
We have entered into
employment agreements and granted stock awards to our executive officers as more fully described in “Executive Compensation”
above.
Statement of Policy
All
transactions (if any) between us and our officers, directors or five percent stockholders, and respective affiliates will
be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of our
independent directors who do not have an interest in the transactions and who had access, at our expense, to our legal counsel
or independent legal counsel.
On April 3, 2020, we
entered into a financial advisory agreement with Aegis Capital Corp., pursuant to which we agreed to pay Aegis Capital Corp. (“Aegis”)
certain a fee of up to 3% of any proceeds from sales derived by us through commercial transactions entered into with parties introduced
by Aegis. In addition, on April 3, 2020, we entered into a Sales Fee Agreement with Aegis, pursuant to which we agreed to pay Aegis
a fee of up 4.5% of consideration we may receive in a business development transaction (including, any joint-venture, partnership,
strategic collaboration or investment, licensing transaction, co-promotion or distribution agreement or other profit or revenue
sharing, or similar business arrangement) from parties introduced by Aegis. To date, we have not paid Aegis any fees as a result
of these agreements. Adam Stern, a member of our Board, has an interest, and will receive fees due to, Aegis.
To the best of our
knowledge, other than as set forth above, there were no material transactions, or series of similar transactions, or any currently
proposed transactions, or series of similar transactions, to which we were or are to be a party, in which the amount involved exceeds
the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years, and in which
any director or executive officer, or any security holder who is known by us to own of record or beneficially more than 5% of any
class of our common stock, or any member of the immediate family of any of the foregoing persons, has an interest (other than compensation
to our officers and directors in the ordinary course of business).
79
Item 14.
Principal Accounting Fees and Services
The following table
sets forth fees billed to us by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, our independent
registered public accounting firm, during the fiscal years ended December 31, 2020 and December 31, 2019 for: (i) services
rendered for the audit of our annual financial statements and the review of our quarterly financial statements; (ii) services
by our independent registered public accounting firms that are reasonably related to the performance of the audit or review of
our financial statements and that are not reported as audit fees; (iii) services rendered in connection with tax compliance,
tax advice and tax planning; and (iv) all other fees for services rendered.
December 31, 2020
December 31, 2019
Audit Fees
$ 111,000
$ 96,000
Audited Related Fees
$ -
$ -
Tax Fees (1)
$ 15,000
$ 9,000
All Other Fees (2)
$ 43,500
$ 44,000
Total
$ 169,500
$ 149,000
(1)
Consists of fees relating to our tax compliance and tax planning.
(2)
Consists of fees relating to our private placements.
Audit Committee Policies
The Audit Committee
of our Board of Directors is solely responsible for the approval in advance of all audit and permitted non-audit services to be
provided by the independent auditors (including the fees and other terms thereof), subject to the de minimus exceptions for non-audit
services provided by Section 10A(i)(1)(B) of the Exchange Act, which services are subsequently approved by the Board
of Directors prior to the completion of the audit. None of the fees listed above are for services rendered pursuant to such de
minimus exceptions.
80
PART IV
Item 15.
Exhibits, Financial Statement Schedules.
The following exhibits are filed with this
Annual Report.
Exhibit No.
Description
3.1
Composite copy of Certificate of Incorporation, as amended (1)
3.2
Bylaws (2)
3.3
Amendment No. 1 to the Company’s Bylaws (3)
3.4
Certificate of Elimination of Preferences, Rights and Limitations of Series D Convertible Preferred Stock of the Company (4)
3.5
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock of the Company (5)
3.6
Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Convertible Preferred Stock of the Company (5)
3.7
Certificate of Designation of Preferences, Rights and Limitations of Series A-2 Convertible Preferred Stock of the Company (6)
3.8
Certificate of Designation of Preferences, Rights and Limitations of Series A-3 Convertible Preferred Stock of the Company (6)
3.9
Certificate of Designation of Preferences, Rights and Limitations of Series A-4 Convertible Preferred Stock of the Company (6)
4.1
Warrant Agent Agreement, dated as of March 8, 2016, between LabStyle Innovations Corp. and VStock Transfer, LLC (7)
4.2
Form of Representatives’ Warrant (7)
4.3
Form of Warrant (8)
4.4
Form of Pre-Funded Warrant (9)
4.5
Amendment No. 1 To Pre-Funded Warrant (10)
4.6
Description of Securities (1)
4.7
Form of Placement Agent Warrant (1)
4.8
Form of Warrant Exchange Agreement (17)
10.1
Employment Agreement, dated October 11, 2012, between LabStyle Israel and Erez Raphael+ (11)
10.2
Amendment to Employment Agreement, dated April 1, 2013, between LabStyle Israel and Erez Raphael+ (11)
10.3
Amendment to Employment Agreement, dated August 30, 2013, between LabStyle Israel and Erez Raphael+ (11)
10.4
Personal Employment Agreement, dated January 8, 2015, between the Company and Zvi Ben David+ (12)
10.5
Amended and Restated 2012 Equity Incentive Plan of the Company+(13)
10.6
Amendment to the Amended and Restated 2012 Equity Incentive Plan of the Company+(14)
10.7
2020 Equity Incentive Plan of the Company+(16)
10.8
Amended and Restated Employment Agreement, dated as of July 25, 2017, between Erez Raphael and LabStyle Innovation Ltd. +(15)
10.9
Employment Agreement, dated as of September 22, 2013, and as amended on August 1, 2014, April 27, 2015 and May 1, 2016, between Dror Bacher and Labstyle Innovation Ltd. +(15)
10.10
Employment Agreement, effective as of February 1, 2021, between Oded Cohen and Upright
Technologies Ltd. + *
10.11
Form of Subscription Agreement for Series A, Series A-1, Series A-2, Series A-3 and Series A-4 Preferred Stock (1)
10.12
Form of Registration Rights Agreement for Series A, Series A-1, Series A-2, Series A-3 and Series A-4 Preferred Stock (1)
10.13
Placement Agency Agreement by and between DarioHealth Corp. and Aegis Capital Corp. dated October 22, 2019 (1)
10.14
Amendment No. 1 to Amended and Restated Employment Agreement, dated as of February 12, 2020, between Erez Raphael and LabStyle Innovation Ltd. + (1)
81
10.15
Stock Option Agreement between DarioHealth Corp. and Richard Anderson (1)
10.16
Conditional Stock Option Agreement between DarioHealth Corp. and Richard Anderson (1)
10.17
Representative Form of Indemnification Agreements between DarioHealth Corp. and each of its directors and officers+ (1)
10.18
January 2020 Form of Securities Purchase Agreement (18)
10.19
January 2020 Form of Registration Rights Agreement (18)
10.20
Share Purchase Agreement by and among DarioHealth Corp., LabStyle Innovation Ltd., Upright Technologies Ltd., Vertex C (C.I.) Fund L.P., as holder representative and certain holders of Upright’s outstanding securities, dated January 26, 2021.* ^
21.1
List of Subsidiaries of the Company*
23.1
Consent of Kost Forer Gabbay and Kaiserer*
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.*
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.*
32.1
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350.**
101
Interactive Data File (XBRL)*
+
Management contract or compensatory plan or arrangement
*
Filed herewith
**
Furnished herewith
(1)
Incorporated by reference to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2020.
(2)
Incorporated by reference to the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on January 16, 2013.
(3)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 29, 2018.
(4)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 15, 2019.
(5)
Incorporated by reference to the Company’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on December 3, 2019.
(6)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 2019.
(7)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 2016.
(8)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2018.
(9)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 22, 2019.
(10)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 9, 2019.
(11)
Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 6, 2013.
(12)
Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 9, 2015.
(13)
Incorporated by reference to the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on October 19, 2016.
(14)
Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 6, 2019.
(15)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 26, 2017.
(16)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 14, 2020.
82
(17)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 11, 2020.
(18)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 28, 2021.
^
Certain identified information in the exhibit has been excluded from the exhibit because it is both (i) not material and (ii) would likely cause competitive harm to DarioHealth Corp. if publicly disclosed
Item 16.
Form 10-K Summary.
None.
83
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 8 ,
2021
DARIOHEALTH CORP.
By:
/s/ Erez Raphael
Name:
Erez Raphael
Title:
Chief Executive Officer
By:
/s/ Zvi Ben David
Name:
Zvi Ben David
Title:
Chief Financial Officer, Secretary and Treasurer
In accordance with
the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Person
Capacity
Date
/s/ Erez Raphael
Chief Executive Officer and
March
8, 2021
Erez Raphael
Director (Principal Executive Officer)
/s/ Zvi Ben David
Chief Financial Officer, Secretary and
March
8, 2021
Zvi Ben David
Treasurer (Principal Financial and Accounting Officer)
/s/ Yoav Shaked
Chairman of the Board
March 8,
2021
Yoav Shaked
/s/ Dennis Matheis
Director
March 8,
2021
Dennis Matheis
/s/ Hila Karah
Director
March 8,
2021
Hila Karah
/s/ Dennis M. McGrath
Director
March 8,
2021
Dennis M. McGrath
/s/ Adam Stern
Director
March
8, 2021
Adam Stern
/s/ Richard B. Stone
Director
March 8 ,
2021
Richard B. Stone
84
DARIOHEALTH CORP. AND ITS SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020
INDEX
Page
Report of Independent Registered Public Accounting Firm
F-2 - F-3
Consolidated Balance Sheets
F-4 - F-5
Consolidated Statements of Comprehensive Loss
F-6
Statements of Changes in Stockholders’ Equity
F-7
Consolidated Statements of Cash Flows
F-8
Notes to Consolidated Financial Statements
F-9 - F-31
- - - - - - - - - - - - - - -
Kost
Forer Gabbay & Kasierer
144
Menachem Begin Road, Building A,
Tel-Aviv
6492102, Israel
Tel:
+972-3-6232525
Fax:
+972-3-5622555
ey.com
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of DarioHealth
Corp.
Opinion on the Financial Statements
We
have audited the accompanying consolidated balance sheets of DarioHealth Corp. and its subsidiary (the “Company”)
as of December 31, 2020 and 2019, the related consolidated statements of comprehensive loss, changes in stockholders’
equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and
2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31,
2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our
audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of
our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
F - 2
Kost
Forer Gabbay & Kasierer
144
Menachem Begin Road, Building A,
Tel-Aviv
6492102, Israel
Tel:
+972-3-6232525
Fax:
+972-3-5622555
ey.com
Critical
Audit Matters
The critical audit
matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated
or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the
consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication
of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Description of the Matter
Revenue
Recognition
As discussed in Note 2 to the consolidated financial statements, a significant portion of the Company's revenue is derived from the offering of a membership package which contains multiple goods and services that are accounted for as separate performance obligations. Such agreements require the Company to allocate the transaction price to the separate performance obligations based on their relative standalone selling price. The Company does not offer the services included in the membership package on a standalone basis, and estimates the standalone selling price of the performance obligations based on, among others, comparable companies' offerings, customer type and price lists, pricing practices, government backed reimbursement programs, and market standard prices.
Auditing the Company's estimates of the standalone selling prices for the performance obligations included in the membership package was challenging and required complex auditor judgment due to the significant judgment required by management in determining the relevant comparable data used, the extent of required adjustments to the data, the effects of market conditions and customer demographics.
How We Addressed the
Matter in Our Audit
To test management’s
estimate of standalone selling prices our audit procedures included, among others, understanding the methodology applied and testing
the accuracy and completeness of the underlying data used in the Company’s estimate. We obtained and evaluated management’s
analysis of comparable companies and services by assessing the comparability of the comparable companies, reviewing the list of
the Company’s services and prices and comparing that list with the services and prices of comparable companies. We analyzed
the government backed reimbursement programs and market standards used in the Company's assessment, including the review of the
aforementioned programs and their relation to the Company’s services. We also performed inquiry of key personnel and inspected
supporting documentation to evaluate the adjustments made to the comparable data, including effects of market conditions and customer
demographics.
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company’s auditor
since 2012.
Tel-Aviv, Israel
March 8, 2021
F - 3
DARIOHEALTH CORP. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
December 31,
2020
2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$ 28,590
$ 20,395
Short-term restricted bank deposits
187
191
Trade receivables
124
672
Inventories
2,293
1,414
Other accounts receivable and prepaid expenses
2,934
267
Total current assets
34,128
22,939
NON-CURRENT ASSETS:
Deposits
20
17
Operation lease right of use assets
498
765
Long-term assets
185
200
Property and equipment, net
576
648
Total non-current assets
1,279
1,630
Total assets
$ 35,407
$ 24,569
The accompanying notes are an integral
part of the consolidated financial statements.
F - 4
DARIOHEALTH CORP. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except stock
and stock data)
December 31,
2020
2019
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade payables
$ 2,480
$ 1,656
Deferred revenues
1,224
1,223
Operating lease liabilities
310
317
Other accounts payable and accrued expenses
3,020
2,024
Total current liabilities
7,034
5,220
OPERATING LEASE LIABILITIES
222
455
STOCKHOLDERS’ EQUITY
Common Stock of $0.0001 par value - Authorized: 160,000,000 shares at December 31, 2020 and 2019; Issued and Outstanding: 8,119,493 and 2,235,649 shares at December 31, 2020 and 2019, respectively
*) -
*) -
Preferred Stock of $0.0001 par value - Authorized: 5,000,000 shares at December 31, 2020 and 2019; Issued and Outstanding: 15,823 and 21,375 shares at December 31, 2020 and 2019, respectively
*) -
*) -
Additional paid-in capital
171,399
129,039
Accumulated deficit
(143,248 )
(110,145 )
Total stockholders’ equity
28,151
18,894
Total liabilities and stockholders’ equity
$ 35,407
$ 24,569
The accompanying
notes are an integral part of the consolidated financial statements.
*) Represents an
amount lower than $1.
F - 5
DARIOHEALTH CORP. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
U.S. dollars in thousands (except stock
and stock data)
Year ended
December 31,
2020
2019
Revenues
$ 7,576
$ 7,559
Cost of revenues
5,063
4,962
Gross profit
2,513
2,597
Operating expenses:
Research and development
$ 4,433
$ 3,692
Sales and marketing
15,227
11,127
General and administrative
12,756
5,483
Total operating expenses
32,416
20,302
Operating loss
29,903
17,705
Total financial (income) expenses, net
(458 )
31
Net loss
$ 29,445
$ 17,736
Deemed dividend
3,658
3,155
Net loss attributable to holders of Common Stock
$ 33,103
$ 20,891
Net loss per share:
Basic and diluted loss per share
$ 4.01
$ 8.00
Weighted average number of Common Stock used in computing basic and diluted net loss per share
5,963,305
2,266,135
The accompanying notes are an integral
part of the consolidated financial statements.
F - 6
DARIOHEALTH CORP. AND ITS SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
U.S. dollars in thousands (except stock
and stock data)
Ordinary shares
Preferred shares
Additional
paid-in
Accumulated
Total
shareholders'
Number
Amount
Number
Amount
capital
deficit
equity
Balance as of January 1, 2019
1,831,746
$
*) -
-
$
-
$
98,179
$
(89,254
)
$
8,925
Payment for executives and directors under stock for salary program
104,363
*) -
-
-
1,011
-
1,011
Exercise of options
406
*) -
*) -
-
*) -
Issuance of common stock to directors and employees
51,613
*) -
-
-
795
-
795
Issuance of common stock to consultants and service provider
4,753
*) -
-
-
59
-
59
Issuance of common stock and pre-funded warrants in 2019 public offering, net of issuance costs
242,768
*) -
-
-
6,558
-
6,558
Issuance of preferred stock in 2019 private placement, net of issuance cost
-
-
21,375
*) -
18,689
-
18,689
Deemed dividend related to issue of preferred shares
-
-
-
-
3,155
(3,155
)
-
Stock-based compensation
-
-
-
-
593
-
593
Net loss
-
-
-
-
-
(17,736
)
(17,736
)
Balance as of December 31, 2019
2,235,649
$
*) -
21,375
$
*) -
$
129,039
$
(110,145
)
$
18,894
Payment for executives and directors under stock for salary program
164,875
*) -
-
-
1,003
-
1,003
Exercise of agent warrants
222,016
*) -
-
-
-
-
-
Exercise of repriced warrants
88,889
*) -
-
-
1,088
-
1,088
Issuance of common stock to consultants and service provider
245,480
*) -
-
-
1,993
-
1,993
Issuance of common stock to directors and employees
721,820
*) -
-
-
4,913
-
4,913
Deemed dividend related to warrants exchange
161,317
*) -
-
-
599
(599
)
-
Deemed dividend related to issuance of Preferred Stock
-
-
-
-
3,059
(3,059
)
-
Conversion of preferred stock to common stock
1,278,695
*) -
(5,552
)
*) -
-
-
*) -
Issuance of warrants to service providers
-
-
-
-
1,487
-
1,487
Issuance of common stock, net of issuance cost
3,000,752
*) -
-
-
26,460
-
26,460
Stock-based compensation
-
-
-
-
1,758
-
1,758
Net loss
-
-
-
-
-
(29,445
)
(29,445
)
Balance as of December 31, 2020
8,119,493
*) -
15,823
*) -
171,399
(143,248
)
28,151
*) Represents an amount lower than $1.
The accompanying notes are an integral
part of the consolidated financial statements.
F - 7
DARIOHEALTH CORP. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
U.S. dollars in thousands
Year ended
December 31,
2020
2019
Cash flows from operating activities:
Net loss
$
(29,445
)
$
(17,736
)
Adjustments required to reconcile net loss to net cash used in operating activities:
Stock-based compensation, common stock, and stock instead of cash compensation to directors, employees, consultants, and service providers
11,102
2,257
Depreciation
190
183
Change in operating lease right of use assets
267
368
Decrease (increase) in trade receivables
548
(504
)
Decrease (increase) in other accounts receivable and prepaid expenses and long-term assets
(1,152
)
124
Increase in inventories
(879
)
(37
)
Increase (decrease) in trade payables
824
(918
)
Increase in other accounts payable and accrued expenses
1,048
371
Increase in deferred revenues
1
487
Change in operating lease liabilities
(240
)
(320
)
Net cash used in operating activities
(17,736
)
(15,725
)
Cash flows from investing activities:
Investment in deposits
(4
)
(15
)
Purchase of property and equipment
(118
)
(98
)
Loan Receivables
(1,500
)
Net cash used in investing activities
(1,622
)
(113
)
Cash flows from financing activities:
Proceeds from issuance of Common Stock, warrants, warrant exercises and Preferred Stock in 2019 private placement, net of issuance costs
27,548
25,247
Net cash provided by financing activities
27,548
25,247
Increase in cash, cash equivalents and short-term restricted bank deposits
8,190
9,409
Cash, cash equivalents and short-term restricted bank deposits at beginning of year
20,535
11,126
Cash, cash equivalents and short-term restricted bank deposits at end of year
$
28,725
$
20,535
The accompanying
notes are an integral part of the consolidated financial statements.
F - 8
DARIOHEALTH CORP. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (expect stock and stock data)
NOTE 1:-
GENERAL
a.
DarioHealth Corp. (the “Company”)
was incorporated in Delaware and commenced operations on August 11, 2011.
DarioHealth is a leading Global Digital
Therapeutics (DTx) company changing the way people with chronic conditions manage their health. By delivering personalized
evidence-based interventions that are driven by precision data analytics, high quality software, and personalized coaching, DarioHealth
has developed a novel approach that empowers individuals to adjust their lifestyle in a unique and holistic way.
DarioHealth’s cross-functional team
operates at the intersection of life sciences, behavioral science, and software technology to deliver seamlessly integrated and
highly engaging digital therapeutics interventions. Our diabetes solutions, its user-centric approach is used by tens of thousands
of customers around the globe. DarioHealth is rapidly expanding its solutions for additional chronic conditions such as hypertension
and moving into new geographic markets.
DarioHealth’s digital therapeutic
platform has been designed with a ‘user-first’ strategy, focusing on the user’s needs first and foremost, and
user experience and satisfaction. User satisfaction is constantly measured and drives, all company processes, including our technology
design.
DarioHealth has one reporting unit and one segment.
b.
The Company’s wholly owned subsidiary, LabStyle Innovation Ltd. (the “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.
c.
During the year ended December 31, 2020, the Company incurred
operating losses and negative cash flows from operating activities amounting to $29,903 and $17,736, respectively. On December 31,
2020, we had $28,590 in available cash and cash equivalent. On February 1, 2021, the Company entered into securities purchase agreements
with accredited investors relating to an offering of its common stock, resulting in aggregate gross proceeds of approximately $70,000
($64,880 net of issuance expenses). Management believes that the proceeds from the recent securities purchase agreements, combined
with our cash on hand are sufficient to meet our obligations as they come due for at least a period of twelve months from the date
of the issuance of these unaudited condensed consolidated financial statements. There are no assurances, however, that the Company
will be able to obtain an adequate level of financial resources that are required for the long-term development and commercialization
of its product offering.
d.
In December 2015, the United States Food and Drug Administration granted the Subsidiary 510(k) clearance for the Dario Blood Glucose Monitoring System, including its components, the Dario Blood Glucose Meter, Dario Blood Glucose Test Strips, Dario Glucose Control Solutions and the Dario app on the Apple iOS 6.1 platform and higher.
e.
On March 4, 2016, the Company’s Common Stock, par value $0.0001 per share (the
“Common Stock”) and warrants to purchase shares of Common Stock were approved for listing on the Nasdaq Capital
Market under the symbols “DRIO” and “DRIOW,” respectively. The Company’s listed warrants are
due to expire and cease being listed on the Nasdaq Capital Market on March 8, 2021.
f.
On November 18, 2019, the Company affected a 1-for-20 reverse stock split (referred to herein as the Reverse Stock Split) of its Common Stock. No fractional shares were issued, and no cash or other consideration were paid as a result of the Reverse Stock Split. Instead, the Company issued one additional whole share of the post-Reverse Stock Split Common Stock to any shareholder who otherwise would have received a fractional share as a result of the Reverse Stock Split. The amount of authorized Common Stock was not affected. All issued and outstanding share and per share amounts included in the accompanying consolidated financial statements have been adjusted to reflect this Reverse Stock Split for all periods presented.
g.
The Company has been carefully monitoring the COVID-19 pandemic
and its impact on its business. In that regard, the Company has continued to sell its products and services and has not experienced
disruptions in its supply chains. With respect to the Company’s DTx platform, it has observed that some of its business-to-business
prospective partners have been addressing their business needs as a result of the COVID-19 pandemic, which has resulted in a slowdown
of negotiations and discussions with some of these potential partners. In addition, the Company has also seen an increase in interest
from other business-to-business prospective partners in its DTx platform, as certain parties are seeking tele-health products.
The Company expects the significance of the COVID-19 pandemic, including the extent of its effect on the Company’s financial
and operational results, to be dictated by, among other things, its duration, the success of efforts to contain it and the impact
of actions taken in response. While the Company has not experienced any material disruptions to its business and operations as
a result of the COVID-19 pandemic, it is possible such disruptions may occur in the future which may impact its financial and operational
results, and which could be material.
F - 9
DARIOHEALTH CORP. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements
are prepared according to United States generally accepted accounting principles (“U.S. GAAP”).
a.
Use of estimates:
The preparation of the
consolidated financial statements and related disclosures in conformity with U.S. GAAP requires the Company’s
management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial
statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions
it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be
material.
Management believes the Company’s
critical accounting policies and estimates are reasonable based upon information available at the time they are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
b.
Financial statements in U.S. dollars (“$,” “dollar” or “dollars”):
The accompanying
consolidated financial statements have been prepared in dollars.
The Company’s revenues and
financing activities are incurred in U.S. dollars. Although a portion of the Subsidiary’s expenses is denominated in New
Israeli Shekels (“NIS”) (mainly cost of personnel), a substantial portion of its
expenses is denominated in dollars. Accordingly, the Company’s management believes that the currency of the primary economic
environment in which the Company and its subsidiary operate is the dollar; thus, the dollar is the functional currency of the Company.
Transactions and balances denominated in dollars are presented at their original amounts. Monetary accounts denominated in currencies
other than the dollar are re-measured into dollars in accordance with Accounting Standard Codification (“ASC”) 830,
“Foreign Currency Matters”. All transaction gains and losses of the re-measurement of monetary balance sheet items
are reflected in the consolidated statements of comprehensive loss as financial income or expenses, as appropriate.
c.
Principles of consolidation:
The consolidated financial statements
include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated upon consolidation.
d.
Cash and cash equivalents:
The Company considers all highly
liquid investments, which are readily convertible to cash with a maturity of three months or less at the date of acquisition,
to be cash equivalents.
e.
Short-term restricted bank deposits:
Short-term restricted bank deposits
are restricted deposits with maturities of up to one year and are pledged in favor of the bank as a security for the bank guaranties
issued to the landlords of the Company’s offices and credit card payments. The short-term restricted bank deposits are denominated
in NIS and USD and bear interest at an average rate of 0.01% and of 0.02% as of December 31, 2020 and 2019, respectively.
The short-term restricted bank deposits are presented at their cost, including accrued interest.
As of December 31, 2020,
and 2019, the Company had, a short-term restricted bank deposit which are used as collateral for rent in the amount of $ 123 and
$ 128, respectively.
F - 10
DARIOHEALTH CORP. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
As of December 31, 2020, and
2019, the Company had, short-term restricted bank deposits which are used as collateral for credit payments in amounts of $ 64
and $ 63, respectively.
The following table provides a
reconciliation of the cash balances reported on the balance sheets and the cash, cash equivalents and short-term restricted bank
deposits balances reported in the statements of cash flows:
December 31,
2020
2019
Cash, and cash equivalents as reported on the balance sheets
$ 28,590
$ 20,395
Short-term restricted bank deposits, as reported on the balance sheets
$ 135
$ 140
Cash, restricted cash, cash equivalents and short-term restricted bank deposits as reported in the statements of cash flows
$ 28,725
$ 20,535
f.
Inventories:
Inventories are stated at the lower
of cost or net realized value. Cost is determined on a first in first out (“FIFO”) basis. Inventory write-downs are
provided to cover technological obsolescence, excess inventories and discontinued products. Inventory write-downs represent the
difference between the cost of the inventory and net realizable value. Inventory write-downs are charged to the cost of revenues
and ramp up of manufacturing when a new lower cost basis is established. Subsequent changes in facts and circumstances do not result
in the restoration or increase in that newly established cost basis.
Work-in-process is immaterial,
given the typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.
Total write-downs during the years
ended December 31, 2020 and 2019 amounted to $99 and $62, respectively.
g.
Long-term assets:
Long-term assets during the years
ended December 31, 2020 and 2019 include mainly long-term prepayments for the Company’s cartridges manufacturing.
h.
Property and equipment:
Property and equipment are stated
at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives
of the assets at the following annual rates:
%
Computers, and peripheral equipment
15-33
Office furniture and equipment
6-15
Production lines
14-20
Leasehold improvements
Over the shorter of
the lease term or
useful economic
life
F - 11
DARIOHEALTH CORP. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
i.
Impairment of long-lived assets:
The Company’s long lived
assets are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment,” whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2020, and 2019, no impairment was
recorded.
j.
Revenue recognition
The Company recognizes
revenue in accordance with ASC 606, revenue from contracts with customers, when (or as) it satisfies performance obligations
by transferring promised products or services to its customers in an amount that reflects the consideration the Company
expects to receive. The Company applies the following five steps: (1) identify the contract with a customer,
(2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate
the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance
obligation is satisfied.
The Company considers customer
and distributers purchase orders to be the contracts with a customer. For each contract, the Company considers the promise to transfer
tangible products and services, each of which are distinct, to be the identified performance obligations. In determining the transaction
price, the Company evaluates whether the price is subject to rebates and adjustments to determine the net consideration to which
the Company expects to receive. As the Company’s standard payment terms are less than one year, the contracts have no significant
financing component. The Company allocates the transaction price to each distinct performance obligation based on their relative
standalone selling price. Revenue from tangible products is recognized when control of the product is transferred to the customer
(i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment. The revenues from fixed-price
services are recognized ratably over the contract period and the costs associated with these contracts are recognized as incurred.
The Company's standard arrangements with its customers typically do not allow for rights of return.
k.
Cost of revenues:
Cost of revenues is comprised
of the cost of production, data center costs, shipping and handling inventory, personnel and related overhead costs, depreciation
of production line and related equipment costs, amortization of deferred costs and inventory write-downs.
l.
Concentrations of credit risk:
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term restricted bank
deposits and trade receivables.
All of the cash and cash equivalents
and short-term restricted bank deposits of the Company and its Subsidiary are invested in deposits and current accounts with major
U.S. and Israeli banks. Such cash and cash equivalents and short-term restricted bank deposits may be in excess of insured limits
and are not insured in other jurisdictions. Generally, cash and cash equivalents and short-term restricted bank deposits may be
redeemed and therefore a minimal credit risk exists with respect to these deposits and investments.
F - 12
DARIOHEALTH CORP. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company’s trade receivables
are derived mainly from sales to distributers and to end-users world-wide. The Company performs ongoing credit evaluations of its
customers. An allowance for doubtful accounts is determined with respect to those specific amounts that the Company has determined
to be doubtful of collection.
The Company had no off-balance-sheet
concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
m.
Income taxes:
The Company accounts for income
taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). This guidance prescribes the use of the liability
method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts that
are more likely than not to be realized. As of December 31, 2020, and 2019 a full valuation allowance was provided by the
Company.
ASC 740 contains a two-step approach
to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position taken or expected
to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that,
on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals
or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. As of December 31, 2020, and 2019, no liability for unrecognized tax benefits was recorded
as a result of the implementation of ASC 740.
n.
Research and development costs:
Research and development costs
are charged to the consolidated statements of comprehensive loss, as incurred.
o.
Accounting for stock-based compensation:
The Company accounts for stock-based
compensation in accordance with ASC 718, “Compensation - Stock Compensation” (“ASC 718”), which requires
companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value
of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods
in the Company’s consolidated statement of comprehensive loss.
The Company recognizes compensation
expenses for the value of its awards granted based on the straight-line method over the requisite service period of each of the
awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those estimates.
The Company estimates the fair
value of stock options granted using the Black-Scholes-Merton option-pricing model. The option-pricing model requires a number
of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility
was calculated based upon historical volatility of the Company. The expected option term represents the period that the Company’s
stock options are expected to be outstanding and is determined based on the simplified method until sufficient historical exercise
data will support using expected life assumptions. The risk-free interest rate is based on the yield from U.S. treasury bonds with
an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.
F - 13
DARIOHEALTH CORP. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
p.
Fair value of financial instruments:
The Company applies ASC 820, “Fair
Value Measurements and Disclosures” (“ASC 820”). Under this standard, fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction
between market participants at the measurement date.
In determining fair value, the
Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used
when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based
on market data obtained from sources independent from the Company. Unobservable inputs are inputs that reflect the Company’s
assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information
available in the circumstances.
The hierarchy is broken down into
three levels based on the inputs as follows:
Level 1 -
Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2 -
Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 -
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of observable
inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type of
investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based
on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment
and the investments are categorized as Level 3.
The carrying amounts of cash and
cash equivalents, short-term restricted bank deposits, trade receivables, other accounts receivable and prepaid expenses, trade
payables and other accounts payable and accrued expenses approximate their fair value due to the short-term maturity of such instruments.
Some of the inputs to these models are unobservable in the market and are significant. The Company has no financial assets or liabilities
measured using Level 2, or Level 3 inputs.
q.
Basic and diluted net loss per share:
Basic net loss per share is computed
based on the weighted average number of shares of Common Stock outstanding during each year. Diluted net loss per share is computed
based on the weighted average number of shares of Common Stock outstanding during each year, plus dilutive potential Common Stock
considered outstanding during the year, in accordance with ASC 260, “Earnings Per Share”.
The Company follows the two-class
method when computing net loss per common share when shares are issued that meet the definition of participating securities. The
two-class method determines net income (loss) per common share for each class of common shares and participating securities according
to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income
available to common shareholders for the period to be allocated between common shares and participating securities based upon
their respective rights to receive dividends as if all income for the period had been distributed. The Company’s convertible
preferred shares contractually entitle the holders of such shares to participate in dividends.
The total number of shares related
to the outstanding options, warrant and preferred shares excluded from the calculations of diluted net loss per share due to their
anti-dilutive effect was 7,819,905 and 6,545,910 for the year ended December 31, 2020 and 2019, respectively.
F - 14
DARIOHEALTH CORP. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
r.
Severance pay:
Since inception date, all Ltd.
employees who are entitled to receive severance pay in accordance with the applicable law in Israel, have been included under section
14 of the Israeli Severance Compensation Law (“Section 14”). Under this section, they are entitled only to monthly
deposits, at a rate of 8.33% of their monthly salary, made by the employer on their behalf with insurance companies. Payments in
accordance with Section 14 release Ltd. from any future severance payments in respect of those employees. Payments under Section 14
are not recorded as an asset in the Company’s balance sheet.
Severance pay expense for the year
ended December 31, 2020 and 2019 amounted to $387 and $346, respectively.
s.
Legal and other contingencies:
The Company accounts for its contingent
liabilities in accordance with ASC 450 “Contingencies”. A provision is recorded when it is both probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed
and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information
and events pertaining to a particular matter. As of December 31, 2019 and 2020, the Company is not a party to any litigation
that could have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.
Legal costs incurred in connection with loss contingencies are expensed as incurred.
t.
Leases:
Lessee accounting:
On January 1, 2019, the Company
adopted ASU No. 2016-02, Leases (ASC 842). The Company determines if an arrangement is a lease and the classification of that
lease at inception based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company
obtains the right to substantially all the economic benefits from the use of the asset throughout the period, and (3) whether
the Company has a right to direct the use of the asset. The Company elected to not recognize a lease liability or right-of-use
(“ROU”) asset for leases with a term of twelve months or less. The Company also elected the practical expedient to
not separate lease and non-lease components for its leases.
ROU assets represent the right
to use an underlying asset for the lease term and lease liabilities represent the obligation to make minimum lease payments arising
from the lease. ROU assets are initially measured at amounts, which represents the discounted present value of the lease payments
over the lease, plus any initial direct costs incurred. The ROU assets are reviewed for impairment. The lease liability is initially
measured at lease commencement date based on the discounted present value of minimum lease payments over the lease term. The implicit
rate within the operating leases is generally not determinable; therefore, the Company uses the Incremental Borrowing Rate (“IBR”)
based on the information available at commencement date in determining the present value of lease payments. The Company’s
IBR is estimated to approximate the interest rate on similar terms and payments and in economic environments where the leased
asset is located.
Certain leases include options
to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and
lease liability when it is reasonably certain that the Company will exercise that option. An option to terminate is considered
unless it is reasonably certain that the Company will not exercise the option.
F - 15
DARIOHEALTH CORP. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
u.
Recently issued accounting pronouncements, not yet adopted:
In September 2016, the Financial
Accounting Standards Board (the “FASB”) issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 changes the impairment model
for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans,
and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally
will result in the earlier recognition of allowances for losses. The guidance also requires increased disclosures. For the Company,
the amendments in the update were originally effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. In November 2019, the FASB issued ASU No. 2019-10 which delayed the effective
date of ASU 2016-13 for smaller reporting companies (as defined by the U.S. Securities and Exchange Commission) and other non-SEC
reporting entities to fiscal years beginning after December 15, 2022, including interim period
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