DarioHealth Corp. - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2017

For the transition period from                      to                    

Commission File No. 001-37704

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨

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

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

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

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

As of August 11, 2017, the registrant had 9,754,887 shares of common stock outstanding.

When used in this quarterly report, the terms “Dario,” “the Company,” “we,” “our,” and “us” refer to DarioHealth Corp., a Delaware corporation.

DarioHealth Corp.

Quarterly Report on Form 10-Q

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors. These statements may be found under the section of our Annual Report on Form 10-K for the year ended December 31, 2016 (filed on March 22, 2017) entitled “Risk Factors” as well as in our other public filings.

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

DARIOHEALTH CORP. AND ITS SUBSIDIARIES

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2017

UNAUDITED

INDEX

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

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

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

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

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

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

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

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

*) Represents an amount lower than $1.

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

The significant accounting policies applied in the audited annual consolidated financial statements of the Company as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 are applied consistently in these unaudited interim consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The accompanying unaudited interim consolidated financial statements as of June 30, 2017, have been prepared in accordance with U.S. generally accepted accounting principles and standards of the Public Company Accounting Oversight Board for interim financial information. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the Company's consolidated financial position as of June 30, 2017, and the Company's consolidated results of operations and the Company's consolidated cash flows for the six months ended June 30, 2017. Results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

During the six months’ period ended June 30, 2017 and the year ended December 31, 2016, total inventory write-off expenses amounted to $47 and $315, respectively.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

or on a cashless basis if no registration statement covering the resale of the shares issuable upon exercise of the warrants is available.

Transactions related to the grant of options to employees, directors and non-employees under the above plans during the six-month period ended June 30, 2017 were as follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company's closing stock price on the last day of the second quarter of 2017 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2017. This amount is impacted by the changes in the fair market value of the Common Stock.

As of June 30, 2017, the total amount of unrecognized stock-based compensation expense was approximately $1,200 thousand which will be recognized over a weighted average period of 1.24 years.

The total compensation cost related to all of the Company's equity-based awards recognized during the six-month period ended June 30, 2017 and 2016 was comprised as follows:

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

On September 23, 2014, the Company consummated a private placement (the “September 2014 Private Placement”) consisting of an aggregate of 42,350 units which consisted of 42,350 shares of newly designated Series A Convertible Preferred Stock which were convertible into up to an aggregate of 10,683,662 shares of Common Stock, and warrants to purchase 5,341,834 shares of Common Stock with an exercise price of $0.48 per share which is subject to a standard anti-dilution protections clause.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In July 2017, 71,908 shares of Common Stock were issued to certain members of the Board of Directors, Officers and employees of the Company as consideration for a reduction in or waiver of cash salary fees and bonuses owed to such individuals. The shares were issued under the Company’s 2012 Plan.

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

Readers are advised to review the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2016. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements”. You should review the “Risk Factors” section of our Annual Report for the fiscal year ended December 31, 2016 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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

We are a digital health (mHealth) company that is developing and commercializing a patented and proprietary technology providing consumers with laboratory-testing capabilities using smart phones and other mobile devices. 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. Our flagship product, Dario™, is a mobile, real-time, cloud-based, diabetes management solution based on an innovative, multi-feature software application combined with a stylish, ‘all-in-one’, pocket-sized, blood glucose monitoring device, which we call the Dario™ Smart Meter.

We commenced a commercial launch of the free Dario™ application in the United Kingdom in late 2013 and commenced an initial soft launch of the full Dario™ solution (including the app and the Smart Meter) in selected jurisdictions in March 2014 and 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. We currently have approximately 69,000 installs of our iOS app and over 12,000 installs of our Android app.

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

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 January 2018 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 continue the market penetration of Dario™ or meet our commercial sales targets (or if we are unable to ramp up revenues), and if we are unable to obtain additional capital resources in the near term, we may be unable to continue activities, absent a material alternations in our business plans and our business might fail.

Critical Accounting Policies

Reference is made to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the year ended December 31, 2016 (filed on March 22, 2017) with respect to our Critical Accounting Policies, which have not changed.

Results of Operations

Comparison of the three and six months ended June 30, 2017 and 2016 (in thousands)

Revenues

Revenues for the three and six months ended June 30, 2017 amounted to $1,210 and $2,217, respectively, compared to $669 and $1,237 of revenues during the three and six months ended June 30, 2016. The increases in revenues in the three and six months ended June 30, 2017 compared to the six months ended June 30, 2016 are mainly as a result of an increase in the sales of our products.

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

Cost of Revenues

During the three and six months ended June 30, 2017 we recorded costs related to revenues in the amount of $850 and $1,751, respectively, as compared to $826 and $1,496 of recorded costs related to revenues during the three and six months ended June 30, 2016. The increases in costs related to revenues in the three and six months ended June 30, 2017, compared to the three and six months ended June 30, 2016, are mainly as a result of an increase in the sales of our products.

Cost of revenues consist mainly of the 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 $663, or 127%, to $1,184 for the three months ended June 30, 2017 compared to $521 for the three months ended June 30, 2016, and increased by $735, or 80%, to $1,653 for the six months ended June 30, 2017 compared to $918 for the six months ended June 30, 2016. These increases were mainly due to increases in salaries, stock based compensation and costs associated with clinical trials.

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

Sales and Marketing Expenses

Our sales and marketing expenses increased by $1,063, or 93%, to $2,205 for the three months ended June 30, 2017 compared to $1,142 for the three months ended June 30, 2016 and increased by $2,369, or 143%, to $4,030 for the six months ended June 30, 2017 compared to $1,661 for the six months ended June 30, 2016. These increases were mainly due to expanding our sales and marketing activities in the United States and Australia, an increase in costs of online marketing campaigns, the cost related to marketing consultants and the costs associated with subcontractors and employee payroll.

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

General and Administrative Expenses

Our general and administrative expenses increased by $286, or 36%, to $1,089 for the three months ended June 30, 2017 compared to $803 for the three months ended June 30, 2016, and increased by $1,398, or 82%, to $3,106 for the six months ended June 30, 2017 compared to $1,708 for the six months ended June 30, 2016. These increases were mainly due to an increase in share based compensation resulting from shares issued to management during the period. On January 30, 2017 the Compensation Committee of the Board of Directors approved the grant of shares and options to members of management pursuant to our Amended and Restated 2012 Equity Incentive Plan. In that regard, we issued 227,616 shares of common stock to our Chairman and CEO and 74,896 shares of common stock to our Chief Financial Officer on January 30, 2017. These share grants were accounted for as expenses according to the closing price of our shares of common stock on January 30, 2017 ($3.40 per share) amounting to an expense of $1,029 in the aggregate and included in the share based compensation expenses for the period. On April 20, 2017, the Compensation Committee of the Board of Directors approved the grant of shares to management, pursuant to our Amended and Restated 2012 Equity Incentive Plan as a bonus payment for the Company’s achievements during the year ending December 31, 2016. In that regard, we issued 50,000 shares of common stock to our Chairman and CEO and 20,000 shares of common stock to our Chief Financial Officer on April 20, 2017. These share grants were accounted for as expenses according to the closing price of our shares of common stock on April 19, 2017 ($2.73 per share) amounting to an expense of $191 in the aggregate and included in the share based compensation expenses for the period.

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

Financial Income (Expenses), net

Our finance expense (income) for the three and six months ended June 30, 2017 were $26 and $7,473, respectively, compared to finance expense of $1,434 and $1,869 for the three and six months ended June 30, 2016, respectively. This change was mainly due to the reversing of the warrant revaluation expense during the first quarter of 2017, which was initially recorded during the fiscal year ended 2016, due to a price protection feature included in warrants issued to investors in March and August of 2016. This price protection feature expired on March 8, 2017, and as a result, we cancelled the liability related to these warrants by recording financing income of $7,460 during the period.

Financial expense (income) includes mainly the results of a revaluation of warrants to investors and a former placement agent, which were recorded as a liability and presented at fair value each reporting period.

Net loss

Net loss increased by $46, or 1%, to $4,092 for the three months ended June 30, 2017 compared to a loss of $4,057 for the three months ended June 30, 2016 and decreased by $6,020, or 88%, to $850 for the six months ended June 30, 2017 compared to $6,870 for the six months ended June 30, 2016.

The decrease in net loss for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 was mainly due to our financial income related to revaluation of warrants.

Liquidity and Capital Resources

As of June 30, 2017, we had approximately $3,898 in cash and cash equivalents compared to $1,093 at December 31, 2016.

We have experienced cumulative losses of $55,810 from inception (August 11, 2011) through June 30, 2017, and have a stockholders’ equity of $3,953 at June 30, 2017. In addition, we have not completed our efforts to establish a stable recurring source of revenues sufficient to cover our operating costs and expect to continue to generate losses for the foreseeable future. There is no assurances that we will be able to obtain an adequate level of financing needed for our near term requirements or the long-term development and commercialization of our product. These conditions raise substantial doubt about our ability to continue as a “going concern”.

Since inception, we have financed our operations primarily through private placements and public offerings of our common stock and warrants to purchase shares of our common stock, receiving aggregate net proceeds totaling $47,400 as of June 30, 2017.

On March 3, 2016, we conducted a public offering, pursuant to which we issued 1,333,333 shares of common stock and warrants exercisable for an aggregate of 1,333,333 shares of common stock for an aggregate net consideration of $5,038.

Concurrently with our public offering, on March 3, 2016, we conducted a concurrent private placement pursuant to which we issued 555,555 units, with each unit consisting of one share of common stock and one warrant to purchase 1.2 shares of common stock, such that an aggregate of 555,555 shares of common stock and a warrant to exercisable for an aggregate of 666,666 shares of common stock was issued and sold for an aggregate net consideration of approximately $2,500.

On January 9, 2017, we commenced a private placement offering of up to $5,100 consisting of up to 1,821,437 shares of common stock and warrants to purchase up to 1,821,437 shares of common stock. The warrants are exercisable after the six-month anniversary of each respective closing and will expire on the 5-year anniversary of their issuance. On January 9, 2017, we held the initial closing of the offering with a lead investor and an additional investor and issued and sold 1,113,922 shares of common stock and warrants to purchase 1,113,922 shares of common stock for aggregate gross proceeds of approximately $3,119. On January 11, 2017, we entered into securities purchase agreements with 18 investors for the future issuance and sale of 707,515 shares of common stock and warrants to purchase 707,515 shares of common stock, provided that the issuance and sale of such securities shall only occur upon our obtaining stockholder approval, pursuant to Nasdaq rules. On March 9, 2017, following receipt of stockholder approval, we issued and sold 707,515 shares of common stock and warrants to purchase 707,515 shares of common stock to the 18 investors for gross proceeds of $1,981.

On March 31, 2017, we entered into an underwriting agreement with Aegis Capital Corp., as representative of the underwriters named therein for a firm commitment public offering of 1,450,000 shares of common stock at a price to the public of $3.10 per share for aggregate gross proceeds of approximately $4,500. On April 5, 2017, the Company closed a public offering of 1,450,000 shares of common stock, at a purchase price of $3.10 per share, for aggregate consideration of $3,855, net of issuance costs.

According to our management’s estimates, based on our budget and the initial launch of our commercial sales, we believe that we will have sufficient resources to continue our activity into January 2018 without raising additional capital. This includes an amount of anticipated inflows from sales of Dario™ through distribution partners and to direct customers.

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

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

Cash Flows

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

Net cash used in operating activities

Net cash used in operating activities was $5,826 for the six months ended June 30, 2017 compared to $3,798 used in operations for the same period in 2016. Cash used in operations increased due to the increase in the volume of our operations.

Net cash used in investing activities

Net cash used in investing activities was $38 for the six months ended June 30, 2017 compared to $245 for the same period in 2016. Cash used in investing activities decreased mainly due to a reduction in investment in fixed assets.

Net cash provided by financing activities

Net cash provided by financing activities was $8,669 for the six months ended June 30, 2017 compared to $7,748 for the same period in 2016. During the six months ended June 30, 2017, we raised net proceeds of approximately $8,669 through our January 2017 private placement and March 2017 underwritten public offering. During the six months ended June 30, 2016 we raised net proceeds of approximately $7,538 through our March 2016 public offering and private placement transactions and $210 was raised through proceeds from exercise of warrants. This increase was due to higher amount raised during the first six month of 2017.

Off-Balance Sheet Arrangements

As of June 30, 2017, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Based on their evaluation, the Certifying Officers concluded that, as of June 30, 2017, our disclosure controls and procedures were designed at a reasonable assurance level and were therefore effective.  

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Internal Controls

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

PART II- OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

As of June 30, 2017, we issued an option to purchase an aggregate of 158,142 shares of our common stock to a consultant under our Amended and Restated 2012 Equity Incentive Plan. We claimed exemption from registration under the Securities Act of 1933, as amended, or the Securities Act, for the foregoing transaction under Section 4(a)(2) of the Securities Act.

Item 6. Exhibits.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.