DarioHealth Corp. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2020

For the transition period from                      to                    

Commission File No. 001-37704

Securities registered pursuant to Section 12(b) of the Act:

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.

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

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

As of May 9, 2020, the registrant had 3,793,240 shares of common stock outstanding.

When used in this quarterly 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. 

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 Reform Act of 1995. Statements which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting our business, including many assumptions regarding future events. Such forward-looking statements include statements regarding, among other things:

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, 2019 (filed on March 17, 2020) 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.

All information in this Quarterly Report, relating to shares or price per share reflects the 1-for-20 reverse stock split effected by us on November 18, 2019.

DARIOHEALTH CORP. AND ITS SUBSIDIARY

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2020

UNAUDITED

INDEX

DARIOHEALTH CORP. AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS 

U.S. dollars in thousands

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

DARIOHEALTH CORP. AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

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

DARIOHEALTH CORP. AND ITS SUBSIDIARY

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.

DARIOHEALTH CORP. AND ITS SUBSIDIARY

STATEMENTS OF STOCKHOLDERS' EQUITY

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

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

DARIOHEALTH CORP. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

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

DARIOHEALTH CORP. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

DARIOHEALTH CORP. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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:

In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” (“ASU No. 2018-13”) which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; the ASU allows for early adoption in any interim period after issuance of the update. The adoption of this ASU is not expected to have a significant impact on the Company’s consolidated financial statements.

In June 2016, 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 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.

DARIOHEALTH CORP. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The accompanying unaudited interim consolidated financial statements as of March 31, 2020, have been prepared in accordance with U.S. generally accepted accounting principles and standards of the Public Company Accounting Oversight Board for interim financial information. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the Company's consolidated financial position as of March 31, 2020, and the Company's consolidated results of operations and the Company's consolidated cash flows for the three months ended March 31, 2020. Results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

During the three months period ended March 31, 2020, and the year ended December 31, 2019, total inventory write-off expenses amounted to $23 and $62, respectively.

The following tables represent the Company’s total revenues for the three months ended March 31, 2020 and 2019 by product type:

*) Reclassified

DARIOHEALTH CORP. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Consolidated revenues by category type are as follows:

The Company recognizes contract liabilities, or deferred revenues, when it receives advance payments from customers before performance obligations primarily related services have been performed. Advance payments are received at the beginning of the service period and the related deferred revenues are reclassified to revenue ratably over the service period. The balance of deferred revenues approximates the aggregate amount of the transaction price allocated to the unsatisfied performance obligations at the end of reporting period.

The following table presents the significant changes in the deferred revenue balance during the three months ended March 31, 2020:

Because all performance obligations in the Company’s contracts with customers relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption and is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.

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

DARIOHEALTH CORP. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

DARIOHEALTH CORP. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Transactions related to the grant of options to employees, directors and non-employees under the above plans during the three-month period ended March 31, 2020, were as follows:

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company's closing stock price on the last day of the first quarter of 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2020. This amount is impacted by the changes in the fair market value of the Common Stock.

DARIOHEALTH CORP. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents the assumptions used to estimate the fair values of the options granted to employees, directors and non-employees in the period presented:

As of March 31, 2020, the total amount of unrecognized stock-based compensation expense was approximately $3,201,which will be recognized over a weighted average period of 1.8 years.

The total compensation cost related to all of the Company's equity-based awards recognized during the three months period ended March 31, 2020, and 2019 was comprised as follows:

DARIOHEALTH CORP. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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, 2019. 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, 2019 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 leading global Digital Therapeutics, or DTx, company revolutionizing the way people manage their health across the chronic condition spectrum to live a better and healthier life. By delivering personalized evidence-based interventions that are driven by data, high-quality software, easy-to-use medical devices and coaching, we empower individuals to make healthy adjustments to their daily lifestyle choices in a personalized way and improve their overall health. Our cross-functional team operates at the intersection of life sciences, behavioral science and software technology to deliver highly engaging therapeutic interventions. The Dario^TM Blood Sugar Monitor is among the most downloaded healthcare apps, with 4.9/5.0 stars from 9,000+ reviews on the Apple App Store as of March 2020. We are rapidly moving into new chronic conditions such as hypertension, using a performance-based approach to improve the health of users managing chronic disease.

We attempt to drive behavioral change by creating highly personalized, closed-loop interactions that support our customers, who become members of our services, via connected FDA cleared monitoring devices, just-in-time health information and real-time coaching. This highly scalable infrastructure results in members with significant improvement in their health conditions at a modest price-point. The Dario solution is intended to stretch across various health conditions and ailments. We currently focus our efforts on diabetes and hypertension, and we plan to expand our focus into additional chronic conditions during 2020, including hypertension.

Our solution goes beyond being simply a device. We are a modular platform that allows for customized implementations by segment and within each segment. Core components of our solution include:

We make our services available directly to consumers via online marketplaces, including Amazon, Walmart, Best Buy and the Google and Apple app stores. In 2020, we plan to focus on expanding our offering to include providers, payers and employers. We believe that these represent significant growth opportunities for our business.

We have designed our DTx platform with a ‘user-first’ strategy, focusing on user’s needs first and foremost, along with user experience and satisfaction. User satisfaction drives all company processes, including our technology design. This approach, which disrupts the traditional approach among healthcare companies, has taken us to a place where MyDario^TM is loved by customers in the diabetes arena. In order to obtain firsthand data and feedback from our users, we decided to launch our product directly to our customers, and initially commenced sales in the United States in March 2016. This user-focused approach led us into a continuous process of product upgrades and improvements in an agile, interactive way to achieve finetuned user satisfaction. Our success is reinforced by the fact that most of our users choose to purchase our solution out of pocket.

We have designed our DTx platform as an open platform that allows us to enable our partners to offer their customers a customized, evidence-based digital therapy solution, which takes advantage of the real-time connectivity of our platform with its users. We believe that our data-evidenced proof of the medical outcomes resulting from the use of our DTx platform represents an attractive return on investment model to healthcare providers in the United States and other geographic regions.

In addition, we have been carefully monitoring the COVID-19 pandemic and its impact on our business. In that regard, we have continued to sell our Dario^TM Blood Sugar Monitor and have not experienced disruptions in our supply chains. With respect to our DTx platform, we have observed that some of our 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, we have also seen an increase in interest from other business-to-business prospective partners in our DTx platform, as certain parties are seeking tele-health products, as exhibited with our April 2020 announcement regarding our partnership with MediOrbis relating to the expansion of our existing service offering with a full suite of telemedicine capabilities.

We expect the significance of the COVID-19 pandemic, including the extent of its effect on our 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 we are not able at this time to estimate the impact of the COVID-19 pandemic on our financial and operational results, it could be material.

According to a Business Insider Intelligence report published in October 2019, DTx are a new class of treatments disrupting the entire healthcare value chain with their promise to tackle chronic diseases, and which, according to estimates by Business Insider, represents up to $3.3 trillion on chronic disease expenditure in 2018 in the United States alone. Digital therapeutics deliver evidence-based therapies for an array of chronic conditions via software, like mobile health (mHealth) apps and can either replace or complement existing drug treatments. According to a report released by the Rand Corporation, Sixty percent of the United States population suffers from at least one chronic condition, and these diseases come with a hefty price tag, as exemplified by the Business Insider report. DTx companies have shown early evidence of their treatments’ efficacy and ability to slash the costs associated with chronic disease care, which is fueling the global DTx market to become a $9 billion opportunity by 2025 according to the Business Insider Intelligence report.

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.

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 into September 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 a material alteration in our business plans and our business might fail.

Critical Accounting Policies

Please see Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q for the summary of significant accounting policies. In addition, reference is made to Part I, 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, 2019 (filed on March 17, 2020) with respect to our Critical Accounting Policies. There have been no other material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2019. 

Results of Operations

Comparison of the three months ended March 31, 2020 and 2019 (dollar amounts in thousands)

Revenues

Revenues for the three months ended March 31, 2020, amounted to $1,667, a decrease of 25.6% compared to $2,242 of revenues during the three months ended March 31, 2019. The decrease in revenues for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, is due to a decrease in our direct to consumer (“D2C”) acquisitions in the first quarter of 2020.

Revenues were derived mainly from the sales of Dario’s components, including the Dario Blood Glucose Monitoring System itself and our membership offering, through D2C acquisitions located mainly in the United States and Australia, through our on-line store and through distributors.

Cost of Revenues

During the three months ended March 31, 2020 we recorded cost of revenues in the amount of $888, a decrease of 47.3% as compared to $1,684 of recorded cost of revenues during the three months ended March 31, 2019. The decrease in cost of revenues in three months ended March 31, 2020, compared to the three months ended March 31, 2019, are mainly as a result of a decrease in the sales of our products in the first quarter of 2020.

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

Gross Profit

Gross profit for the three months ended March 31, 2020, amounted to $779 (46.7% of revenues) compared to $558 (24.9% of revenues) during the three months ended March 31, 2019. The increase in gross profit for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, is mainly as a result of the increase in the portion of our membership offering as a percentage of our revenues.

Research and Development Expenses

Our research and development expenses increased by $229, or 23% to $1,231 for the three months ended March 31, 2020, compared to $1,002 for the three months ended March 31, 2019. This increase was mainly due to an increase in our equity based compensation to $337 for the three months ended March 31, 2020, compared to $45 for the three months ended March 31, 2019. Our research and development expenses excluding equity based compensation for the three months ended March 31, 2020 were $894 compared to $957 for the three months ended March 31, 2019, a decrease of $63. This decrease is resulting mainly from the reduction in development costs.

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

Sales and Marketing Expenses

Our sales and marketing expenses increased by $145, or 3.7% to $4,091 for the three months ended March 31, 2020, compared to $3,946 for the three months ended March 31, 2019. This increase was mainly due to an increase in our equity based compensation to $1,551 for the three months ended March 31, 2020, compared to $49 for the three months ended March 31, 2019.Our marketing expenses excluding equity based compensation for the three months ended March 31, 2020 were $2,540 compared to $3,897 for the three months ended March 31, 2019, a decrease of $1,357. This decrease is resulting mainly from the reduction of our digital marketing activity.

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

General and Administrative Expenses

Our general and administrative expenses increased by $4,598, or 473%, to $5,571 for the three months ended March 31, 2020, compared to $973 for the three months ended March 31, 2019. This increase was mainly due to an increase in our equity based compensation to $4,453 for the three months ended March 31, 2020, compared to $149 for the three months ended March 31, 2019. Our general and administrative expenses excluding equity based compensation for the three months ended March 31, 2020 were $1,118 compared to $824 for the three months ended March 31, 2019, an increase of $294. This increase is resulting mainly from the increase in consulting and insurance expenses.

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

Financial Income (Expenses), net

Our financial income for the three months ended March 31, 2020, was $222, an increase of 1808% compared to finance expenses of $13 for three months ended March 31, 2019. This increase was mainly due to foreign currency translation differences and interest income.

Financial expenses include mainly bank charges, interest income, lease liability translation differences and foreign currency translation differences.

Net loss

Net loss increased by $4,516, or 84%, to $9,892 for the three months ended March 31, 2020, compared to a net loss of $5,376 for the three months ended March 31, 2019. The increase in net loss for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was mainly due to the increase of our equity based compensation as detailed above.

Non-GAAP Financial Measures

The factors described above resulted in net loss attributable to common stockholders of $11,167 and $5,376 for the three months ended March 31, 2020 and 2019, respectively.

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

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

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

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

Liquidity and Capital Resources (amounts in thousands except for share and share amounts)

As of March 31, 2020, we had approximately $15,826 in cash and cash equivalents compared to $20,395 at December 31, 2019.

We have experienced cumulative losses of $121,312 from inception (August 11, 2011) through March 31, 2020 and have a stockholders’ equity of $15,426 at March 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. There are no assurances that we will be able to obtain an adequate level of financing needed for our near term requirements or the long-term development and commercialization of our product. These conditions raise substantial doubt about our ability to continue as a “going concern”.

Since inception, we have financed our operations primarily through private placements and public offerings of our common stock and warrants to purchase shares of our common stock, receiving aggregate net proceeds totaling $96,426 as of March 31, 2020.

On May 24, 2019, we closed on a firm commitment, underwritten public offering consisting of 242,768 shares of common stock and pre-funded warrants to purchase 358,779 shares of our common stock, pursuant to an underwriting agreement entered into with Craig-Hallum Capital Group LLC, as representative of the underwriters. The shares of common stock were sold at a public offering price of $12.00 per share and the pre-funded warrants were sold at a public offering price of $11.998 per pre-funded warrant, for aggregate gross proceeds of approximately $7,218.

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 $13,561. The initial conversion price for the Series A and Series A-1 Convertible Preferred Stock to Common Stock is $4.05. The initial closing of the offering took place on November 27, 2019. The Series A and Series A-1 Convertible Preferred Stock issued are convertible into up to 3,349,567 shares of Common Stock. 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 Convertible Preferred Stock, at a purchase price of $1,000 for each share, for aggregate gross proceeds to the Company of $1,915. The initial conversion price for the Series A-2 Convertible Preferred Stock to Common Stock is $4.28. The Series A-2 Convertible Preferred Stock issued are convertible into up to 448,110 shares of Common Stock. 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 Convertible Preferred Stock, at a purchase price of $1,000 for each share, for aggregate gross proceeds to the Company of $3,808.The initial conversion price for the Series A-3 Convertible Preferred Stock to Common Stock is $4.98. The Series A-3 Convertible Preferred Stock issued are convertible into up to 765,408 shares of Common Stock. 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 Convertible Preferred Stock, at a purchase price of $1,000 for each share, for aggregate gross proceeds to the Company of $745.The initial conversion price for the Series A-4 Convertible Preferred Stock to Common Stock is $5.90. The Series A-4 Convertible Preferred Stock issued are convertible into up to 126,650 shares of Common Stock. 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 Convertible Preferred Stock, at a purchase price of $1,000 for each share, for aggregate gross proceeds to the Company of $1,346. The initial conversion price for the Series A-3 Convertible Preferred Stock to Common Stock is $4.98. The Series A-3 Convertible Preferred Stock issued are convertible into up to 270,546 shares of Common Stock. The total aggregate gross proceeds of the offering described above, together with gross proceeds from the closing of the offering of Series A Convertible Preferred Stock, Series A-1 Convertible Preferred Stock, Series A-2 Convertible Preferred Stock, Series A-3 Convertible Preferred Stock and Series A-4 Convertible Preferred Stock was $21,375, and the total amount of Common Stock issuable upon conversion of all the shares of Convertible Preferred Stock is up to 4,960,281 shares of Common Stock. As of May 9, 2020, certain Convertible Preferred Stock holders converted 2,790 shares of various classes of the Company’s A Preferred Stock to 644,860 shares of Common Stock.

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 September 2021 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 (2) our efforts to obtain regulatory clearances or approvals necessary to be able to commercially launch Dario, DarioEngage and Dario Intelligence, (3) expenses which will be required in order to expand manufacturing of our products, (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 distribute our products and services in the jurisdictions and in the timeframes we expect.

Cash Flows (dollar amounts in thousands)

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

Net cash used in operating activities

Net cash used in operating activities was $4,545 for the three months ended March 31, 2020 an increase of 14% compared to $3,989 used in operations for the same period in 2019. Cash used in operations increased mainly due to the decrease in our sales to customers.

Net cash used in investing activities

Net cash used for investing activities was $28 for the three months ended March 31, 2020, a decrease of 38% compared to cash derived from investing activities of $45 for the same period in 2019. Cash used for investing activities decreased mainly due to the decrease in purchase of property and equipment.

Net cash provided by financing activities

Net cash provided by financing activities was $0 for the three months ended March 31, 2020, as well as for the same period in 2019.

Off-Balance Sheet Arrangements

As of March 31, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Based on their evaluation, the Certifying Officers concluded that, as of March 31, 2020, our disclosure controls and procedures were designed at a reasonable assurance level and were therefore effective.  

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2020, 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 1A. Risk Factors.

Our business faces many risks, a number of which are described under the caption “Risk Factors” in the 2019 Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Other than as set forth below, there have been no material changes from the risk factors previously disclosed in the 2019 Annual Report. The risks described in the 2019 Annual Report and below may not be the only risks we face. Other risks of which we are not yet aware, or that we currently believe are not material, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described in the risk factors contained in the 2019 Annual Report or described below occurs, our business, financial condition or results of operations could be adversely impacted and the value of an investment in our securities could decline. Investors and prospective investors should consider the risks described in the 2019 Annual Report and below, and the information contained under the caption “Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q before deciding whether to invest in our securities.

The COVID-19 pandemic, or any other pandemic, epidemic or outbreak of an infectious disease, may materially and adversely affect our business and operations. 

The recent outbreak of COVID-19 originated in Wuhan, China, in December 2019 and has since spread to multiple countries, including the United States, Israel and many European countries in which we operate. On March 11, 2020, the World Health Organization declared the outbreak a pandemic. While COVID-19 is still spreading and the final implications of the pandemic are difficult to estimate at this stage, it is clear that it has affected the lives of a large portion of the global population. At this time, the pandemic has caused states of emergency to be declared in various countries, travel restrictions imposed globally, quarantines established in certain jurisdictions and various institutions and companies being closed. We are actively monitoring the pandemic and we are taking any necessary measures to respond to the situation in cooperation with the various stakeholders.

Based on guidelines provided by the Israeli Government, employers (including us) are also required to prepare and increase as much as possible the capacity and arrangement for employees to work remotely. In that regard, and in compliance with all applicable Israeli rules and guidelines, our offices have remained closed since the middle of March 2020, and all of our employees currently work remotely. In addition, COVID-19 infection of our workforce could result in a temporary disruption in our business activities, including manufacturing, and other functions.

In addition, we have been carefully monitoring the COVID-19 pandemic and its impact on our business. In that regard, we have continued to sell our Dario^TM Blood Sugar Monitor and have not experienced disruptions in our supply chains. With respect to our DTx platform, we have observed that some of our 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, we have also seen an increase in interest from other business-to-business prospective partners in our DTx platform, as certain parties are seeking tele-health products, as exhibited with our April 2020 announcement regarding our partnership with MediOrbis relating to the expansion of our existing service offering with a full suite of telemedicine capabilities.

The spread of an infectious disease, including COVID-19, may also result in the inability of our manufacturers to deliver components or finished products on a timely basis. In addition, health professionals may reduce staffing and reduce or postpone meetings with clients in response to the spread of an infectious disease. Such events may result in a period of business and manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.

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

During the first quarter of 2020, we issued an aggregate of 66,905 shares of our common stock to certain of our service providers as compensation in lieu of cash compensation owed to them for services rendered. We claimed exemption from registration under the Securities Act of 1933, as amended, or the Securities Act, for the foregoing transactions under Section 4(a)(2) of the Securities Act.

In January 2020, we entered into Exchange Agreements with certain warrant holders who were issued warrants to purchase shares of common stock in September 2018. Pursuant to the terms of the exchange agreements, the warrant holders agreed to surrender their warrants to purchase an aggregate of 139,336 shares of common stock for cancellation and received, as consideration for such cancellation, an aggregate of 97,536 restricted shares of common stock. The securities issued pursuant to the foregoing are exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) and/or Regulation S and/or Section 4(a)(2) of the Securities Act and/or Rule 506(b) of Regulation D promulgated thereunder because, among other things, the transaction did not involve a public offering and the warrant holders are accredited investors.

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.