DarioHealth Corp. - Quarter Report: 2022 September (Form 10-Q)

Amortization

period (Years)

Technology

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

	For the quarterly period ended September 30, 2022

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

	For the transition period from to

Commission File No. 001-37704

DarioHealth Corp.

(Exact name of registrant as specified in its charter)

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


18 W. 18th St.
New York, New York	10011
(Address of Principal Executive Offices)	(Zip Code)

(972)-4 770-6377

(Registrant’s telephone number, including area code)

n/a

(Former name, former address and former fiscal year, if changed since last report)

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


Title of each class	Trading Symbol(s)	Name of exchange on which registered
Common Stock, par value $0.0001 per share	DRIO	The Nasdaq Capital Market LLC

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 ☒ 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 ☒ 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	☒	Smaller reporting company
		☐	Emerging growth company

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

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

As of November 11, 2022, the registrant had 23,296,754 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, our subsidiaries LabStyle Innovation Ltd. and Upright Technologies Ltd., each of which are Israeli companies, and Upright Technologies Inc. and PsyInnovations Inc., each a Delaware 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.

Table of Contents

DarioHealth Corp.

Quarterly Report on Form 10-Q

TABLE OF CONTENTS

		Page

Cautionary Note Regarding Forward-Looking Statements		3

PART 1- FINANCIAL INFORMATION

Item 1.	Interim Consolidated Financial Statements (unaudited)	F-1

	Interim Consolidated Balance Sheets	F-2 – F-3

	Interim Consolidated Statements of Comprehensive Loss	F-4

	Interim Statements of Stockholders’ Equity	F-5 – F- 6

	Interim Consolidated Statements of Cash Flows	F-7

	Notes to Interim Consolidated Financial Statements	F-8 – F-25

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4

Item 4.	Control and Procedures	11

PART II- OTHER INFORMATION		12

Item 1A.	Risk Factors	12

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	12

Item 6.	Exhibits	13

SIGNATURES		14

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

●

our current and future capital requirements and our ability to satisfy our capital needs through financing transactions or otherwise;

●

our product launches and market penetration plans;

●

the execution of agreements with various providers for our solution;

●

our ability to maintain our relationships with key partners, including Sanofi U.S. Services Inc. (“Sanofi”) ;

●

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;

●

the impact of the COVID-19 pandemic on our manufacturing, sales, business plan and the global economy;

●

interpretations of current laws and the passages of future laws; and

●

acceptance of our business model by investors.

Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors. These statements are described under the heading “Risk Factors” in Part I, Item 1A., of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Annual Report”) and in Part II, Item 1A., of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 (the “Quarterly Report”), as well 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.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2022

UNAUDITED

INDEX

		Page
Interim Consolidated Balance Sheets		F-2 – F-3

Interim Consolidated Statements of Comprehensive Loss		F-4

Interim Statements of Stockholders’ Equity		F-5 – F- 6

Interim Consolidated Statements of Cash Flows		F-7

Notes to Interim Consolidated Financial Statements		F-8 – F-25

F-1

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands


	September 30,		December 31,
	2022		2021
	Unaudited
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	57,081	$	35,808
Short-term restricted bank deposits		176		192
Trade receivables		4,521		1,310
Inventories		7,762		6,228
Other accounts receivable and prepaid expenses		2,042		2,067

Total current assets		71,582		45,605

NON-CURRENT ASSETS:
Deposits		6		20
Operating lease right of use assets		1,174		287
Long-term assets		21		57
Property and equipment, net		858		702
Intangible assets, net		11,053		12,460
Goodwill		41,640		41,640

Total non-current assets		54,752		55,166

Total assets	$	126,334	$	100,771

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

F-2

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

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


	September 30,		December 31,
	2022		2021
	Unaudited
LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Trade payables	$	1,982	$	5,109
Deferred revenues		990		1,195
Operating lease liabilities		270		266
Other accounts payable and accrued expenses		6,512		7,806
Earn-out liability		1,770		825

Total current liabilities		11,524		15,201

NON-CURRENT LIABILITIES
Operating lease liabilities		817		21
Long-term loan		24,046		—
Warrant liability		1,001		—

Total non-current liabilities		25,864		21

STOCKHOLDERS’ EQUITY
Common stock of $0.0001 par value - Authorized: 160,000,000 shares at September 30, 2022 (unaudited) and December 31, 2021; Issued and Outstanding: 23,291,008 and 16,573,420 shares at September 30, 2022 (unaudited) and December 31, 2021, respectively		2		2
Preferred stock of $0.0001 par value - Authorized: 5,000,000 shares at September 30, 2022 (unaudited) and December 31, 2021; Issued and Outstanding: 9,912 and 11,927 shares at September 30, 2022 (unaudited) and December 31, 2021, respectively		*) -		*) -
Additional paid-in capital		361,912		307,561
Accumulated deficit		(272,968)		(222,014)

Total stockholders’ equity		88,946		85,549

Total liabilities and stockholders’ equity	$	126,334	$	100,771

*) - Represents an amount lower than $1

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

F-3

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

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


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021

	Unaudited				Unaudited
Revenues:
Services	$	4,552	$	776	$	12,802	$	1,852
Hardware and consumable products		2,053		4,853		8,045		12,633
Total revenues		6,605		5,629		20,847		14,485

Cost of revenues:
Services*		1,826		126		3,538		233
Hardware and consumable products*		1,874		3,433		7,255		8,498
Amortization of acquired intangible assets		1,105		1,244		3,131		2,339
Total cost of revenues		4,805		4,803		13,924		11,070

Gross profit		1,800		826		6,923		3,415

Operating expenses:
Research and development	$	4,803	$	5,506	$	14,867	$	11,903
Sales and marketing		7,571		10,696		26,403		27,476
General and administrative		3,999		7,123		13,453		18,865

Total operating expenses		16,373		23,325		54,723		58,244

Operating loss		14,573		22,499		47,800		54,829

Total financial (income) expenses, net		1,059		(55)		1,775		346

Loss before taxes		15,632		22,444		49,575		55,175

Income Tax		—		—		1		—

Net loss	$	15,632	$	22,444	$	49,576	$	55,175

Other comprehensive income (loss):
Deemed dividend	$	494	$	488	$	1,378	$	1,520

Net loss attributable to shareholders	$	16,126	$	22,932	$	50,954	$	56,695

Net loss per share:

Basic and diluted loss per share	$	0.64	$	1.18	$	2.03	$	2.98
Weighted average number of common stock used in computing basic and diluted net loss per share		22,973,197		16,473,449		22,876,397		16,202,541

* Excluding amortization

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

F-4

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

INTERIM STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

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


							Additional				Total
	Common Stock			Preferred Stock			paid-in		Accumulated		stockholders’
Three Months Ended September 30, 2022	Number	Amount		Number	Amount		capital		deficit		equity
Balance as of June 30, 2022 (unaudited)	22,860,044	$	2	10,797	$	*)-	$	356,492	$	(256,842)	$	99,652

Issuance of common stock to directors and employees	5,564		*)-	—		—		29		—		29
Issuance of common stock to consultants and service provider	8,941		*)-	—		—		43		—		43
Conversion of preferred stock to common stock	308,711		*)-	(885)		*)-		—		—		*)-
Deemed dividend related to issuance of preferred stock	—		—	—		—		494		(494)		—
Issuance of warrants to service providers	—		—	—		—		609		—		609
Stock-based compensation	107,748		*)-	—		—		4,245		—		4,245
Net loss	—		—	—		—		—		(15,632)		(15,632)

Balance as of September 30, 2022 (unaudited)	23,291,008	$	2	9,912	$	*)-	$	361,912	$	(272,968)	$	88,946

							Additional				Total
	Common Stock			Preferred Stock			paid-in		Accumulated		stockholders’
Nine Months Ended September 30, 2022	Number	Amount		Number	Amount		capital		deficit		equity
Balance as of December 31, 2021(audited)	16,573,420	$	2	11,927	$	*)-	$	307,561	$	(222,014)	$	85,549

Exercise of warrants	81,221		*)-	—		—		—		—		*)-
Issuance of common stock to directors and employees	29,755		*)-	—		—		190		—		190
Issuance of common stock to consultants and service provider	21,901		*)-	—		—		230		—		230
Conversion of preferred stock to common stock	648,128		*)-	(2,015)		—		—		—		*)-
Deemed dividend related to issuance of preferred stock	—		—	—		—		1,378		(1,378)		—
Issuance of warrants to service providers	—		—	—		—		2,467		—		2,467
Stock-based compensation	1,064,126		*)-	—		—		11,011		—		11,011
Issuance of common stock and pre-funded warrants, net of issuance cost	4,674,454		*)-	—		—		38,023		—		38,023
Issuance of common stock, net of issuance cost upon Acquisition of Physimax Technologies Ltd.	256,660		*)-	—		—		1,186		—		1,186
Repurchase and retirement of common stock	(58,657)		*)-	—		—		(134)		—		(134)
Net loss	—		—	—		—		—		(49,576)		(49,576)

Balance as of September 30, 2022 (unaudited)	23,291,008	$	2	9,912	$	*)-	$	361,912	$	(272,968)	$	88,946

*) Represents an amount lower than $1.

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

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

INTERIM STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

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


							Additional				Total
	Common Stock			Preferred Stock			paid-in		Accumulated		stockholders’
Three Months Ended September 30, 2021	Number	Amount		Number	Amount		capital		deficit		equity
Balance as of June 30, 2021 (unaudited)	16,330,842	$	*)-	12,122	$	*)-	$	295,124	$	(177,011)	$	118,113

Payment for executives and directors under Stock for Salary Program	1,791		*)-	—		—		34		—		34
Issuance of common stock to consultants and service provider	112,332		*)-	—		—		1,705		—		1,705
Issuance of common stock to directors and employees	18,885		*)-	—		—		303				303
Conversion of preferred stock to common stock	8,100		*)-	(25)		*)-		—		—		*)-
Deemed dividend related to issuance of preferred stock	—		—	—		—		488		(488)		—
Issuance of warrants to service providers	—		—	—		—		2,121		—		2,121
Stock-based compensation	37,394		*)-	—		—		4,607		—		4,607
Net loss	—		—	—		—		—		(22,444)		(22,444)

Balance as of September 30, 2021 (unaudited)	16,509,344	$	*)-	12,097	$	*)-	$	304,382	$	(199,943)	$	104,439

							Additional				Total
	Common Stock			Preferred Stock			paid-in		Accumulated		stockholders’
Nine Months Ended September 30, 2021	Number	Amount		Number	Amount		capital		deficit		equity
Balance as of December 31, 2020 (audited)	8,119,493	$	*)-	15,823	$	*)-	$	171,399	$	(143,248)	$	28,151

Payment for executives and directors under Stock for Salary Program	9,124		*)-	—		—		133		—		133
Exercise of options	40,545		*)-	—		—		256		—		256
Exercise of placement agent warrants	111,061		*)-	—		—		—		—		*)-
Exercise of warrants	219,992		*)-	—		—		633		—		633
Issuance of common stock to consultants and service provider	287,753		*)-	—		—		4,078		—		4,078
Issuance of common stock to directors and employees	18,885		*)-	—		—		303		—		303
Conversion of preferred stock to common stock	874,530		*)-	(3,726)		*)-		—		—		*)-
Deemed dividend related to issuance of preferred stock	—		—	—		—		1,520		(1,520)		—
Issuance of warrants to service providers	—		—	—		—		4,918		—		4,918
Stock-based compensation	1,093,537		*)-	—		—		9,238		—		9,238
Issuance of common stock, net of issuance cost	3,278,688		*)-	—		—		64,877		—		64,877
Issuance of common stock upon acquisition of Upright Technologies Ltd.	1,687,612		*)-	—		—		28,933		—		28,933
Issuance of common stock upon acquisition of PsyInnovations Inc.(dba WayForward)	768,124		*)-	—		—		18,094		—		18,094
Net loss	—		—	—		—		—		(55,175)		(55,175)

Balance as of September 30, 2021 (unaudited)	16,509,344	$	*)-	12,097	$	*)-	$	304,382	$	(199,943)	$	104,439

*) Represents an amount lower than $1.

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

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands


	Nine months ended
	September 30,
	2022		2021

	Unaudited
Cash flows from operating activities:
Net loss	$	(49,576)	$	(55,175)
Adjustments required to reconcile net loss to net cash used in operating activities:
Stock-based compensation, common stock, and payment in stock to directors, employees, consultants, and service providers		13,898		18,670
Depreciation		243		202
Change in operating lease right of use assets		(887)		137
Amortization of acquired intangible assets and inventories step-up		3,224		3,381
Increase in trade receivables		(3,211)		(1,125)
Decrease in other accounts receivable, prepaid expense and long-term assets		129		221
Increase in inventories		(1,534)		96
Increase in trade payables		(3,136)		-
Decrease in other accounts payable and accrued expenses		(1,401)		(1,368)
Decrease in deferred revenues		(205)		(139)
Change in operating lease liabilities		800		(173)
Remeasurement of earn-out		945		-
Non-Cash financial expenses		807		-

Net cash used in operating activities		(39,904)		(35,273)

Cash flows from investing activities:
Investment In deposit		-		(2)
Purchase of property and equipment		(399)		(193)
Cash paid as part of PsyInnovations Inc. (dba WayForward) acquisition		-		(5,023)
Cash paid as part of Upright Technologies Ltd. acquisition		-		(2,472)
Purchase of intangible assets		(115)		-

Net cash used in investing activities		(514)		(7,690)

Cash flows from financing activities:
Proceeds from issuance of common stock and prefunded warrants (net of issuance costs)		38,023		64,877
Proceeds from exercise of warrants		-		633
Proceeds from exercise of options		-		256
Proceeds from borrowings on credit agreement		23,786		-
Repurchase and retirement of common stock		(134)		-

Net cash provided by financing activities		61,675		65,766

Increase in cash, cash equivalents and restricted cash and cash equivalents		21,257		22,803
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period		35,948		28,725

Cash, cash equivalents and restricted cash and cash equivalents at end of period	$	57,205	$	51,528
Supplemental disclosure of cash flow information:
Cash paid during the period for interest on long-term loan	$	969	$	-
Non-cash activities:
Right-of-use assets obtained in exchange for lease liabilities	$	1,177	$	80

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

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1: - GENERAL

DarioHealth Corp. (the “Company” or “DarioHealth”) was incorporated in Delaware and commenced operations on August 11, 2011.

DarioHealth is a 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, software, and personalized coaching, DarioHealth has developed an approach that empowers individuals to adjust their lifestyle in 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 solution, 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.

The Company operates as one reporting unit and one operating segment.

The Company has a wholly owned subsidiary, LabStyle Innovation Ltd. (“LabStyle”), which 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.

Financial instruments that potentially subject the Company to credit risk primarily consist of cash and cash equivalents, short-term deposits, restricted deposits and trade receivables. For cash and cash equivalents, the Company is exposed to credit risks in the event of default by the financial institutions to the extent of the amounts recorded on the accompanying consolidated balance sheets exceed federally insured limits. The Company places its cash and cash equivalents and short-term deposits with financial institutions with high-quality credit ratings and has not experienced any losses in such accounts.

For trade receivables, the Company is exposed to credit risk in the event of non-payment by customers to the extent of the amounts recorded on the accompanying consolidated balance sheets.

As of September 30, 2022, the Company's two major customers accounted for 39.3% and 30.3%, respectively, of the Company's accounts receivable balance.

The Company's two major customers accounted for 26.9% and 20.7%, respectively, for the three months period ended September 30, 2022, and 8.5% and 35.2%, respectively, for the nine-months period ended September 30, 2022, of the Company's revenue in the relevant periods.

On January 26, 2021, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) pursuant to which the Company, through LabStyle, acquired all of the outstanding securities of Upright Technologies Ltd. and its wholly owned subsidiary Upright Technologies Inc. (“Upright”). Upright is a digital musculoskeletal (“MSK”) health company focused on preventing and treating the most common MSK conditions through behavioral science, biofeedback, coaching, and wearable tech.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1: - GENERAL (Cont.)

On May 15, 2021, the Company entered into an agreement and plan of merger pursuant to which the Company, through its wholly owned subsidiary WF Merger Sub, Inc. (“Merger Sub”), merged with PsyInnovations Inc. (“WayForward”), pursuant to which the Merger Sub was the surviving company. WayForward is a mental health company that developed the WayForward behavioral digital health platform with artificial intelligence enabled screening to triage and navigate members to specific interventions, digital cognitive behavioral therapy, self-directed care, expert coaching and access to in-person and telehealth provider visits.

During the nine months ended September 30, 2022, the Company incurred operating losses and negative cash flows from operating activities amounting to $47,800 and $39,904, respectively. On September 30, 2022, we had $57,081 in available cash and cash equivalents. Management believes that the Company’s cash on hand is sufficient to meet its obligations as they come due for at least a period of twelve months from the date of the issuance of these 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.

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim consolidated financial statements as of September 30, 2022, have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s consolidated financial position as of September 30, 2022, and the Company’s consolidated results of operations and the Company’s consolidated cash flows for the nine months ended September 30, 2022. Results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

Use of Estimates

Preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. These estimates are based on management's knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Significant Accounting Policies

a. The significant accounting policies applied in the audited annual consolidated financial statements of the Company as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 are applied consistently in these unaudited interim consolidated financial statements.

b. Short-term restricted bank deposits:

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:


	September 30,		September 30,
	2022		2021
	Unaudited		Unaudited
Cash, and cash equivalents as reported on the balance sheets	$	57,081	$	51,331
Short-term restricted bank deposits, as reported on the balance sheets		124		197

Cash, restricted cash, cash equivalents and restricted cash and cash equivalents as reported in the statements of cash flows	$	57,205	$	51,528

c. Business and Asset Acquisitions

When the Company acquires a business, the purchase price is allocated to the tangible and identifiable intangible assets, net of liabilities assumed. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital. These estimates are inherently uncertain and unpredictable. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.

The Company accounts for a transaction as an asset acquisition when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, or otherwise does not meet the definition of a business. Asset acquisition-related costs are capitalized as part of the asset or assets acquired.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

d. Recently issued accounting pronouncements, not yet adopted:

In September 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 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 the fiscal years beginning after December 15, 2019, including the 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 SEC) and other non-SEC reporting entities to fiscal years beginning after December 15, 2022, including the 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.

In August 2020, the FASB issued ASU 2020-06 (“ASU 2020-06”), which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for (a) convertible debt with a cash conversion feature and (b) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was within the scope of those models before the adoption of ASU 2020-06. ASU 2020-06 also requires that the effect of potential share settlement be included in the diluted earnings per share calculation when an instrument may be settled in cash or share. This amendment removes current guidance that allows an entity to rebut this presumption if it has a history or policy of cash settlement. Furthermore, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share, the treasury stock method will be no longer available. The provisions of ASU 2020-06 are applicable for fiscal years beginning after December 15, 2023, with early adoption permitted for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, which requires companies to apply Accounting Standards Codification 606 (“ASC 606”) to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. This creates an exception to the general recognition and measurement principle in Accounting Standards Codification 805 (“ASC 805”). requires companies to apply ASC 606 to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. For the Company, the guidance is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2021-08 on its consolidated financial statements.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3: – ACQUISITIONS

Technology Purchase of Physimax Technologies Ltd.

On March 31, 2022 (the “Acquisition Date”), the Company completed the acquisition, through its subsidiary LabStyle, of a technology from Physimax Technologies Ltd (“Physimax Technology”). The Company considered this transaction as an asset acquisition.

The consideration transferred included the issuance of 256,660 shares of its common stock subjected to certain terms of lock-up periods valued at $1,186, a cash payment of $500, of which $400 was paid during the fourth quarter of 2021, and the remaining to be paid on the second quarter of 2022, The total consideration transferred in the acquisition of Physimax Technology was $1,686. In addition, the Company incurred acquisition-related costs in an amount of $131.

Purchase price allocation:

Under asset acquisition accounting principles, the total purchase price was allocated to Physimax Technology as set forth below.

NOTE 4: - INVENTORIES


	September 30,		December 31,
	2022		2021
	Unaudited
Raw materials	$	1,339	$	714
Finished products		6,423		5,514

	$	7,762	$	6,228

During the nine-month period ended September 30, 2022, and the year ended December 31, 2021, total inventory write-down expenses amounted to $22 and $73, respectively.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5: - REVENUES

The Company is operating a multi-condition healthcare business, empowering individuals to manage their chronic conditions and take steps to improve their overall health. The Company generates revenue directly from individuals through a la carte offering and membership plans. The Company also contracts with enterprise business market groups to provide digital therapeutics solutions for individuals to receive access to services through the Company’s commercial arrangements.

Agreement with Preferred Partner

On February 28, 2022, the Company entered into an exclusive preferred partner, co-promotion, development collaboration and license agreement for a term of five (5) years (the “Exclusive Agreement”). Pursuant to the Exclusive Agreement, the Company will provide a license to access and use certain Company data. In addition, the Company may provide development services for new products of the other party.

The Company has determined that the other party is a customer. The aggregate consideration under the contract is up to $30 million over the initial term of the Exclusive Agreement, consisting of (i) an upfront payment, (ii) annual compensation for development costs per annual development plans to be agreed upon annually and (iii) certain contingent milestone payments upon meeting certain net sales and enrollment rate milestones at any time during the term of the Exclusive Agreement.

During the second quarter of 2022, the parties' joint steering committee approved the first-year development plan, pursuant to the terms of the Exclusive Agreement. The Company has concluded that the development plan is a contract modification which should be accounted for as a separate contract. The Company has also concluded that the development plan includes a single performance obligation – to provide development services, which is satisfied over time. The contract consideration includes fixed and variable consideration. As of September 30, 2022, the Company excluded the variable payments from the transaction price since it is not probable that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is resolved. The Company has also concluded that the measure of progress that best depicts the Company's performance in transferring control of the services transferred to the customer is an input method, based on labor hours consumed. During the three months ended September 30, 2022, the Company has recognized revenues under the development plan of $1,370 with additional revenues of $655 expected to be recognized by the end of 2022.

Agreement with National Health Plan

On October 1 2021, the Company entered into a Master Service Agreement (“MSA”) with a national health plan (“Health Plan”). Pursuant to the terms of the MSA, the Company will perform services as set forth in each statement of work (each “SOW”).

On October 1, 2021, the Company entered into an SOW (“October SOW”) with the Health Plan. Pursuant to the October SOW, the Company will provide the Health Plan access to web and app-based platform, for behavioral health.

The Company concluded that the MSA and the October SOW should be combined into a single contract (the “Contract”).

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5: - REVENUES (Cont.)

The Company has concluded that the Contract contained a single performance obligation – to provide access to the Company's platform. The consideration in the Contract was based entirely on customer usage. Since no usage has occurred as of September 30, 2022, the Company has yet to recognize any revenues from the October SOW.

On August 2022, the Company entered into an additional SOW (“August SOW”) with the Health Plan, and as a result, the Company will provide additional services to the Health Plan.

The Company concluded that the August SOW is a contract modification, which should be accounted for as a separate contract which includes two performance obligations, as follows:

(i)Phase 1 – Digital Behavioral Health Navigation Platform Implementation. This performance obligation includes configuration and implementation of the platform.

(ii)Phase 2 – Enhancements to the Digital Behavioral Health Navigation Platform. This performance obligation includes adding additional features and capabilities to the Platform, such as user chat, additional sorting questions and linking to the Health Plan’s additional services.

The August SOW includes a fixed consideration in the amount of $2,650. The Company allocated the consideration between the two performance obligations based on standalone selling prices. The Company determined the standalone selling prices based on the expected cost plus a margin approach.

As of September 30, 2022, the Company has recognized revenues of $1,778 with additional revenues of $872 expected to be recognized by June of 2023.

The following tables represent the Company’s total revenues for the three and nine months ended September 30, 2022, and 2021 disaggregated by revenue source:


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021

	Unaudited				Unaudited
Commercial	$	4,195	$	309	$	11,591	$	491
Consumers		2,410		5,320		9,256		13,994

	$	6,605	$	5,629	$	20,847	$	14,485

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.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5: - REVENUES (Cont.)

The following table presents the significant changes in the deferred revenue balance during the nine months ended September 30, 2022:


Balance, beginning of the period	$	1,195
New performance obligations		5,754
Reclassification to revenue as a result of satisfying performance obligations		(5,959)
Balance, end of the period	$	990

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.

NOTE 6: - FAIR VALUE MEASUREMENTS

Under U.S. GAAP, fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and requires that assets and liabilities carried at fair value are classified and disclosed in the following three categories:



Level 1-		Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at measurement date.

Level 2-		Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3		Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. The carrying amounts of cash and cash equivalents, short-term and restricted bank deposits, trade receivables, trade payables, other receivables and prepaid expenses and other payables and accrued expenses approximate their fair value due to the short-term maturity of such instruments.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6: - FAIR VALUE MEASUREMENTS (Cont.)

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy used to determine such fair values:


	September 30, 2022
	Unaudited
	Fair Value		Level 1		Level 2		Level 3

			(in thousands)
Financial Assets:
Financial commitment asset (“FCA”)	$	454	$	—	$	—	$	454

Total Financial Assets	$	454	$	—	$	—	$	454

Financial Liabilities:
Earn out liability	$	1,770	$	—	$	—	$	1,770
Long Term Loan		24,046		—		—		24,046
Warrant liability		1,001		—		—		1,001

Total Financial Liabilities	$	26,817	$	—	$	—	$	26,817


	December 31, 2021
	Fair Value		Level 1		Level 2		Level 3

			(in thousands)
Financial Liabilities:
Earn out liability	$	825	$	—	$	—	$	825

Total Financial Liabilities	$	825	$	—	$	—	$	825

FCA

On June 9, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”), by and between the Company, as borrower, and OrbiMed Royalty and Credit Opportunities III, LP, as the lender (the “Lender”). The Credit Agreement provides for a five-year senior secured credit facility in an aggregate principal amount of up to $50 million (the “Loan Facility” or “Loan”), of which $25 million was made available on the Closing Date (the “Initial Commitment Amount” or "First Tranche") and up to $25 million may be made available on or prior to June 30, 2023, subject to certain revenue requirements (the “Delayed Draw Commitment Amount” or “Second Tranche”). On June 9, 2022, the Company closed on the Initial Commitment Amount, less certain fees and expenses payable to or on behalf of the Lender.

The FCA instrument was recognized in connection with the Delayed Draw Commitment Amount (Note 7). The fair value of the FCA is estimated by the Company at each reporting date, which are prepared based on significant inputs that are generally determined based on relative value analyses. The FCA fair value was estimated using a discount rate of 15.6% which reflects the internal rate of return of the Loan at closing of the transactions contemplated by the Credit Agreement as of June 9, 2022 and represents the $25 million Delayed Draw Commitment Amount that may be made available on or prior to June 30, 2023 on similar terms to the Initial Commitment Amount. Therefore, the value of the FCA for the Delayed Draw Commitment Amount of the Loan was initially estimated as 50% of the sum of the commitment fee paid upfront and the lender expenses in relation to the Loan origination.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6: - FAIR VALUE MEASUREMENTS (Cont.)

The fair value of the FCA is amortized over the period of the Delayed Draw Commitment Amount on a straight-line basis. The total amount was estimated at $454.

Earn out Liability

As part of the acquisition of Wayforward on June 7, 2021, the consideration transferred included earn-out payable in up to 237,076 restricted shares of Common Stock. The earn-out arrangement is not indexed to the Company's own stock and was accounted as a liability and subsequently measured at fair value through earnings until the settlement date of December 31, 2022.

On July 7, 2022, the Company entered into an Amendment to Agreement and Plan of Merger (the “Amendment”) with representatives of the former equity holders of PsyInnovations, Inc. Pursuant to the terms of the Amendment, the Company agreed to reduce the earn-out threshold of revenue derived from Wayforward products from $5 million to $3 million.

In determining the earn-out fair value, the Company used the Monte-Carlo simulation valuation technique, in order to predict the probability of different outcomes that rely on repeated random variables.

The significant inputs into the models were:


	September 30,	December 31,
	2022	2021
Expected Term (in years)	0.33		1.08
Expected Volatility	32.1%		32.1%
Beta	45%		45%
Debt Rate	4.62%		0.82%

For the nine months ended September 30, 2022, the Company recorded expenses from remeasurement of the earn-out in the amount of $945.

Loan Facility

The fair value of the Loan Facility is recognized in connection with the Company’s Credit Agreement with respect to the Initial Commitment Amount only (Note 7). The fair value of the Loan Facility was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the Loan, which is reported within non-current liabilities (Maturity Date - June 9, 2027) on the consolidated balance sheets, is estimated by the Company at each reporting date based on significant inputs that are generally determined based on relative value analyses.

The Loan incorporates comparisons to instruments with similar covenants, collateral, and risk profiles and was obtained using a discounted cash flow technique. On the date of Loan origination, or June 9, 2022, the discount rate was arrived at by calibrating the loan amount of $25 million with the fair value of the warrants of $1,930 and the loan terms interest rate of secured overnight financing rate (“SOFR”) + 9.5%. The implied internal rate of return of the loan was 15.6%. The fair value of the Loan, as of September 30, 2022, was estimated using a discount rate of 15.6% which reflects the internal rate of return of the Loan at closing, as of June 9, 2022. The change in the fair value of the loan was recorded in earnings since the Company has concluded that no adjustment related to instrument specific credit risk was required.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6: - FAIR VALUE MEASUREMENTS (Cont.)

Warrant Liability

The fair value of the warrant liability is recognized in connection with the Company’s Loan agreement with the Lender and with respect to the Initial Commitment Amount only (Note 7). The fair value of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the warrant liability, which is reported within non-current liabilities on the consolidated balance sheets, is estimated by the Company based on the Monte-Carlo simulation valuation technique, in order to predict the probability of different outcomes that rely on repeated random variables.

The fair value of the warrant liability was estimated using a Monte-Carlo simulation valuation technique, with the following significant unobservable inputs (Level 3):


		June 9,		September 30,
		2022		2022
Stock price	$	7.45	$	4.63
Exercise price		6.62		6.62
Expected term (in years)		7.00		6.69
Volatility		148.8%		146.8%
Dividend rate		-		-
Risk-free interest rate		3.13%		4.05%

The following tables present the summary of the changes in the fair value of our Level 3 financial instruments:


	Three months ended September 30, 2022
	Unaudited
		Long-Term Loan		Warrant Liability		FCA
Balance as of June 30, 2022	$	23,061	$	1,588	$	607
Change in fair value		985		(587)		(153)

Balance as of September 30, 2022	$	24,046	$	1,001	$	454


	Nine months ended September 30, 2022
	Unaudited
		Long-Term Loan		Warrant Liability		FCA
Balance as of January 1, 2022	$	—	$	—	$	—
Issuance		23,070		1,930		—
Initial measurement of the FCA		—		—		607
Change in fair value		976		(929)		(153)

Balance as of September 30, 2022	$	24,046	$	1,001	$	454

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7: - LONG TERM DEBT

Loan Facility

On June 9, 2022 the Company entered into the Credit Agreement with the Lender. The Credit Agreement provides for a five-year senior secured credit facility in an aggregate principal amount of up to $50 million, of which $25 million, representing the Initial Commitment Amount, was made available on the closing date and up to $25 million, representing the Delayed Draw Commitment Amount, may be made available on or prior to June 30, 2023, subject to certain revenue requirements. On June 9, 2022, the Company closed on the Initial Commitment Amount, less certain fees and expenses payable to or on behalf of the Lender.

All obligations under the Credit Agreement are guaranteed by all of the Company’s wholly owned subsidiaries other than Dario Health Services Private Limited. All obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the Company's and each guarantor's assets by a Pledge and Security Agreement, dated June 9, 2022 (the “Pledge and Security Agreement”). If, until the maturity date of the Loan Facility, the Company’s net revenue does not equal or exceed the applicable amount for such period as set in the Credit Agreement, then the Company shall repay in equal monthly installments the outstanding principal amount of the Loan Facility, together with a repayment premium and other fees. The Company shall repay amounts outstanding under the Loan Facility in full immediately upon an acceleration as a result of an event of default as set forth in the Credit Agreement, together with a repayment premium and other fees.

During the term of the Loan Facility, interest payable in cash by the Company shall accrue on any outstanding balance due under the Loan Facility at a rate per annum equal to the higher of (x) the adjusted SOFR rate (which is the forward-looking term rate for a one-month tenor based on the secured overnight financing rate administered by the CME Group Benchmark Administration Limited) and (y) 0.50% plus, in either case, 9.50%.

During an event of default, any outstanding amount under the Loan Facility will bear interest at a rate of 5.00% in excess of the otherwise applicable rate of interest.

The Credit Agreement contains customary events of default, including with respect to non-payment of principal, interest, fees or other amounts; material inaccuracy of a representation or warranty; failure to perform or observe

covenants; bankruptcy and insolvency events; material monetary judgment defaults; impairment of any material definitive loan documentation; other material adverse effects; key person events and change of control.

Each of the Credit Agreement and a Pledge and Security Agreement also contain a number of customary representations, warranties and covenants that, among other things, will limit or restrict the ability of the Company and its subsidiaries to (subject to certain qualifications and exceptions): create liens and encumbrances; incur additional indebtedness; merge, dissolve, liquidate or consolidate; make acquisitions, investments, advances or loans; dispose of or transfer assets; pay dividends or make other payments in respect of their capital stock; amend certain material documents; redeem or repurchase certain debt; engage in certain transactions with affiliates; and enter into certain restrictive agreements. In addition, the Company will be required to maintain at least $10 million of unrestricted cash and cash equivalents at all times.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7: - LONG TERM DEBT (Cont.)

On the closing date of the Credit Agreement, and with respect to the Initial Commitment Amount only, the Company agreed to issue the Lender a warrant (the “Warrant”) to purchase up to 226,586 shares of the Company’s common stock, at an exercise price of $6.62 per share, which shall have a term of 7 years from the issuance date. The Warrant contains customary share adjustment provisions, as well as weighted average price protection in certain circumstances but in no event will the exercise price of the Warrant be adjusted to a price less than $4.00 per share. In the event the Company is eligible to draw the Delayed Draw Commitment Amount, the Company agreed to issue the Lender an additional warrant (the “Additional Warrant”), with a term of 7 years from the issuance date, to purchase up to 6% of the Delayed Draw Commitment Amount based on a 10 day volume weighted average price of the Company’s common stock (the “Volume Weighted Average Price”) with an exercise price equal to the Volume Weighted Average Price.

The Company concluded that the Credit Agreement includes three legally detachable and separately exercisable freestanding financial instruments: the Initial Commitment Amount, the warrants, and the right to receive the Delayed Draw Commitment Amount, which we refer to as the "Financial Commitment Asset" or "FCA".

The Company has concluded that the warrants are not indexed to the Company's own stock and should be recorded as a liability measured at fair value with changes in fair value recognized in earnings.

The Company has also concluded that the FCA is not indexed to the Company's own stock and should be recorded as an asset, measured at fair value with changes in fair value recognized in earnings. The FCA is presented within other accounts receivable on the interim consolidated balance sheets.

The Company elected to account for the Initial Commitment Amount under the fair value option in accordance with ASC 825, “Financial Instruments.” Under the fair value option, changes in fair value are recorded in earnings except for fair value adjustments related to instrument specific credit risk, which are recorded as other comprehensive income or loss.

During the nine-month period ended on September 30, 2022, the Company recognized $200 of remeasurement expenses related to the Initial Commitment Amount, which were included as part of financial expenses (income) in the Company's statements comprehensive loss. During the nine-month period ended on September 30, 2022, the Company did not recognize any instrument specific credit risk fair value adjustment.

NOTE 8: - COMMITMENTS AND CONTINGENT LIABILITIES

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

Royalties:

The company has a liability to pay future royalties to the Israeli Innovation Authority (the “IIA”) for participated in programs sponsored by the Israeli government for the support of research and development activities. The Company is obligated to pay royalties to the IIA, amounting to 3% of the sales of the products and other related revenues (based on the US dollar) generated from such projects, up to 100% of the grants received. Royalty payment obligations also bear interest at the LIBOR rate. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9: - STOCKHOLDERS’ EQUITY

On January 4, 2022, out of the pre-funded warrants that were issued in May 2019, 81,233 were exercised on a cashless basis into 81,221 shares of the Company’s common stock. As of September 30, 2022, the Company’s total outstanding prefunded warrants were exercisable into 1,769,794 shares of common stock.

On February 28, 2022, the Company entered into securities purchase agreements with institutional accredited investors relating to an offering with respect to the sale of an aggregate of 4,674,454 shares of the Company’s common stock, and pre-funded warrants to purchase an aggregate of 667,559 shares of the Company’s common stock at an exercise price of $0.0001 per share, at a purchase price of $7.49 per share (or share equivalent). The aggregate gross proceeds were approximately $40,000 ($38,023, net of issuance expenses).

During the nine-month ended September 30, 2022, the Company’s Compensation Committee of the Board of Directors approved the grant of 29,755 shares of the Company’s common stock to employees of the Company, and the grant of 1,149,550 restricted shares of the Company’s common stock to employees and consultants. The shares vest over a period of three years commencing on the respective grant dates. The Compensation Committee also approved the grant of options to purchase up to 813,050 shares of the Company’s common stock to employees and a consultant of the Company, at exercise prices between $5.46 and $8.10 per share. The stock options vest over a three-year period commencing on the respective grant dates. The options have a ten-year term and were issued under the 2020 Equity Incentive Plan, as amended (the “2020 Plan”).

In February 2021, the Board of Directors authorized the Company to issue warrants to purchase up to 400,000, shares of Common Stock, to a certain consultant of the Company, at a purchase price of $25.00. During the nine-month ended September 30, 2022, the Company recorded compensation expense for this certain service provider in the amount of $863.

In July 2021, the Compensation Committee authorized the Company to issue warrants to purchase 30,000 shares of Common Stock, to certain consultants of the Company, with an exercise price of $23.30 per share, and warrants to purchase 83,948 shares of the Company’s common stock with an exercise price of $16.06 per share. Of these warrants, warrants to purchase 35,000 shares of the Company’s common stock shall vest over a 48-month period and warrants to purchase 48,948 shares of the Company’s common stock are subjected to certain performance terms. During the nine-month ended September 30, 2022, the Company recorded compensation expense for this certain service provider in the amount of $110.

In May and June 2022, the Compensation Committee authorized the Company to grant warrants to purchase up to 70,000, and 175,000 shares of the Company’s common stock which shall vest over 12 months and 24 months period, respectively, to certain consultants of the Company, at a purchase price of $6.45 and $7.20, respectively. During the nine-month ended September 30, 2022, the Company recorded compensation expense for those certain service providers in the amount of $215.

On June 8, 2022, the Compensation Committee authorized the Company to redeem 17,957 shares of restricted stock held by a certain officer, in compliance with Rule 16b-3 promulgated by the SEC, The redemption is part of previously granted 91,652 and 20,000 shares of restricted stock granted in January and July 2021, in exchange for the aggregate redemption price equal to the withholding tax obligation in the amount of $170.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9: - STOCKHOLDERS' EQUITY (Cont.)

During the nine-month ended September 30, 2022, certain series A Convertible Preferred Stockholders converted 1,130 shares of various classes of the Company’s A Convertible Preferred stock into 277,687 shares of Common Stock.

On September 20, 2022, the Board of Directors authorized the Company to enter into an exchange agreement with a certain preferred stockholder to exchange 885 shares of the Company’s Series A-1 Preferred Stock for 308,711 shares of the Company’s common stock. During the nine months ended 30, 2022, the investor exchanged those certain shares. The Company has accounted for the exchange as a modification and recorded the increase in fair value as a deemed dividend in the amount of $62.

During the nine-month ended September 30, 2022, 61,730 shares of the Company’s common stock were issued as dividend to certain Series A Convertible Preferred stockholders upon conversion of such shares.

Stock based compensation:

On January 23, 2012, the Company’s Amended and Restated 2012 Equity Incentive Plan (the “2012 Plan”) was adopted by the Board of Directors of the Company and approved by a majority of the Company’s stockholders, under which options to purchase shares of the Company’s common stock have been reserved. Under the 2012 Plan, options to purchase shares of Common Stock may be granted to employees and non-employees of the Company or any affiliate, each option granted can be exercised to one share of Common Stock. The 2012 Plan has expired.

On October 14, 2020, the Company’s stockholders approved the 2020 Plan and the immediate reservation of 900,000 shares under the 2020 Plan for the remainder of the 2020 fiscal year. Under the 2020 Plan, options to purchase shares of the Company’s common stock may be granted to employees and non-employees of the Company or any affiliate, each option granted can be exercised to one share of Common Stock.

In January 2022, pursuant to the terms of the 2020 Plan as approved by the Company’s stockholders, the Company increased the number of shares authorized for issuance under the 2020 Plan by 1,339,624 shares, from 2,528,890 to 3,868,514.

On April 23, 2022, the Company released 56,788 holdback shares of the Company’s common stock to certain employee of the Company. The holdback release was part of a separation agreement with the employee, pursuant to which the Company waived the lock-up period.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9: - STOCKHOLDERS' EQUITY (Cont.)

Transactions related to the grant of options to employees, directors, and non-employees under the above plans during the nine-months period ended September 30, 2022, were as follows:


			Weighted
		Weighted	average
		average	remaining	Aggregate
		exercise	contractual	Intrinsic
	Number of	price	life	value
	options	$	Years	$
Options outstanding at beginning of period	1,878,168	18.13	6.96	3,861
Options granted	813,050	7.02	—	—
Options exercised		—	—	—
Options expired	(115,271)	17.74	—	—
Options forfeited	(409,410)	14.95	—	—

Options outstanding at end of period	2,166,537	14.59	7.07	131

Options vested and expected to vest at end of period	2,021,479	14.71	7.03	131

Exercisable at end of period	978,807	18.72	5.55	131

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 2022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2022. This amount is impacted by the changes in the fair market value of the Common Stock.

Transactions related to the grant of restricted shares to employees, directors, and non-employees under the above plans during the nine-months period ended September 30, 2022, were as follows:


								Number of
								Restricted shares

Restricted shares outstanding at beginning of period								1,094,627
Restricted shares granted								1,149,550
Restricted shares forfeited								(103,381)

Restricted shares outstanding at end of period								2,140,796

As of September 30, 2022, the total amount of unrecognized stock-based compensation expense was approximately $26,245 which will be recognized over a weighted average period of 1.19 years.

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9: - STOCKHOLDERS' EQUITY (Cont.)

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:


	Three months ended
	September 30,
	2022				2021

Volatility	92.25	-	92.60	%	93.34	-	96.01	%
Risk-free interest rate	2.70	-	3.01	%	0.01	-	0.01	%
Dividend yield	-		-	%	-		-	%
Expected life (years)	5.81	-	5.88		5.25	-	5.88

The total compensation cost related to all of the Company’s stock-based awards recognized during the nine-month period ended September 30, 2022, and 2021 was comprised as follows:


	Nine months ended
	September 30,
	2022		2021

	Unaudited
Cost of revenues	$	72	$	63
Research and development		3,215		2,480
Sales and marketing		5,089		4,007
General and administrative		5,522		12,120

Total stock-based compensation expenses	$	13,898	$	18,670

NOTE 10: - FINANCIAL EXPENSES (INCOME), NET


	Nine months ended
	September 30,
	2022		2021

	Unaudited
Bank charges	$	59	$	60
Foreign currency adjustments expenses, net		51		322
Interest income		(228)		(36)
Loan Interest Expenses		969		—
Remeasurement of long-term loan		976		—
Remeasurement of warrant liability		(929)		—
Debt issuance cost		724		—
Remeasurement of FCA		153		—

Total Financial expenses (income), net	$	1,775	$	346

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DARIOHEALTH CORP. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 11: - BASIC AND DILUTED NET LOSS PER COMMON STOCK

We compute net loss per share of common stock using the two-class method. Basic net loss per share is computed using the weighted-average number of shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of shares and the effect of potentially dilutive securities outstanding during the period.

The total number of potential shares of common stock 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 6,804,530 and 5,987,711 for the nine months ended September 30, 2022, and 2021, respectively.

The following table sets forth the computation of the Company’s basic and diluted net loss per common stock:


	Nine months ended
	September 30,
	2022		2021

	Unaudited
Net loss attributable to common stock shareholders used in computing basic net loss per share	$	46,336	$	48,357

Weighted average number of common stock used in computing basic loss per share		22,876,397		16,202,541

Basic net loss per common stock	$	2.03	$	2.98

NOTE 12: - SUBSEQUENT EVENTS

In October and November 2022, the Company issued a total of 7,705 restricted shares of the Company’s common stock to a certain service provider, with such issuances approved by the Company’s Compensation Committee of the Board of Directors.

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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, 2021. 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, 2021 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 revolutionizing how people with chronic conditions manage their health through the innovation of a new category of digital health: Digital Therapeutics as a Service (DTaaS). We believe that our innovative approach to digital therapeutics disrupts the traditional provider-centered system of health care delivery by offering user-centric care that is continuous, customized and multi-condition. Our solutions combine the power of technologies and behavior science to make better health accessible, affordable, and easy for all by solving for what people need, when and where they want it, with hyper-personalized care that is always connected – to services, devices, and people – and delivered continuously. This is how we deliver meaningful and sustainable results that result in measurable value for all stakeholders, supporting the full transformation of health care into a more effective and affordable ecosystem.

We began as a direct-to-consumer digital therapeutics company, solving first for the problem of how to engage users and support behavior change to improve clinical outcomes in diabetes. In the last two years, we made two strategic shifts to transform our business: first, we significantly expanded commercial growth opportunities by adding a business-to-business product (B2B) and a commercial team alongside the legacy direct-to-consumer channel. In addition, we began targeting three traditional health business verticals – health plans, employers, and provider groups. As a result, we believe that our new B2B business now leverages our consumer-centric capabilities as a competitive advantage.

Second, we transitioned from a single condition platform to a multi-condition platform, creating a robust suite of solutions to address the five most commonly co-occurring and expensive chronic conditions, which are also representative of some of the most sought-after digital health solutions: diabetes, hypertension, pre-diabetes/weight management, musculoskeletal and behavioral health. After building weight loss and hypertension management into the legacy diabetes platform, we made three acquisitions in order to expand into musculoskeletal and behavioral health.

Our acquisition of Upright Technologies Ltd. (“Upright”) in early 2021 and Physimax in early 2022 enables our musculoskeletal (“MSK”) solutions – “Dario Move.”, our digital behavioral health capabilities were secured through the acquisition of PsyInnovations, Inc. (dba WayForward) in mid-2021.

We believe a key success factor is our ability to integrate multiple chronic conditions into a single digital therapeutics’ platform, the “Dario One.” During 2021 we successfully won contracts in all three B2B business segments, including several contracts for Dario One, creating a compounding effect as more members enroll and many in multiple programs. The combination of moving from direct-to-consumer to the enterprise business market (B2B2C) and expanding from a single condition to multi condition platform, created multiple commercial growth engines as well as a multiplying impact that we believe will improve our financial profile by increasing potential revenue per account and per user.

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

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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.

Except as otherwise disclosed herein, we currently do not 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.

Recent Developments

Employer Contracts

In September 2022, we announced two new employer contracts, including one for the full suite of integrated solutions, which are scheduled to launch in late 2022 and early 2023.

In October 2022, we announced that a mid-sized Midwestern city selected us to provide our full suite of digital therapeutics solutions to several thousand city employees beginning in the first quarter of 2023.

In October 2022, we announced that our full suite of chronic condition management solutions was selected by two employers to help improve overall employee health beginning in the first quarter of 2023.

Presentation of New Studies

In September 2022, we announced new research examining the link between the use of our biofeedback device to help users improve their posture and reduced back pain, which was presented at the International Association of the Study of Pain (IASP) 2022 World Congress on Pain. The research examined the connection between users of our posture trainer, posture awareness and the impact on levels of pain. Our posture training solution, part of the Dario Move suite of musculoskeletal solutions, helps users develop better posture through the use of a wearable biofeedback sensor that vibrates when the user is in a slouching position. Over the course of time, this trains users, helping them to develop awareness and adoption of proper posture. We analyzed the data from close to 1,000 individuals who reported high levels of pain in their initial assessment and who conducted six or more hours a week of posture training for at least eight weeks. This data set allowed researchers to demonstrate that increased time wearing the posture trainer was predictive of posture quality which, in turn, was predictive of the level of pain, establishing the linkage between postural digital biofeedback technology and back pain reduction.

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Results of Operations

Comparison of the three and nine months ended September 30, 2022 and 2021 (dollar amounts in thousands)

Revenues

Revenues for the three and nine months ended September 30, 2022, amounted to $6,605 and $20,847 respectively, compared to revenues of $5,629 and $14,485 during the three and nine months ended September 30, 2021, representing an increase of 17% and 44%, respectively. The increase in revenues for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, is due to an increase in revenues from sales through our B2B channel.

Cost of Revenues

During the three and nine months ended September 30, 2022, we recorded cost of revenues in the amount of $4,805 and $13,924, respectively, compared to costs of revenues of $4,803 and $11,070 during the three and nine months ended September 30, 2021, representing a zero and 25.8% increase, respectively. The increase in cost of revenues in the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, resulted from including payroll development costs in the cost of revenues which were incurred during the period.

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, amortization of technologies, hosting costs, shipping and handling costs and inventory write-downs.

Gross Profit

Gross profit for the three and nine months ended September 30, 2022, amounted to $1,800 (27.3% of revenues) and $6,923 (33.2% of revenues), respectively compared to $826 (14.7% of revenues) and $3,415 (23.6% of revenues) during the three and nine months ended September 30, 2021. The increase in gross profit as a percentage of revenue for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, is due to the revenues derived from sales through our B2B channel. Gross profit for the three and nine months ended September 30, 2022, excluding amortization of acquired technology and inventory step-up were $2,905 (44% of revenues) and $10,054 (48.2% of revenues) compared to $2,532 (45% of revenues) and $6,739 (46.5% of revenues) during the three and nine months ended September 30, 2021.

Research and Development Expenses

Our research and development expenses decreased by $703, or 12.8%, to $4,803 for the three months ended September 30, 2022, compared to $5,506 for the three months ended September 30, 2021, and increased by $2,964, or 24.9%, to $14,867 for the nine months ended September 30, 2022, compared to $11,903 for the nine months ended September 30, 2021. The decrease for the three months ended September 30, 2022 was mainly a result of a decrease in payroll expenses. The increase for the nine months ended September 30, 2022 was mainly a result of expanding our research and development activities. Our research and development expenses, excluding stock-based compensation and depreciation, for the three and nine months ended September 30, 2022, were $3,625 and $11,620 compared to $3,854 and $9,155 for the three and nine months ended September 30, 2021, a decrease of $229 and increase of $2,465, respectively.

Research and development expenses consist mainly of payroll expenses to employees involved in research and development activities, expenses related to: (i) our solutions including our Dario Smart Diabetes Management Solution, DarioEngage platform, Dario Move solution and our digital behavioral health solution, (ii) labor contractors and engineering expenses, (iii) depreciation and maintenance fees related to equipment and software tools used in research and development, (iv) clinical trials performed in the United States to satisfy the FDA product approval requirements and (v) facilities expenses associated with and allocated to research and development activities. We view research and development as a principal strategic investment and have continued our commitment to invest in this area. We will need to continue to invest in research and development and such expenses may increase in the future to keep pace with new trends in our industry.

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Sales and Marketing Expenses

Our sales and marketing expenses decreased by $3,125, or 29.2%, to $7,571 for the three months ended September 30, 2022, compared to $10,696 for the three months ended September 30, 2021, and decreased by $1,073, or 3.9%, to $26,403 for the nine months ended September 30, 2022, compared to $27,476 for the nine months ended September 30, 2021. The decrease was mainly due a decrease in our digital marketing expenses, partially offset by an increase in stock-based compensation and payroll related expenses. Our sales and marketing expenses, excluding stock-based compensation and depreciation, for the three and nine months ended September 30, 2022 were $5,570 and $20,96 compared to $8,780 and $23,322 for the three and nine months ended September 30, 2021, a decrease of $3,210 and $2,356, respectively.

Sales and marketing expenses consist mainly of payroll expenses, online marketing campaigns of our service offering, and other costs associated with sales and marketing activities, as well as trade show expenses, customer support expenses and marketing consultants and subcontractors.

General and Administrative Expenses

Our general and administrative expenses decreased by $3,124, or 43.8%, to $3,999 for the three months ended September 30, 2022, compared to $7,123 for the three months ended September 30, 2021, and decreased by $5,412, or 28.7% to $13,453 for the nine months ended September 30, 2022, compared to $18,865 for the nine months ended September 30, 2021. This decrease was mainly due to decreases in stock-based compensation expenses during the three and nine months ended September 30, 2022. Our general and administrative expenses, excluding stock-based compensation, depreciation, acquisition related costs and earn-out remeasurement for the three and nine months ended September 30, 2022 were $2,170 and $7,099, compared to $1,873 and $6,124 for the three and nine months ended September 30, 2021, an increase of $297 and $975, respectively.

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 expenses, net for the three months ended September 30, 2022, were $1,059, representing an increase of $1,114, compared to financial income of $55 for the three months ended September 30, 2021. Our financial expenses, net for the nine months ended September 30, 2022, were $1,775, representing increase of $1,429, compared to financial expenses of $346 for the nine months ended September 30, 2021. The increase in our financial expenses was mainly due to cost related to obtaining the credit facility agreement dated June 9, 2022 and interest expense for the period from June 9, 2022 in the amount of $1,693 and due to revaluation of the long-term loan, the warrant liability and the financial commitment asset relating to our loan from OrbiMed Royalty and Credit Opportunities III, LP, as the lender (the “Lender”), in the amount of $200.

Financial expenses, net primarily consists of credit facility interest expense, debt issuance costs, interest income from cash balances, bank charges, lease liability and foreign currency translation differences.

Net loss

Net loss decreased by $6,812, or 30.4%, to $15,632 for the three months ended September 30, 2022, compared to a net loss of $22,444 for the three months ended September 30, 2021, and decreased by $5,599, or 10.1%, to $49,576 for the nine months ended September 30, 2022, compared to a net loss of $55,175 for the nine months ended September 30, 2021. The decrease in net loss for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, was mainly due to the increase in our gross profit and the decrease in our operating expenses.

The factors described above resulted in net loss attributable to common stockholders for the three and nine months ended September 30, 2022, amounted to $16,126 and $50,954, respectively, compared to net loss attributable to common stockholders of $22,932 and $56,695.

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Non-GAAP Financial Measures

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

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

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

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


	Three Months Ended September 30,
	(in thousands)
	2022		2021		$ Change
Net Loss Reconciliation
Net loss - as reported	$	(15,632)	$	(22,444)	$	6,812

Adjustments
Depreciation expense		89		69		20
Inventory step up amortization		—		462		(462)
Amortization of acquired technology and brand		1,136		1,290		(154)
Other financial expenses (income), net		1,059		(55)		1,114

EBITDA		(13,348)		(20,678)		7,330

Earn-out remeasurement		6		—		6
Stock-based compensation expenses		4,926		8,770		(3,844)

Non-GAAP adjusted loss	$	(8,416)	$	(11,908)	$	3,492

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	Nine Months Ended September 30,
	(in thousands)
	2022		2021		$ Change
Net Loss Reconciliation
Net loss - as reported	$	(49,576)	$	(55,175)	$	5,599

Adjustments
Depreciation expense		243		202		41
Inventory step up amortization		—		985		(985)
Amortization of acquired technology and brand		3,224		2,396		828
Other financial expenses, net		1,775		346		1,429
Income Tax		1		—		1

EBITDA		(44,333)		(51,246)		6,913

Acquisition costs		—		880		(880)
Earn-out remeasurement		945		—		945
Stock-based compensation expenses		13,898		18,670		(4,772)

Non-GAAP adjusted loss	$	(29,490)	$	(31,696)	$	2,206

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

As of September 30, 2022, we had approximately $57,081 in cash and cash equivalents compared to $35,808 on December 31, 2021.

We have experienced cumulative losses of $272,968 from inception (August 11, 2011) through September 30, 2022 and have a stockholders’ equity of $88,946 on September 30, 2022. 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. However, we believe that our sources of liquidity and capital resources will be sufficient to meet our business needs for at least the next twelve months.

Since inception, we have financed our operations primarily through private placements and public offerings of our common stock, warrants to purchase shares of our common stock, the exercise of existing warrants and options, and credit facility, receiving aggregate net proceeds totaling $251,494 as of September 30, 2022.

On February 1, 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 Common Stock, at a purchase price of $21.35 per share. The aggregate gross proceeds were approximately $70,000.

On February 28, 2022, we entered into a securities purchase agreement with institutional investors, pursuant to which we agreed to issue and sell to the investors in a registered direct offering priced at-the-market under Nasdaq rules an aggregate of 4,674,454 shares of our common stock, par value $0.0001 per share, and pre-funded warrants to purchase an aggregate of 667,559 shares of our common stock. Each share was sold at an offering price of $7.49 per share, and each pre-funded warrant was sold at an offering price of $7.4899, for aggregate gross proceeds of approximately $40 million before deducting the offering expenses. In addition, the investors have executed lock up agreements agreeing to a lock up period of three days.

On October 22, 2021, we entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”), as agent, pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $50 million from time to time through Cowen. As of June 30, 2022, we have not conducted any sales through our Sales Agreement with Cowen.

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On June 9, 2022 (the “Closing Date”), we entered into a credit agreement (the “Credit Agreement”) with the Lender. The Credit Agreement provides for a five-year senior secured credit facility in an aggregate principal amount of up to $50 million, of which $25 million was made available on the Closing Date (the “Initial Commitment Amount”) and up to $25 million may be made available on or prior to June 30, 2023, subject to certain revenue requirements (the “Delayed Draw Commitment Amount”). On the Closing Date, we closed on the Initial Commitment Amount, less certain fees and expenses. If, until the maturity date of the Loan Facility, our net revenue does not equal or exceed the applicable amount for such period as set in the Credit Agreement, then we shall repay in equal monthly installments the outstanding principal amount of the Loan Facility During the term of the Loan Facility, interest payable in cash by us shall accrue on any outstanding balance due. We will pay certain fees with respect to the Loan Facility, including an upfront fee, an unused fee on the undrawn portion of the Loan Facility, an administration fee, a repayment premium and an exit fee, as well as certain other fees and expenses of the Lender. We agreed to issue the Lender a warrant to purchase up to 226,586 shares of our common stock, at an exercise price of $6.62 per share, which shall have a term of 7 years from the issuance date. In the event we are eligible to draw the Delayed Draw Commitment Amount, we agreed to issue the Lender an additional warrant, with a term of 7 years from the issuance date, to purchase up to 6% of the Delayed Draw Commitment Amount based on a 10 day volume weighted average price of our common stock with an exercise price equal to the Volume Weighted Average Price.

Management believes that the proceeds from the prior private placement and the Loan Facility and the funds we may draw down from the Sales Agreement, 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. As a result, we have resolved to remove the going concern note from our financial statements. There are no assurances, however, that we will be able to obtain an adequate level of financial resources that are required for the long-term development and commercialization of our product offering.

As such, we have a significant present need for capital. If we are unable to scale up our commercial launch of our products 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:


	September 30,
	2022	2021
	$	$
Cash used in operating activities:	(39,904,000)	(35,273,000)
Cash used in investing activities:	(514,000)	(7,690,000)
Cash provided by financing activities:	61,675,000	65,766,000
	21,257,000	22,803,000

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Net cash used in operating activities

Net cash used in operating activities was $39,904 for the nine months ended September 30, 2022 an increase of 13.1% compared to $35,273 used in operations for the same period in 2021. Cash used in operations increased mainly due to the increase in our operating activities.

Net cash used in investing activities

Net cash used for investing activities was $514 for the nine months ended September 30, 2022, a decrease of $7,176 compared to $7,690 for the same period in 2021. Cash used for investing activities decreased mainly due to the reduction in acquisition activities compared to the payments made as part of the acquisition of Upright and PsyInnovations Inc. during the nine months ended September 30, 2021.

Net cash provided by financing activities

Net cash provided by financing activities was $61,675 for the nine months ended September 30, 2022 compared to $65,766 net cash provided by financing activities during the same period in 2021.

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, (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 (the “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 September 30, 2022, our disclosure controls and procedures were designed at a reasonable assurance level and were therefore effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2022, 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.

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PART II- OTHER INFORMATION

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2021 Annual Report and in our Quarterly Report, which could materially affect our business, financial condition or future results.

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, except as noted below.

Currently, our revenues are concentrated with two major customers, Sanofi, and a national health plan, and our revenues may decrease significantly if we were to lose our major customers.

Due to our limited operating history, we have a limited customer base and have depended on a major customer, Sanofi, for a significant portion of our revenue. On February 8, 2022, we entered into an exclusive preferred partner, co-promotion, development collaboration and license agreement for a term of five (5) years (the “Exclusive Agreement”) with Sanofi. Pursuant to the Exclusive Agreement, we will provide a license to access and use certain Company data. As of September 30, 2022, our major customer accounted for 27.9% of our accounts receivable balance and, for the nine and three month periods ended September 30, 2022, Sanofi accounted for 34.7% and 19.7%, respectively, of our revenue in the relevant periods. If Sanofi were to terminate the Exclusive Agreement, or if we fail to adequately perform under the Exclusive Agreement, and if we are unable to diversify our customer base, our revenue could decline, and our results of operations could be adversely affected.

In addition, in October 2021, we entered into a master services agreement with a national health plan, which provided for various projects that may be undertaken by us at the direction of the national health plan customer. As of September 30, 2022, the national health plan customer accounted for 39.3% of our accounts receivable balance and, for the nine and three month periods ended September 30, 2022, they accounted for 8.5% and 26.9%, respectively, of our revenue in the relevant periods. During these periods, these revenues were as a result of a specific project that we were assigned to complete for this particular customer. There is no guarantee that the national health plan customer will continue to assign us projects under the master services agreement in the future and we may not realize any significant revenues, if at all, if we are not assigned such projects. If we are unable to realize any additional revenues from our master services agreement with the national health plan customer, our revenue could decline, and our results of operations could be adversely affected.

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

During the three month period ended September 30, 2022, we issued an aggregate of 8,941 shares of the Company’s common stock to certain of our service providers as compensation in lieu of cash compensation owed to them for services rendered.

In addition, on September 20, 2022, we entered into an exchange agreement with a certain preferred stockholder to exchange 885 shares of our Series A-1 Preferred Stock for 308,711 shares of our common stock.

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.

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Item 6. Exhibits.

No.		Description of Exhibit
31.1*	Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a).
31.2*		Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a).
32.1**		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2**		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.1*		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Loss, (iii) Statements of Changes in Stockholders’ Deficiency, (iv) Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.
104		Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).

*Filed herewith.

**Furnished herewith.

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SIGNATURES

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

Date: November 14, 2022		DarioHealth Corp.

	By:	/s/ Erez Raphael
		Name:	Erez Raphael
		Title:	Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Zvi Ben David
		Name:	Zvi Ben David
		Title:	Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer)