Overview
We are a digital health
(mHealth) company that is developing and commercializing a patented and proprietary technology providing consumers with laboratory-testing
capabilities using smart phones and other mobile devices. Our principal operating subsidiary, LabStyle Innovation Ltd., is an Israeli
company with its headquarters in Caesarea, Israel. We were formed on August 11, 2011 as a Delaware corporation with the name LabStyle
Innovations Corp. On July 28, 2016, we changed our name to DarioHealth Corp. Our flagship product, Dario™, which we also
refer to as our Dario™ Smart Diabetes Management Solution is a mobile, real-time, cloud-based, diabetes management solution
based on an innovative, multi-feature software application combined with a stylish, ‘all-in-one’, pocket-sized, blood
glucose monitoring device, which we call the Dario™ Smart Meter.
The Dario™ Smart
Diabetes Management Solution is targeted at the mHealth app market currently estimated at $10 billion globally with expected annual
growth of 15% to $31 billion by 2020 according to Research2Guidance. In addition, we are also focusing on the global diabetes care
devices market for diabetic blood glucose self-monitoring, known as BGMS, that is expected to reach approximately $24.6 billion
by 2020 according to researchandmarkets.com. Diabetes is a disease where insufficient levels, or a total absence, of the hormone
insulin produces high levels of glucose in the bloodstream, which can lead to long term adverse effects on a patient’s blood
vessels, which in turn can lead to heart attack, stroke, high blood pressure, blindness, kidney disease and nerve damage. As part
of controlling blood sugar, many patients must self-monitor their blood glucose levels using home testing kits (called glucose
meters) and treat high and low blood sugar episodes accordingly to avoid the complications from the disease. We believe that by
allowing patients to properly monitor the disease, provide actionable insights in real-time and create an online link to healthcare
providers, this will ultimately improve patient outcomes and reduce healthcare costs - both critical advantages for the diabetes
industry.
Dario™ is a comprehensive,
digital diabetes management solution utilizing our patented and proprietary technology delivered through a cutting edge software
application (commonly known as an “app”) available for iPhone or Android and cloud-based data services with a novel
BGMS device (the Dario™ Smart Meter) that connect via a device’s audio jack consisting of a lancet (to obtain a blood
sample), a device-specific disposable test strip cartridge and a smart mobile device-driven glucose reader adaptor. Roughly the
size of a pack of gum, we believe that the Dario™ Smart Meter has the potential to replace standalone glucose meters and
their kits (lancing, lancets and strips vials) which are the current market standard, most of which have the necessary testing
components separated from one another in what we believe is a cumbersome design. Moreover, all but a few glucose meters lack an
interface with a smart mobile device, and none presently have the software features associated with Dario™, each of which
we believe will distinguish Dario™ as an alternative in the marketplace.
Beyond the benefits of
individual diabetes management, we envision the Dario™ application becoming the centerpiece in a new era of interconnected
devices and services, providing healthier and better lives for diabetic patients worldwide. With every single measurement captured
and stored on a secure cloud data base, DarioHealth’s software driven, comprehensive data-management technology has the potential
to deliver actionable insight and analytical tools to manage individual patients or large populations, as well as provide a complete
and comprehensive “big data” solution for healthcare providers and payers.
Beyond blood glucose testing,
DarioHealth’s technology provides a body-fluid testing apparatus for performing metered measurement of samples utilizing:
(i) a lancing device to obtain a test sample (blood in the case of Dario™); and (ii) an adaptor specifically designed to
connect a strip devised to absorb the sample, which then produces an electric signal indicating the level of the substance
tested for in the sample. The adaptor is then connected to a smart mobile device via the headphone jack, which allows
the test signal to be transmitted to the smart mobile device, which will then utilize our software application to obtain and display
the test result on the device. This is coupled with a set of software features available via a smart mobile device application
as well as cloud-based services, in real-time. We are presently pursuing patent applications in multiple jurisdictions
covering the specific processes related to blood glucose level measurement as well as more general methods of rapid tests of body
fluids using mobile devices and cloud-based services. On August 5, 2014, we were issued a U.S. patent (No. 8,797,180) relating
to how the Dario™ blood glucose monitor draws power from and transmits data to a smart phone via the audio jack port and
on September 8, 2015, we were issued a U.S. patent (No. 9,125,549) that broadens our registered patent No. 8,797,180 to include
testing of other bodily fluids through an audio jack connection. We believe these represent critical intellectual property recognition
and a significant initial validation of our intellectual property efforts.
On September 23, 2013,
we announced our receipt of CE Mark certification to market Dario™. The receipt of the CE Mark (which incorporated positive
data from clinical user performance studies undertaken in Israel) allows Dario™ to be marketed and sold in 32 countries across
Europe as well as in certain other countries worldwide. On March 5, 2014, the Medical Device Safety Service, or MDSS, our European
Authorized Representative, completed the registration of the Dario™ Smart Meter with the German Authority as required by
Article 10 of Directive 98/79/EC on in vitro diagnostic medical devices.
On December 22, 2015, we
announced that the United States Food and Drug Administration (FDA) has granted 510(k) clearance for the Dario Blood Glucose Monitoring
System, including its components, the Dario Blood Glucose Meter, Dario Blood Glucose Test Strips, Dario Glucose Control Solutions
and the Dario app on the Apple iOS 6.1 platform and higher. The receipt of FDA clearance allows Dario™ to be marketed and
sold in the United States and was a significant milestone towards marketing and commercialization of Dario in the United States
in the first quarter of 2016.
In June 2014, we were granted
(effective September 1, 2014) reimbursement status in England, Wales, Scotland and Northern Ireland for strips and lancets to be
utilized together with the Dario™ Smart Meter. We are actively pursuing reimbursement coverage in other jurisdictions.
In July 2014, we received
approval from Israel’s Ministry of Health to sell the Dario™ Smart Meter for diabetes in Israel and also released the
Dario™ Diabetes Management App for Android smartphone users. The Android mobile application has the same user interface and
features as the iOS Dario™.
In December 2014, we received
Therapeutic Goods Administration, or TGA, certification to market the Dario™ in Australia. We were also granted reimbursement
status for the Dario™ test strips in Australia by the NDSS.
In December 2014, we entered
into an agreement with Israel’s leading Health Maintenance Organization (healthcare HMO), Maccabi Healthcare, or MOMA, to
implement a comprehensive Dario™ digital suite for patients and professionals. The agreement with MOMA (Maccabi TeleCare
unit) represents an additional revenue stream channel for Dario™. We believe this revenue channel demonstrates the significant
potential available in software-based services and value added services with HMOs and other strategic partners worldwide. The Dario™
application for MOMA is a proprietary customized diabetes management solution that enables remote treatment for diabetes and aims
to improve overall outcomes for patients leveraging mHealth technology for effective engagement of health care professionals.
In February 2015, we obtained
National Pharmaceutical Product Interface (known as NAPPI) approval and have registered Dario™ for sale in South Africa.
In March 2015, we started
marketing the Dario™ Smart Diabetes Management Solution in the Netherlands and New Zealand as a private, out of pocket offering
(no reimbursement).
In May 2015, we received
Health Canada approval to market and sell Dario™ in Canada and we commenced sales in Canada in June 2015. The majority of
Canadian medical plans are currently providing reimbursement coverage for Dario™.
The Dario™ Smart Diabetes Management Solution
has fully launched and begun penetrating the above mentioned markets with additional launch and market penetration plans for Germany
and India. In 2017, we plan to consistently add additional features and functionality in order to make Dario™ Smart Diabetes
Management Solution the new standard of care in diabetes data management. For example, we have recently completed the development
of a version of the Dario™ Smart Meter that connects to an iPhone 7 through the lightning jack instead of the missing audio
jack. We plan to start marketing our new meter product in the coming months after completing the clearance process with the relevant
regulatory authorities like the FDA and obtaining a CE mark.
We commenced a commercial
launch of the free Dario
TM
application in the United Kingdom in late 2013 and commenced an initial soft launch of the
full Dario
TM
solution (including the app and the Smart Meter) in selected jurisdictions in March 2014 with the goal
of collecting customer feedback to refine our longer-term roll-out strategy and continued to scale up launch during 2014 in the
United Kingdom, the Netherlands and New Zealand, in 2015 in Australia, Israel and Canada and in 2016 in the United States. We are
consistently adding additional features and functionality in making Dario
TM
Smart Diabetes Management Solution the new
standard of care in diabetes data management.
In the United States we
commenced commercialization in March 2016 and intend to continue to generate demand through a digital direct to consumer marketing
campaign. Customers are currently able to purchase the product directly through our proprietary e-store where they can also subscribe
to a subscription-based service. In July 2016, we signed an agreement with GEMCO Medical, an established healthcare distributor
and a pioneer in the diabetes supply industry, to become the first authorized United States distributor of Dario
TM
and
to complement the Company's direct-to-consumer model to further expand and strengthen its presence in the United States. Also during
July 2016, we launched our Australian proprietary e-store where customers may subscribe to a subscription-based service. Additional
third party distribution channels are expected to be established through 2017, although there is no guarantee we will be successful.
We also intend to continue to broaden our reach via distribution agreements with national and regional durable medical equipment
and pharmacy chains.
In Europe, we plan to start
our direct to consumer marketing efforts in 2017.
Although we are initially
targeting only the large and growing BGMS market, we believe our invention has the potential to cover dozens of laboratory tests
of bodily fluids (including blood, urine and saliva) that could potentially be undertaken using a smart mobile device, including
blood coagulation, cholesterol, HIV and others.
Our Initial Product - Dario™
We believe that the diabetic
disease management market presents the most attractive initial application for our proprietary technology as there are millions
of potential diabetic users of a smart mobile device-enabled glucose monitoring technology. As such, our first product, which
we also refer to as the Dario™ Smart Diabetes Management Solution, will seek to revolutionize the way diabetic patients around
the world manage their disease and connect with healthcare providers and others, making the Dario™ solution user-centric,
engaging and accessible to all.
The full Dario™
diabetes management solution consists of a robust, real-time, cloud-based software application combined with the Dario™
Smart Meter. Roughly the size of a pack of gum, the Dario™ Smart Meter is an all-in-one device that includes
the glucose reader which is connected to a smart mobile device via the device audio jack, along with a lancing device (a reusable
blood-sampling device, when loaded with a disposable lancet) and an integrated, disposable cartridge for test strips. Beyond the
benefits of individual diabetes management, we envision the Dario™ application becoming the centerpiece in a new era of interconnected
devices and services, providing healthier and better lives for diabetic patients worldwide. With every single measurement captured
and stored on a secure cloud data base, DarioHealth’s software driven, comprehensive data-management technology has the potential
to deliver actionable insight and analytical tools to manage individual patients or large populations, as well as provide a complete
and comprehensive “big data” solution for healthcare providers and payers.
Our revenues are derived
from sales of Dario™’s components, including the
Smart Meter
itself,
and principally from the recurring sale of our disposable cartridges with 25 test strips and other consumables. Our
customers receive access to our smart mobile device application, which incorporate tools to help diabetic patients manage their
disease. Importantly, our revenue model is driven by the fact that only our test strips, purchased through us and our
partners, are able to be utilized with the Dario™
Smart Meter
and
software, so it is our expectation that we will be the sole source for Dario™ compatible test strips. In addition
to
Smart Meter
and test strip related revenue, we anticipate to generate
revenues in the future from our ability to offer Dario™’s subscribers additional products and services based on
personalized recommendations, such as location-based, low-sugar food recommendations and the ability to send alerts to caregivers
and family and friends. It is our intention to generate and sustain revenue not only from the consumables but also from
software licensing and added value services so that the data monetization revenue channel becomes a significant contributor to
the company’s gross margin. We plan to monetize the comprehensive data that is collected in the Dario™ cloud as a result
of various offerings such as a platform for diabetes
related clinical
trials.
We believe the following
features of our Dario™ solution and the manner in which we plan to market and distribute the product will help position Dario™
to gain users and drive revenue growth:
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Look and Feel
. While
utilizing the same state of the art electro-chemical, blood-based measurement techniques as standard glucose monitors offers familiar
usability, the Dario™ blood glucose monitor is easily integrated with the patient’s own smart mobile device that
offers a distinctive look and feel. Furthermore, unlike the market standards, the Dario™
Smart
Meter
has an integrated lancing device and disposable strip cartridge. This eliminates the need for a separate
glucose monitor, lancing device and strip vial and, we believe, will make Dario™ the
Smart
Meter
among the smallest footprint in the market. Furthermore, Dario™ has novel applications
incorporating software tools to help diabetic patients manage their disease.
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Large Market of Potential Users
. Our reliance on diabetics within the massive smart mobile device market gives us an established potential user-base. The most recent publicly available reports from Nielsen indicate that in the U.S., smartphone usage continues to climb. More than three out of five (61%) mobile subscribers in the U.S. owned a smartphone during the most recent three-month period for which data is available (March-May 2013), up more than 10% since smartphones became the mobile majority in early 2012. In March 2012, 50% of mobile subscribers used smartphones, making up the majority for the first time. Moreover, according to a Research2Guidance report from 2014, the percentage of people with diabetes who own a smartphone and will utilize apps to manage their condition is 1.2% or approximately 3.7 million people in 2014, growing to an anticipated 7.8%, or approximately 24 million people, by 2018, which would represent an increase of 650%. In many countries (including the U.S.), smart mobile devices are also typically subsidized by the cellular providers through discounted pricing associated with related plan subscriptions, enabling Dario™ to benefit from the extensive marketing by cellular companies of these devices. We believe that it is reasonable to assume that the percentage of smart mobile device users with diabetes mirrors that of the general population.
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Marketing and Distribution
. In the U.S. and Australia we have our own direct to consumer marketing channel to support our sales efforts. In the U.S. we also plan to contract with nonexclusive distributors and partners. In Europe, New Zealand and Canada, we use distribution partners to market and sell Dario™. In Israel, we have developed a direct sales and marketing channel through e-commerce. Our direct to consumer marketing channel supports our distributors’ efforts in Canada, and we are planning to expand such efforts to the U.K. during 2017. This approach enables a direct communication channel with the market and the diabetic community. This approach is also designed to effectively create brand awareness with a significantly reduced use of our capital resources versus the amounts required via the traditional, offline retail channels. In some additional jurisdictions, we may adopt a direct sales model in addition to utilizing local distributors.
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“Expanding the Pie”
. Our goal is to obtain significant market share using technological innovations and by expanding the total BGMS market size “pie” through offering a user-friendly diabetes management solution that utilizes an existing platform and installed potential user base (smart mobile devices and smart mobile device users, respectively). We will endeavor to emphasize the user friendly nature of Dario™ to expand the total BGMS market size by encouraging existing diabetes patients to test their glucose levels more frequently and by encouraging the “non-testing” population to adopt glucose monitoring.
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Competitive Cost of Goods Sold.
Based on our market research and discussions with our test strip manufacturer, we believe that our anticipated outsourced manufacturing cost of the test strips will be similar to our estimate of our competitors’ cost for existing single-use disposable strips. In addition, we believe the manufacturing costs of our Dario™
Smart Meter
will be competitive with those of the leading glucose meters.
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Opportunities for Commercialization Partnerships.
Healthcare and pharmaceutical company entrants into the BGMS market (such as Perigo and Sanofi) are licensing and/or acquiring technologies, seeking differentiation, thereby providing us with opportunities for more rapid commercialization through partnerships. Therefore, we plan to explore the possibility of entering into commercialization agreements, including an upfront payment, supply agreement and royalty payments, with strategic partners.
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Currently
there are a few new market entrants in the BGMS space that are attempting to utilize computer or smart mobile device connectivity,
including Medisana GlucoDock, One Drop and iHealth Align. We believe that none of these devices offer the integration
of an all-in-one unit that includes a lancing device and strip cartridge as Dario™ does. We further believe that these competitors
provide limited capabilities over their diabetes management apps as compared to the Dario™ application.
As a result, we believe Dario™
will bring an entirely new dynamic to the BGMS device market. We believe that our primary business model for Dario™
is clean and simple - sales of proprietary glucose test strips (the disposable component) directly to consumers, leveraging an
installed base of mobile phones. The entire mechanism consists of a small and simple adaptor combined with a strip which is connected
to the smart mobile device’s headphone jack, with the strip test results being read by the smart mobile device.
We
also believe that this business model is the foundation for a broader push to improve the health care system. An application that
is always in your pocket and used multiple times per day is an ideal platform to support people living with diabetes, their health
care providers, and health systems. Our application is designed to improve health outcomes and reduce costs through increased insights,
motivating tools and automation.
Background on Diabetes
Diabetes
is a chronic disease that arises when the pancreas does not produce enough (or ceases to produce) insulin, or when the body cannot
effectively use the insulin it produces. Insulin is a hormone made by the pancreas that enables cells to take in glucose
from the blood and use it for energy. Failure to produce insulin, or of insulin to act properly, or both, leads to raised
glucose (sugar) levels in the blood (hyperglycemia), which can be detected with a blood test. Excess glucose in the
blood has been shown to cause damage to blood vessels and is thus associated with long-term damage to the body and failure of various
organs and tissues, including the retina and the kidneys. There are three main types of diabetes:
Type 1 diabetes
,
sometimes called insulin-dependent, or juvenile, diabetes, is caused by an auto-immune reaction where the body’s defense
system attacks the insulin-producing cells located in a person’s pancreas. The reason why this occurs is not fully
understood. People with Type 1 diabetes produce very little or no insulin. The disease can affect people
of any age, but usually occurs in children or young adults. People with this form of diabetes need injections or infusions
of insulin every day in order to control the levels of glucose in their blood. Type 1 diabetes patients constitute approximately
10% of the overall number of patients, but are much more extensive users of BGMS, as these diabetics need to measure their glucose
levels 4-10 times day (versus once or twice a day for most Type 2 diabetic patients). The vast majority of Type 1 diabetes
patients are insulin dependent.
Type 2 diabetes
is
sometimes called adult-onset diabetes and accounts for at least 90% of all cases of diabetes. It is characterized by
insulin resistance and relative insulin deficiency, either of which may be present at the time that diabetes becomes clinically
manifest. The diagnosis of Type 2 diabetes usually occurs after the age of 40 but can occur earlier, especially in populations
with high diabetes incidence. Type 2 diabetes can remain undetected for many years and the diagnosis is often made from
associated complications or incidentally through an abnormal blood or urine glucose test. It is often, but not always,
associated with obesity, which may contribute to insulin resistance and lead to elevated blood glucose levels. A growing
portion of the Type 2 diabetes patients are insulin dependent or use insulin as part of their treatment.
Gestational diabetes
(GDM)
is a form of diabetes consisting of high blood glucose levels during pregnancy. It
develops in one in 25 pregnancies worldwide and is associated with complications in the time period immediately before and after
birth. GDM usually disappears after pregnancy but women with GDM and their offspring are at an increased risk of developing
Type 2 diabetes later in life. Approximately half of women with a history of GDM go on to develop Type 2 diabetes within
five to ten years after delivery.
We
also believe we will be able to support patients with
pre-diabetes
, also called metabolic syndrome. Metabolic
syndrome is a combination of medical disorders that increase the risk of developing cardiovascular disease and diabetes. According
to the National Institutes of Health, during the years 2009-2012, 37% of U.S. adults ages 20 years or older had pre-diabetes, with
51% of those ages 65 years or older, leading the NIH to estimate that approximately 86 million persons in the U.S. had pre-diabetes
in 2012. This population is typically prescribed with periodic lab-based glucose level testing (which requires a doctor visit,
significantly reducing the compliance level) and typically does not involve the utilization of self-monitoring glucose devices.
The Diabetic and BGMS Markets and the Dario™
Solution
Diabetes is a growing epidemic for which no
cure exists, but for which treatments (including a regimen of frequent blood glucose testing) are available. The medical
journal Lancet has reported that number of worldwide diabetics has doubled over the past thirty years. While about 70% of
the increase has been attributed in the Lancet report to population growth and aging, the balance was linked to changing diets,
rising obesity levels and less physical activity.
According to the International
Diabetes Foundation (IDF), approximately 415 million people worldwide were estimated to have diabetes in 2015, or one in eleven
adults. The greatest number are between 40 and 59 years old. If these trends continue, by 2040, some 642 million people. According
to the IDF, in Europe, there were 59.8 million adults over the age of 20 with diabetes in 2015and approximately 29.2 million adults
over the age of 20 with diabetes in the U.S. in 2015. In the U.S., one in four adults have diabetes. An additional
86 million U.S. adults had pre-diabetes in 2012, which puts them at high risk for developing Type 2 diabetes according to the ADA.
Approximately 179 million adults with diabetes live in China and India, with approximately 14.2 million in Brazil and 12 million
in Russia.
It is estimated that the
costs of diabetes complications account for between 5% and 10% of total healthcare spending in the world. In the United States,
the ADA estimates that the total cost of diagnosed diabetes has risen from $174 billion in 2007 to $245 billion in 2012. Early
diagnosis of warning signs and ongoing monitoring of diabetes are the keys to the prevention and treatment of the disease, with
blood glucose monitoring being the primary method of diagnosis and disease management, coupled with matching blood glucose readings
with food (i.e., carbohydrate) and insulin or other medication intake.
Since blood glucose self-monitoring
is a key part of managing diabetes, the market for BGMS products required to service these many patients is also large. As
reported in a press release published by Transparency Market Research, the blood glucose self-monitoring market is currently estimated
to be $12 billion and is expected to grow to an estimated $27 billion by 2022. The same source also notes that the total
diabetes management market was $50.8 billion in 2011 and is estimated to reach $98.4 billion by 2018. The biggest drivers
for growth in the diabetes device market will be the increased prevalence and awareness of diabetes. The U.S. is the
largest market, contributing close to 40% of the global market for these devices. In fact, the BGMS testing market, which
barely existed in 1980, now accounts for approximately a quarter of the entire in vitro diagnostics industry.
Key factors driving market
growth include increasing number of people with diabetes, growing patient awareness, technological advancements and increasing
number of patients adopting blood glucose self-monitoring. In addition, the affordable cost of blood glucose test strips,
and increase in daily monitoring, are also expected to contribute to market growth. As such, BGMS represents a large
market that has grown significantly over the past 30 years and is expected to continue to grow.
It is important to note
that the diabetic market is a first point of entry for Dario and the goal of providing mHealth/Digital health solutions for a variety
of chronic and wellness related conditions based on mobile device testing will grant us access to a much larger market. The Dario
TM
Smart Diabetes Management Solution is targeted at the mHealth app market currently estimated at $10 billion globally with expected
annual growth of 15% to $31 billion by 2020.
Industry Background and the Dario™ Opportunity
From a competition perspective,
four companies currently dominate the BGMS business, controlling more than 90% of the market: Roche Diagnostics (part of Hoffman-LaRoche),
LifeScan (a Johnson & Johnson company), Bayer Healthcare Division, and Abbott Laboratories. These “big four”
offer a wide variety of BGMS products and have led the market since the late 1990s. Numerous second-tier and third-tier
competitors, including several in Asia, hold the remaining 10% of the market. We believe that the BGMS offerings by
all vendors are comparable, with mild differentiation of the main feature sets of the devices. This is akin to the differentiation
among personal computers (PCs) during the 1990s and 2000s, where most of them had the same key feature set of Microsoft Windows
and Intel Processors.
We believe that the increasing
global adoption of mobile phones has created an opportunity for disruption in BGMS market. The Dario™ solution, which
features a compact all-in-one
Smart Meter
coupled with iOS, Android and
web-based apps, is intended to eliminate the need for separate glucose monitors, carb-calculators and cumbersome dependency on
wired, computer-based logging tools. Our intention is for Dario™ to not only deliver the best blood glucose
monitoring experience, but also use the unique capabilities of mobile smart mobile devices to deliver better health outcomes.
With respect to the U.S. BGMS market, the principal
barriers to entry (all of which we believe the features of Dario™ can overcome) can be summarized as follows:
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Achieving significant
product differentiation in the eyes of diabetes patients or insurance payers
. We believe that Dario™
offers a novel design that is compatible with the usability of the current devices, yet offers a modern look and feel when compared
to products in the marketplace. Marketing of the product directly to consumers will emphasize the product’s distinguishing
attributes, without incurring the significant product introduction expenses typically incurred for the marketing of a standard
glucose meter via traditional retail channels.
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Costs.
We anticipate that low manufacturing costs for the Dario™ dongle (the part of the Smart Meter that attaches to the phone jack) and the similarity to our competitors’ estimated cost of manufacturing the strips, when coupled with the direct-to-consumer marketing, creates the potential for providing us with a meaningful cost advantage versus most vendors of traditional glucose meters.
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Difficulty obtaining shelf space at the pharmacy
. With many products on the market, a new entrant has to battle for visibility on the shelf. Dario™ will limit this obstacle by emphasizing Internet based direct-to-consumer marketing and sales.
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The challenge of influencing diabetes specialists to recommend another BGMS product to patients
. We will seek to introduce and present Dario™ to the medical community through our participation in academic and professional conferences. Dario™ will mainly be marketed directly to our target users, who we believe are increasingly becoming the primary decision makers in choosing their glucose monitoring equipment.
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We believe that Dario™’s specific
features and trends in the marketplace create a significant opportunity to penetrate the market and effectively compete with and
gain market share against the established players.
Utilization of Mobile Health Applications
Smart mobile device applications
combine easy-to-use interfaces with continuous Internet access to create transformational mobile health solutions (often called
mHealth). Although the potential benefits of mHealth solutions have been widely discussed for over a decade, the market
is now starting to emerge from the trial phase. According to a publicly available 2016 study by Research2Guidance, smart
mobile device applications will enable the mHealth industry to reach 551 million active users (at least once a month) by 2020.
According to this report, in 2016, mHealth companies are estimated to generate $12.5 billion through mHealth apps related
services mainly through service revenue, device revenue, consumable revenue, paid download revenue and advertising revenue. We
believe that Dario™ is designed to play directly into this trend.
Currently more than 70%
of the mHealth applications in major “app stores” are adhering to the paid business model according to Research2Guidance.
With more and more traditional healthcare providers joining the mobile applications market, we expect the business models will
broaden to include healthcare services, advertising and drug sales revenues. According to Research2Guidance, with the
growing sophistication level of mHealth applications, only 14% of the total market revenue in the next 5 years will come from application
download, advertisement and transaction revenue, whereas 76% of total mHealth application market revenue will come from related
services and products. We believe that Dario™ is well-positioned to benefit from that trend.
The Dario™ diabetes
management solution includes the Dario™
Smart Meter
and software application
for people with diabetes. Dario™ currently allows users to easily record, analyze, transmit and store key data points
such as glucose level, insulin and carbohydrate intake. Moreover, the Dario™ application provides knowledge and motivation
with an aim of improving health outcomes. In addition, we are developing software for health care providers and payers to help
better support patients and intelligently manage large patient populations.
Sales and Marketing
Our initial marketing has
been focused on the early adopter diabetics, and we expect to gradually broaden our marketing efforts (and benefitting from viral
marketing) toward the entire diabetic population. We plan to initially focus on insulin dependent diabetic patients. While this
population constitutes about 20-30% of the diabetic patient population, we estimate it to be responsible for over 60% of the
revenue from blood glucose monitoring. Dario™’s ease of use and the lack of need for a special glucometer are
also expected to be of major appeal to the entire Type 2 diabetes population.
In Australia, we revised
our sales and marketing strategy during the third quarter of 2016, and moved to a hybrid direct to consumer model in combination
with on the ground out sourced Channel Sales Organization staff focused on the pharmacies. This model will allow us to accelerate
our penetration into this market, while building a diabetes community via direct engagement.
In the U.K., Dario
TM
is a fully reimbursed product distributed by a new distributor since the second quarter of 2016. Dario is now available via all
main pharmacies in the U.K.. Our sales and marketing efforts have been focused on wholesalers, pharmacies, HCP’s (Health
Care Professionals), diabetes educators and hospitals via the distributor. This has created awareness and understanding of the
value proposition DarioHealth offers to people with diabetes. In addition, DarioHealth will be focusing on increasing its presence
in the U.K. market via its direct to consumer strategy, utilizing the country wide availability of the strips in pharmacy and clinical
awareness of the product via the healthcare providers.
In Canada, Dario is available
through major pharmacy chains across Canada that include brands like Safeway and London Drugs. DarioHealth also offers consumers
the ability to buy direct via our online platform or to get their prescriptions serviced online via Bayshore. Similar to the U.K.,
in Canada we work on both promoting and marketing Dario
TM
to the medical establishment via our distributor and expanding
its awareness via our direct to consumer strategy which we have been ramping up.
Through our experience
in the U.S., U.K., Canada, Australia and additional markets, we are poised to open up additional markets in 2017 that have a high
diabetes penetration rate and fit our hybrid business model.
Dario™ is an Internet-driven
product. Dario™ was designed for the mobile age and will be powered by the Internet as an effective route of launching
and marketing new consumer products. We currently sell directly to consumers and also collaborate with distributorsin
various jurisdictions. It is estimated that a typical Type 1 diabetes patient, who is testing his or her blood sugar 4 to 10 times
a day, uses 120 to 300 strips each month, which creates the potential for a substantial and predictable revenue stream.
On the marketing side,
primarily utilize online marketing in order to create awareness of Dario™. Rather than solely rely on online advertisement,
we will also consider revenue sharing with affiliate networks and a variety of other pay-for-performance methods commonly used
in online commerce.
In December 2014, we entered
into an agreement with Israel's leading healthcare HMO, Maccabi Healthcare, to implement a comprehensive Dario™ digital suite
for patients and professionals. The agreement with MOMA (Maccabi TeleCare unit) represents an additional channel of revenue stream
for Dario™. We believe this channel for revenues indicates the huge potential available which is based on software licensing
and added value services with HMOs and other strategic partners worldwide. The Dario™ application for MOMA is a proprietary
customized diabetes management solution that enables remote treatment for diabetes which aims to improve overall outcomes for patients
leveraging mHealth technology for effective engagement of health care professionals.
We also expect to collaborate with the medical
community to showcase what we expect will be Dario™’s clinical equivalence and usability superiority.
Manufacturing
As we do not engage in
manufacturing activity ourselves, we have supply agreements with manufacturers for the Dario™ Smart Meter, glucose test
strips, lancing devices and lancets. We have arrangements in place with commercial scale manufacturers for both the Dario™
Smart Meters and for our test strips. As a result of investments we have made over the past several years, we own the specialized
equipment used to manufacture Dario™ Smart Meters.
During 2015, we commenced
manufacturing of our Dario™ Smart Meter with a Chinese manufacturer as part of our efforts to further reduce manufacturing
costs of the Dario™ Smart Meter. In the beginning of 2016 we have transitioned our manufacturing to a new Chinese manufacturer
as part of our effort to increase our manufacturing capacity and improve cost savings.
Insurance Reimbursement
In the United States and
in other jurisdictions such as Germany and England, we expect that Dario™’s test strips should generally be available
for full or partial patient reimbursement by third-party payers. We expect to work with third-party payers in the countries
into which we expect to market Dario™ in order to establish coverage for test strips, although we cannot be sure of
this being obtained. In April 2014, we announced the receipt of reimbursement coverage for the use of the Dario™ Smart
Meter in Italy, making 600,000 Italians eligible for reimbursement coverage. In June 2014, we were
granted
(effective September 1, 2014) reimbursement status in England, Wales, Scotland and Northern Ireland for strips and lancets to be
utilized together with the Dario™ Smart Meter. In December 2014, we were granted reimbursement
status for the Dario™
test strips Australia. In May 2015 we launched Dario™ in Canada and the majority of Canadian medical plans are now covering
Dario™ test strips with reimbursement. We expect the balance of Canadian insurance plans to provide reimbursement coverage
in the near future. We are planning to pursue reimbursement coverage in other jurisdictions.
Clinical Trials
As part of our CE Mark
clearance, in 2013 we conducted positive User Performance studies for the Dario™ Smart Meter in Israel with 161 diabetic
patients. The aim of this study was to collect measurement data from capillary blood with defined distribution of glucose concentrations
in order to perform system accuracy evaluation according to ISO 15197:2013, the current international standard requirements for
BGMS systems. The results of this study showed that the Dario™ strips are well within the limits for system accuracy defined
by ISO 15197:2013 in that 100% of results fell within zones A and B of the Consensus Error Grid for all systems, which means that
the system accuracy requirements of the ISO 15197:2013 have been met. The acceptance criteria for accuracy of BGMS per ISO 15197:2013
is “95 % of the individual glucose measured values shall fall within ± 0,83 mmol/l (±15 mg/dl) of the measured
values of the manufacturer’s measurement procedure at glucose concentrations < 5,55 mmol/l (<100 mg/dl) and within
± 15% at glucose concentrations ≥ 5,55 mmol/l (≥100 mg/dl)”.
In January 2015, we completed,
and in March 2015, we announced positive results from, a required User Performance evaluation study in the U.S. to evaluate the
accuracy of blood glucose level results obtained from fingertip using Dario™ compared to reference equipment (YSI 2300
STATPLUS) and to evaluate the ease of use of the Dario™ device by the first time user. This study was in
connection with our regulatory submissions for the product in the U.S. and Canada and in accordance with ISO 15197:2013. The
study was performed at Remington Davis Clinical Research in Columbus, Ohio with the Dario™ device and included 368 participants
with varying demographics. As required by FDA, the study was approved by the institutional review board (IRB) which
supervise the clinical studies performed in their institutions.
The purpose of the study
was to demonstrate the accuracy of the Dario™ compared with the YSI reference standard and to evaluate how the first
time users of the Dario™ (1) use it under the Dario™ guidance materials (i.e., quick user guide and video clip)
in an effort to demonstrate how the use of the Dario™ device and related software could potentially improve patient
care and diabetic compliance, (2) to understand the potential weaknesses of the device and introduce methods of overcoming them
to the users and (3) to establish the proposition that lay users can operate the device.
We evaluated accuracy and
user performance in this clinical trial with 368 diabetic patients, each of whom tested fresh capillary finger prick blood glucose
levels while using Dario™ for the first time, as instructed at Dario™'s instruction material. System accuracy was determined
with samples obtained from each subject measured both on the Dario™ by individual subjects and by a reference YSI analyzer.
We documented sample collection or measurement errors. When required, repeated sampling by each subject was limited to three per
subject. The interval of glucose levels tested were within BGMS range 43.0-477.0 mg/dL, and YSI range 42.3-435.5 mg/dL. There were
no outliers. Accuracy for Dario™ met ISO 15197:2013 criteria, as can be seen in the accuracy tables below. Below 100 mg/dL,
97.8% of values were within ±15mg/d of YSI reference glucose values. For samples with glucose above or equal to 100 mg/dL,
96.4% of values were within ± 15% of YSI glucose levels. Lay subject performance assessment of the Dario™’s
instruction clarity and usefulness showed that 100% successfully obtained a measurement result, and 97.1% of subjects found instructions
easy to follow with 70.7% rating they were very satisfied (5/5) and 26.4% rating they were satisfied (4/5). Reading the result
on the smart mobile device was rated easy to understand by 99.1% of lay subjects, with 86.1% rated it very easy (5/5) and 13% rated
it easy (4/5). If an error message displayed on the report screen, 100% of lay subjects were clear about how to resolve the error,
with 56.5% reporting is was very clear (5/5) and 43.5% reported it was clear (4/5).
System accuracy results: DBGMS platform
|
System accuracy results for glucose
concentrations <100 mg/dL
|
|
System accuracy results for glucose
concentrations ≥100 mg/dL
|
|
Within ± 5
mg/dL
|
|
Within ± 10
mg/dL
|
|
|
Within ± 15
mg/dL
|
|
|
Within ± 5
%
|
|
|
Within ± 10 %
|
|
|
Within ± 15 %
|
|
42/93
|
|
|
73/93
|
|
|
|
91/93
|
|
|
|
111/275
|
|
|
|
211/275
|
|
|
|
265/275
|
|
45.2
|
%
|
|
78.5
|
%
|
|
|
97.8
|
%
|
|
|
40.4
|
%
|
|
|
76.7
|
%
|
|
|
96.4
|
%
|
System accuracy results for glucose concentrations between 42.3 mg/dL and 435.5 mg/dL
|
Within ± 5 mg/dL or ± 5 %
|
|
Within ± 10 mg/dL or ± 10 %
|
|
|
Within ± 15 mg/dL or ± 15 %
|
|
153/368
|
|
|
284/368
|
|
|
|
356/368
|
|
41.5
|
%
|
|
77.2
|
%
|
|
|
96.7
|
%
|
To conclude, the Dario™
meets ISO 15197:2013 standards for clinical performance as determined by lay user accuracy and by satisfactory experience with
the Dario™ instructions clarity and system utility.
In November 2015, we completed
an additional User Performance evaluation study in the U.S. as requested by FDA. We evaluated the accuracy of blood glucose level
results obtained from fingertip using Dario™ compared to reference equipment (YSI 2300 STATPLUS). We also assessed the
usability of the Dario™ device by first time users. The study was performed at the University of Colorado
Barbara Davis Center for Diabetes in Aurora, Colorado with the Dario™ device and included 100 participants with varying
demographics. As required by the FDA, the study was approved by the Western Institutional Review Board (WIRB) which
supervises clinical studies performed in their institutions.
The purpose of the study
was to demonstrate the accuracy of the Dario™ compared with the YSI reference standard and to evaluate how first time
users of the Dario™ (1) use it under the Dario™ guidance materials (i.e., quick user guide and user guide) in
an effort to demonstrate how the use of the Dario™ device and related software could potentially improve patient care
and diabetic compliance, (2) to understand the potential weaknesses of the device and introduce methods of overcoming them to the
users and (3) to establish the proposition that lay users can operate the device.
The acceptance criteria
for accuracy of BGMS per ISO 15197:2003 is “Ninety-five percent (95%) of the individual glucose results shall fall within
± 15mg/dL of the results of the Dario’s measurement at glucose concentrations < 75mg/dL and within ± 20%
at glucose concentrations greater than or equal to 75mg/dL”. The study evaluated accuracy and user performance in this clinical
trial with 100 diabetic patients, each of whom tested fresh capillary finger prick blood glucose levels while using Dario™
for the first time, as instructed at Dario™'s instruction material. System accuracy was determined with samples obtained
from each subject measured both on the Dario™ by individual subjects and by a reference YSI analyzer. We documented sample
collection or measurement errors. When required, repeated sampling by each subject was limited to three per subject. The interval
of glucose levels tested were within BGMS range 42-396 mg/dL, and YSI range 37-386 mg/dL. There were no outliers. Accuracy for
Dario™ met ISO 15197:2003 criteria, as can be seen in the accuracy tables below. Below 75 mg/dL, 100% of values were within
±15mg/dL of YSI reference glucose values. For samples with glucose above or equal to 75 mg/dL, 98.88% of values were within
± 20% of YSI glucose levels. Lay subject performance assessment of the Dario™’s instruction clarity and usefulness
showed that 100% successfully obtained a measurement result. The average rating of the users for successful operation of the Dario
was 4.35 (out of 5 when 1 is “completely failed” and 5 is “very successful”) and an average rate of 3.66
(out of 5 when 1 is “very hard” and 5 is “very easy”) for operating the Dario™ for the first time.
System accuracy results: DBGMS platform
|
System accuracy results for glucose
concentrations <75 mg/dL
|
|
System accuracy results for glucose
concentrations ≥75 mg/dL
|
|
Within ± 5
mg/dL
|
|
Within ± 10
mg/dL
|
|
|
Within ± 15
mg/dL
|
|
|
Within ± 5 %
|
|
|
Within ± 10 %
|
|
|
Within ± 15 %
|
|
|
Within ± 20 %
|
|
4/11
|
|
|
9/11
|
|
|
|
11/11
|
|
|
|
39/89
|
|
|
|
68/89
|
|
|
|
85/89
|
|
|
|
88/89
|
|
36.36
|
%
|
|
81.82
|
%
|
|
|
100
|
%
|
|
|
40.4
|
%
|
|
|
76.7
|
%
|
|
|
96.4
|
%
|
|
|
98.88
|
%
|
To conclude, the Dario™
meets the requirements of ISO 15197:2003 for clinical performance as determined by lay user accuracy and by satisfactory experience
with the Dario™ instructions clarity and system utility.
Government Regulation
The principal markets that
we are initially targeting for Dario™ are the United States, the European Union, Australia and New Zealand. The following
is an overview of the regulatory regimes in these jurisdictions.
United States Regulation
Generally
In the United States, devices
are subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation be conducted
before a device receives clearance for commercial distribution. Under Section 201(h) of the Food, Drug, and Cosmetic
Act, a medical device is an article, which, among other things, is intended for use in the diagnosis of disease or other conditions,
or in the cure, mitigation, treatment or prevention of disease, in man or other animals. The Dario™ is classified
as a medical device and subject to regulation by numerous agencies and legislative bodies, including the FDA and its foreign counterparts. FDA
regulations govern product design and development, pre-clinical and clinical testing, manufacturing, labeling, storage, pre-market
clearance or approval, advertising and promotion, and sales and distribution. Specifically, the FDA classifies medical
devices into one of three classes. Class I devices are relatively simple and can be manufactured and distributed with
general controls. Class II devices are somewhat more complex and require greater scrutiny. Class III devices
are new and frequently help sustain life.
Unless an exemption applies,
each medical device commercially distributed in the United States will require a 510(k) clearance, 510(k)+ “de-novo”
clearance, or a pre-market approval (or PMA) from the FDA.
510(k) Clearance Process.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that
would constitute a major change in its intended use, requires a new 510(k) clearance or could even require a premarket application
approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review
any such decision. If the FDA disagrees with the determination, the agency may retroactively require the manufacturer
to seek 510(k) clearance or premarket application approval. The FDA also can require the manufacturer to cease marketing
and/or recall the modified device until 510(k) clearance or premarket application approval is obtained.
De Novo Classification
. If
the FDA denies 510(k) clearance of a device because it is novel and an adequate predicate device does not exist, the “de
novo classification” procedure can be invoked based upon reasonable assurance that the device is safe and effective for its
intended use. This procedure approximates the level of scrutiny in the 510(k) process but may add several months to
the clearance process. If the FDA grants the request, the device is permitted to enter commercial distribution in the same manner
as if 510(k) clearance had been granted.
Premarket Application
Approval Process
. After approval of a premarket application, a new premarket application or premarket application
supplement is required in the event of a modification to the device, its labeling or its manufacturing process. The
premarket application approval pathway is much more costly, lengthy and uncertain. It generally takes from one to three
years or longer.
European and Non-European
Regulation Generally
Sales of medical devices
outside the United States are subject to foreign regulatory requirements that vary widely from country to country. These laws and
regulations range from simple product registration requirements in some countries to complex clearance and production controls
in others. As a result, the processes and time periods required to obtain foreign marketing clearance may be longer
or shorter than those necessary to obtain FDA clearance.
Commercialization of medical
devices in Europe is regulated by the European Union. The European Union presently requires that all medical products bear the
CE mark, an international symbol of adherence to quality assurance standards and demonstrated clinical effectiveness. Compliance
with the Medical Device Directive (MDD) or the Active Implantable Medical Device Directive (AIMD) or the In Vitro Diagnostic Medical
Device Directive (IVDD) as audited by a notified body and certified by a recognized European Competent Authority, permits the manufacturer
to affix the CE mark on its products.
In September 2013, we obtained ISO
13485 certification for our quality management system and CE Mark certification to market Dario™ and in May 2015 Dario™
was cleared to fulfil the criteria according to EN ISO 15197:2013 The granting of the CE Mark allows Dario™ to
be marketed and sold in 32 countries across Europe as well as in certain other countries worldwide. On November 21, 2014, MDSS,
our European Authorized Representative, completed the registration of the Dario™ Smart Meter with the German Authority as
required by Article 10 of Directive 98/79/EC on in vitro diagnostic medical devices. We commenced an initial soft launch of the
product in Europe in 2014, created initial demand for the product and established brand awareness and marketing techniques to reach
our target market with a goal to continue expansion to new markets and territories.
We achieved regulatory
clearance to market Dario™ in other countries that do not rely on the CE Mark. To date, the non-CE Mark jurisdictions which
we have begun to market Dario™ include New Zealand, Canada and Australia.
In January 2014, we completed
the registration with Medsafe, the New Zealand Medicines and Medical Devices Safety Authority, through their WAND (Web Assisted
Notification of Devices) system allowing us to sell the Dario™ in New Zealand. We also have completed the process of registering
the Dario™ with the Australian TGA, in the ARTG (Australian Register of Therapeutic Goods), which is required in order to
bring and sell the Dario™ in Australia and effective March 3, 2015 our product is approved for reimbursement in Australia.
In February 2015, we also gained National Pharmaceutical Product Interface (known as NAPPI) approval and registered the Dario™
in South Africa. In May 2015, we also received Health Canada approval to market the Dario™ blood glucose monitoring system
and commenced marketing the product. We have also received reimbursement status from the majority of insurance plans in Canada.
We are currently pursuing
regulatory clearance in India. To the extent that we seek to market our product in other non-CE Mark countries in the future, we
will be required to comply with the applicable regulatory requirements in each such country. Such regulatory requirements
vary by country and may be tedious. As a result, no assurance can be given that we will be able to satisfy the regulatory
requirements to sell our products in any such country.
Clinical Studies
Even when a clinical study
has an approved Investigational Device Exemption (IDE) from FDA under significant risk (SR) determination, has been approved by
an Institutional Review Board (IRB) under non-significant risk (NSR) determination and/or has been approved by local or regional
Ethic Committee, the study is subject to factors beyond a manufacturer’s control, including, but not limited to
the fact that the institutional review board at a given clinical site might not approve the study, might decline to renew approval
which is required annually, or might suspend or terminate the study before the study has been completed. There is no assurance
that a clinical study at any given site will progress as anticipated; the interim results of a study may not be satisfactory leading
the sponsor or others to terminate the study, there may be an insufficient number of patients who qualify for the study or who
agree to participate in the study, or the investigator at the site may have priorities other than the study. Also, there
can be no assurance that the clinical study will provide sufficient evidence to assure regulatory authorities that the product
is safe, effective and performs as intended as a prerequisite for granting market clearance. See “Clinical Trials”
above for clinical trials performed to date.
Post-Clearance Matters
Even if the FDA or other
non-US regulatory authorities approve or clear a device, they may limit its intended uses in such a way that manufacturing and
distributing the device may not be commercially feasible. After clearance or approval to market is given, the FDA and foreign regulatory
agencies, upon the occurrence of certain events, are authorized under various circumstances to withdraw the clearance or approval
or require changes to a device, its manufacturing process or its labeling or additional proof that regulatory requirements have
been met.
A manufacturer of a device
approved through the premarket approval application process is not permitted to make changes to the device which affects
its safety or effectiveness without first submitting a supplement application to its premarket approval application and obtaining
FDA clearance for that supplement. In some instances, the FDA may require a clinical trial to support a supplement application. A
manufacturer of a device cleared through a 510(k) submission or a 510(k)+ “de-novo” submission must submit another
premarket notification if it intends to make a change or modification in the device that could significantly affect the safety
or effectiveness of the device, such as a significant change or modification in design, material, chemical composition, energy
source or manufacturing process. Any change in the intended uses of a premarket approval application device or
a 510(k) device requires an approval supplement or cleared premarket notification. Exported devices are subject to the
regulatory requirements of each country to which the device is exported, as well as certain FDA export requirements.
Mobile Medical Applications Guidance
On September 23, 2013,
the FDA issued final guidance for developers of mobile medical applications, or apps, which are software programs that run on mobile
communication devices and perform the same functions as traditional medical devices. The guidance outlines the FDA’s
tailored approach to mobile apps. The FDA plans to exercise enforcement discretion (meaning it will not enforce requirements
under the Federal Food, Drug & Cosmetic Act) for the majority of mobile apps as they pose minimal risk to consumers. The
FDA plans to focus its regulatory oversight on a subset of mobile medical apps that present a greater risk to patients if they
do not work as intended. The FDA is focusing its oversight on mobile medical apps that:
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●
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are intended to be used as
an accessory to a regulated medical device – for example, an application that allows a health care professional to make
a specific diagnosis by viewing a medical image from a picture archiving and communication system (PACS) on a smart mobile device
or a mobile tablet; or
|
|
●
|
transform a mobile platform into a regulated medical device – for example, an application that turns a smart mobile device into an electrocardiography (ECG) machine to detect abnormal heart rhythms or determine if a patient is experiencing a heart attack.
|
Ongoing Regulation by FDA
Even after a device receives
clearance or approval and is placed on the market, numerous regulatory requirements apply. These include:
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●
|
establishment registration and device listing;
|
|
●
|
quality system regulation, which requires manufacturers, including third party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all phases of the product life-cycle;
|
|
●
|
labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses, and other requirements related to promotional activities;
|
|
●
|
medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;
|
|
●
|
corrections and removals reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug and Cosmetic Act that may present a risk to health; and
|
|
●
|
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
|
Failure to comply with
applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
fines, injunctions, civil or criminal penalties, recall or seizure of our current or future products, operating restrictions, partial
suspension or total shutdown of production, refusing our request for 510(k) clearance or PMA approval of new products, rescinding
previously granted 510(k) clearances or withdrawing previously granted PMA approvals.
We may be subject to announced
and unannounced inspections by the FDA, and these inspections may include the manufacturing facilities of our subcontractors. If,
as a result of these inspections, the FDA determines that our or our subcontractor’s equipment, facilities, laboratories
or processes do not comply with applicable FDA regulations and conditions of product clearance, the FDA may seek civil, criminal
or administrative sanctions and/or remedies against us, including the suspension of our manufacturing and selling operations.
Ongoing Regulation by
International Regulators
International sales of
medical devices are subject to foreign government regulations, which may vary substantially from country to country.
In order to maintain the
right to affix the CE Mark to sell medical devices in the European Union, an annual surveillance audit in the company premises
and, if needed, at major subcontractors’ premises needs to be carried out by the notified body. Additionally,
the European Directives dictate the following requirements:
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●
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Vigilance system, which requires the manufacturer to immediately notify the relevant Competent Authority when a company product has been involved in an incident that led to a death; led to a serious injury or serious deterioration in the state of health of a patient, user or other person; or might have led to death, serious injury or serious deterioration in health; and
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Post market surveillance including a documented procedure to review experience gained from devices on the market and to implement any necessary corrective action, commensurate with the nature and risks involved with the product.
|
Failure to comply with
applicable regulatory requirements can result in enforcement action be the regulatory agency, which may include any of the following
sanctions: fines, injunctions, civil or criminal penalties, recall or seizure of our current or future products, operating restrictions,
partial suspension or total shutdown of production, refusing our request for renewing clearance and/or registration of our products
or granting clearance/registration for new products.
State Licensure Requirements
Several states require
that DME providers be licensed in order to sell products to patients in that state. Certain of these states require that DME providers
maintain an in-state location. If these rules are determined to be applicable to us and if we were found to be noncompliant, we
could lose our licensure in that state, which could prohibit us from selling our current or future products to patients in that
state.
Federal Anti-Kickback
and Self-Referral Laws
The Federal Anti-Kickback
Statute prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or
to induce the:
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furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental programs; or
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●
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purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid or other governmental programs.
|
To the extent we are required
to comply with these regulations, it is possible that regulatory authorities could allege that we have not complied, which could
subject us to sanction. Noncompliance with the federal anti-kickback legislation can result in exclusion from Medicare,
Medicaid or other governmental programs, restrictions on our ability to operate in certain jurisdictions, as well as civil and
criminal penalties, any of which could have an adverse effect on our business and results of operations.
Federal law also includes
a provision commonly known as the “Stark Law”, which prohibits a physician from referring Medicare or Medicaid patients
to an entity providing “designated health services”, including a company that furnishes durable medical equipment,
in which the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement.
Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant arrangement,
civil penalties, and exclusion from Medicare, Medicaid or other governmental programs.
Federal False Claims
Act
The Federal False Claims
Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented,
or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement
or used a false record to get a claim approved. In addition, amendments in 1986 to the Federal False Claims Act have
made it easier for private parties to bring “qui tam” whistleblower lawsuits against companies. Penalties
include fines ranging from $5,500 to $11,000 for each false claim, plus three times the amount of damages that the federal government
sustained because of the act of that person.
Civil Monetary Penalties
Law
The Federal Civil Monetary
Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows
or should know is likely to influence the beneficiary’s selection of a particular supplier of Medicare or Medicaid payable
items or services. Noncompliance can result in civil money penalties of up to $10,000 for each wrongful act, assessment of three
times the amount claimed for each item or service and exclusion from the Federal healthcare programs.
State Fraud and Abuse Provisions
Many states have also adopted
some form of anti-kickback and anti-referral laws and false claims acts. A determination of liability under such laws could result
in fines and penalties and restrictions on our ability to operate in these jurisdictions.
Administrative Simplification
of the Health Insurance Portability and Accountability Act of 1996
The Health Insurance Portability
and Accountability Act of 1996, or HIPAA, mandated the adoption of standards for the exchange of electronic health information
in an effort to encourage overall administrative simplification and enhance the effectiveness and efficiency of the healthcare
industry. Ensuring privacy and security of patient information is one of the key factors driving the legislation.
Intellectual Property
Patent applications
On May 8, 2011, certain
of our founders filed Patent Cooperation Treaty (or PCT) Application No. PCT/IL2011/000369, titled “Fluids Testing Apparatus
and Methods of Use”. This PCT took priority from two preceding U.S. provisional applications filed by our founders,
with the earliest priority date being May 9, 2010. The PCT application was transferred to us by our founders on October 27, 2011.
This application covers
the novel blood glucose measurement device, comprising the glucose meter; and an adaptor that connects the glucose meter to a smart-phone
to receive power supply and data display, storage and analysis. A PCT search report and written opinion on patentability
that we received from World Intellectual Property Organization (known as WIPO) was very positive, including only two “Y”
citations, meaning no significant prior art was found with regards to novelty and inventiveness of the application. Corresponding
national applications of our PCT were filed in November 2012 in the U.S., Europe, and other major territories.
On
May 1, 2014 we announced the receipt of a U.S. Notice of Allowance for a key patent relating to how the Dario™ blood glucose
monitor draws power from and transmits data to a smart phone via the audio jack port. This patent was issued as U.S. Patent 8,797,180
in August 2014, and in September 2015, we were issued a U.S. patent (No. 9,125,549) that broadens our registered patent No. 8,797,180
to include testing of other bodily fluids through an audio jack connection. We believe this represents a critical intellectual
property recognition and a significant initial validation of our intellectual property efforts.
Further, a corresponding European patent was granted to us in May 2016, as European patent
No. 2569622 for testing of fluids through an audio jack connection. Additional corresponding patents were granted in Israel. Corresponding
applications for this invention are still pending in the U.S., China and Australia.
Additionally, a U.S. non-provisional
and corresponding PCT application were filed, and are still pending, which cover new connection related technologies.
Furthermore, we filed 2
new U.S. Provisional applications, which are still pending, covering new features and functionalities related to future Dario™ generations.
Additional patent applications
are in the process of being prepared for filing, and we believe that we have a rich pipeline of future technologies that we are
actively developing.
We are further seeking
to develop and protect new intellectual property around future generations of Dario™ hardware and software with the goal
of achieving enhanced functionality, user interface and data usability.
Design patents and patent
applications on the Dario™ device
To further protect our
market distinction and branding for Dario™, three U.S. Design Applications have been filed and granted covering the glucose
meter, the cartridge, and connection dongle. These applications were granted and registered in the United States. We have also
filed national applications for the cartridge in many other jurisdictions, the great majority of which have been granted.
Design patents and patent
applications on the Dario™ App
In addition, three U.S.
Design Applications have been filed and granted covering our smart mobile device display screens with graphical user interface.
These design application were also filed in several major jurisdictions, all of which have been granted.
Trademark applications
We have also filed three
trademark applications covering the Dario™ name and logo, as well as for the DARIO-LITE word mark, and our company’s
name DARIOHEALTH. The marks were granted and registered in the United States; national applications were filed in major
territories, some of which are still pending.
Utility Models
We have been granted Utility
Models for our core invention in Japan and Germany.
Other intangible assets
As the number of Dario™
users grows, large amount of data will be collected from diabetic patients, comprising their blood sugar levels, meal composition
and timing, physical exercise (intensity and duration) as well as many other factors, which are useful for creating meaningful
correlations between these factors and insulin use. We expect that this database will be highly valuable and may be
capitalized in many ways. The accumulation of this type of know-how and related algorithms are protected as trade secrets using
specialized confidentiality protocols.
Competition
We face competition principally
from two arenas:
Direct competition from
existing companies in the blood based glucose monitors market
. We compete directly and primarily with large pharmaceutical
and medical device companies, including, but not limited to, Abbott Laboratories, Bayer Healthcare Division, Johnson & Johnson
LifeScan, Roche Diagnostics and Sanofi. While the market is highly competitive, we believe that Dario™ has important
comparative advantages versus other devices in the market. Some of these devices are now offered as connected devices to smart
mobile devices, such as the Sanofi IBGStar, Medisana GlucoDock, Philosys Gmate Smart, One Drop, and iHealth Align.
The Dario™ Smart
Meter offers an all-in-one glucose monitoring system, including a small form factor glucose reader, lancing device and a strip
cartridge connected to existing smart mobile devices, which enables Dario™ to offer features that are similar to or superior
to the most advanced meters in the market (such as Sanofi IBGStar, Gmate Smart and iHealth Align) while having a smaller form factor
than the compact meters in the market (Abbott FreeStyle Lite and OneTouch UltraMini). We believe this design will be
attractive to diabetic patients.
Non-invasive and continuous
blood glucose monitors.
While there are numerous continuous blood glucose monitoring technologies in the market,
we believe they are expensive to use and are therefore offered mainly for temporary usage and in medical settings (such as hospitals)
or to limited population at high risk for hypoglycemia. There have been a wealth of attempts for noninvasive glucose
monitors, but we are not aware of any that are available in the market or are expected to reach the market with significant presence
over the next few years.
Gearing up for the expansion
of DarioHealth and potential growth into the mHealth space, we are currently analyzing key players in the mobile health/digital
health arena. Big Data and analytical insights are the key offerings for all segments of the market – patients, healthcare
providers and payers. Our technology development focus and marketing efforts are all geared at placing us as a major player in
this global market.
Employees
We currently have 30 full time employees and
1 part time employee. We have employment agreements with our two executive officers. See “Management
– Employment Agreements”.
Investing in our securities
is highly speculative and involves a high degree of risk. You should carefully consider the following factors and other information
in this Annual Report and our other SEC filings before making a decision to invest in our securities. Additional risks and uncertainties
that we are unaware of may become important factors that affect us. If any of the following events occur, our business, financial
conditions and operating results may be materially and adversely affected. In that event, the trading price of our common stock
and warrants may decline, and you could lose all or part of your investment.
Risks Related to Our
Financial Position and Capital Requirements
We were formed in August 2011 and are thus subject to the
risks associated with new businesses.
We were formed in August
2011 as a new business and only recently entered the commercialization stage of our technology. As such, this limited operating
history may not be adequate to enable you to fully assess our ability to develop and commercialize Dario™, achieve market
acceptance of Dario™ and respond to competition. We commenced a commercial launch of the free Dario
TM
application
in the United Kingdom in late 2013 and commenced an initial soft launch of the full Dario
TM
solution (including the
app and the Smart Meter) in selected jurisdictions in March 2014 with the goal of collecting customer feedback to refine our longer-term
roll-out strategy and continued to scale up launch during 2014 in the United Kingdom, the Netherlands and New Zealand, in 2015
in Australia, Israel and Canada and in 2016 in the United States. These efforts have not generated material revenue, and it is
still too early to predict if we will be able to generate significant revenues over the next 12 months. Therefore, we are, and
expect for the foreseeable future to be, subject to all the risks and uncertainties, inherent in a new business and the development
and sale of new medical devices and related software applications. As a result, we may be unable to fully develop, obtain regulatory
approval for, commercialize, manufacture, market, sell and derive material revenues from Dario™ in the timeframes we project,
if at all, and our inability to do so would materially and adversely impact our viability as a company. In addition, we still must
establish many functions necessary to operate a business, including finalizing our managerial and administrative structure, continuing
product and technology development, assessing and commencing our marketing activities, implementing financial systems and controls
and personnel recruitment.
Accordingly, you should
consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in their
initial revenue generating stages, particularly those in the medical device and mobile heath fields. In particular, potential investors
should consider that there is a significant risk that we will not be able to:
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implement or execute our current business plan, or that our business plan is sound;
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maintain our management team and Board of Directors;
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raise sufficient funds in the capital markets or otherwise to effectuate our business plan;
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determine that our technologies that we have developed are commercially viable; and/or
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attract, enter into or maintain contracts with, and retain customers.
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In the event that we do not successfully address
these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected.
Given our limited revenue and lack of
positive cash flow, we will need to raise additional capital, which may be unavailable to us or, even if consummated, may cause
dilution or place significant restrictions on our ability to operate.
According to our management’s
estimates, based on our current cash on hand and further based on our budget and the assumption that initial commercial sales will
commence during our anticipated timeframes, we believe that we will have sufficient resources to continue our activities only into
July 2017.
Since we might be unable
to generate sufficient revenue or cash flow to fund our operations for the foreseeable future, we will need to seek additional
equity or debt financing to provide the capital required to maintain or expand our operations. We may also need additional funding
for developing products and services, increasing our sales and marketing capabilities, and promoting brand identity, as well as
for working capital requirements and other operating and general corporate purposes. Moreover, the regulatory compliance arising
out of being a publicly registered company has dramatically increased our costs.
We do not currently have
any arrangements or credit facilities in place as a source of funds, and there can be no assurance that we will be able to raise
sufficient additional capital on acceptable terms, or at all. If such financing is not available on satisfactory terms, or is not
available at all, we may be required to delay, scale back or eliminate the development of business opportunities and our operations
and financial condition may be materially adversely affected.
If we raise additional
capital by issuing equity securities, the percentage ownership of our existing stockholders may be reduced, and accordingly these
stockholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and
privileges senior to those of our common stock. Given our need for cash and that equity raising is the most common type of fundraising
for companies like ours, the risk of dilution is particularly significant for stockholders of our company.
Debt financing, if obtained,
may involve agreements that include liens on our assets, covenants limiting or restricting our ability to take specific actions,
such as incurring additional debt, could increase our expenses and require that our assets be provided as a security for such debt.
Debt financing would also be required to be repaid regardless of our operating results.
If we raise additional
funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or candidate
products, or to grant licenses on terms that are not favorable to us.
Funding from any source
may be unavailable to us on acceptable terms, or at all, particularly due to certain offering participation rights afforded to
a lead investor that participated in our January 2017 private placement. If we do not have sufficient capital to fund our operations
and expenses, we may not be able to achieve or maintain competitiveness, which could lead to the failure of our business and the
loss of your investment.
We have incurred significant losses since
inception. As such, you cannot rely upon our historical operating performance to make an investment decision regarding our company.
Since our inception, we
have engaged primarily in research and development activities and only recently entered the commercialization stage. We have financed
our operations primarily through private placements of common stock and convertible debt and have incurred losses in each year
since inception including net losses of $11,607,000 and $7,296,000 in 2016 and 2015, respectively. Our accumulated deficit at December
31, 2016 was approximately $55,000,000. We do not know whether or when we will become profitable. Our ability to generate revenue
and achieve profitability depends upon our ability, alone or with others, to launch Dario™ in additional European countries,
and elsewhere and manufacture, market and sell Dario™ where approved. We may be unable to achieve any or all of these goals.
Our independent registered public accounting
firm has expressed in its report to our 2016 audited financial statements a substantial doubt about our ability to continue as
a going concern
.
We only recently entered
the commercialization stage, and the development and commercialization of Dario™ is uncertain and expected to require substantial
expenditures. We have not yet generated sufficient revenues from our operations to fund our activities, and are therefore dependent
upon external sources for financing our operations. There is a risk that we will be unable to obtain necessary financing to continue
our operations on terms acceptable to us or at all. As a result, our independent registered public accounting firm has expressed
in its auditors’ report on the financial statements for December 31, 2016 a substantial doubt regarding our ability to continue
as a going concern. Our financial statements do not include any adjustments that might result from the outcome of the uncertainty
regarding our ability to continue as a going concern. This going concern opinion could materially limit our ability to raise additional
funds through the issuance of equity or debt securities or otherwise. Future reports on our financial statements may include an
explanatory paragraph with respect to our ability to continue as a going concern. If we cannot continue as a going concern, our
stockholders may lose their entire investment in the common stock.
Risks Related to Our Business
We only recently began commercializing Dario™ and our
success will depend on the acceptance of Dario™ in the healthcare market.
Dario
™
has been CE marked since 2013, enabling us to commercialize
in 32 countries across Europe as well as in certain other countries
worldwide
. It was also approved by the regulatory authorities in Australia, New Zealand,
Canada, Israel and South Africa, and most recently in December 2015, we received FDA clearance. As a result, we have a limited
history of commercializing Dario™ and commenced selling Datio
TM
in the United States in 2016.. We have limited
experience engaging in commercial activities and limited established relationships with physicians and hospitals as well as third-party
suppliers on whom we depend for the manufacture of our product.
We are faced with the risk that the marketplace will
not be receptive to Dario™ over competing products and that we will be unable to compete effectively. Factors that could
affect our ability to establish Dario™ or any potential future product include:
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the development of products or devices which could result in a shift of customer preferences away from our device and services and significantly decrease revenue;
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the increased use of improved diabetes drugs that could encourage certain diabetics to test less often, resulting in less usage of self-monitoring test device for certain types of diabetics;
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the challenges of developing (or acquiring externally-developed) technology solutions that are adequate and competitive in meeting the requirements of next-generation design challenges;
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the significant number of current competitors in BGMS market who have significantly greater brand recognition and more recognizable trademarks and who have established relationships with diabetics healthcare providers and payors; and
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intense competition to attract acquisition targets, which may make it more difficult for us to acquire companies or technologies at an acceptable price or at all.
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We cannot assure you that
Dario™ or any future product will gain broad market acceptance. If the market for Dario™ or any future product fails
to develop or develops more slowly than expected, or if any of the technology and standards supported by us do not achieve or sustain
market acceptance, our business and operating results would be materially and adversely affected.
We cannot accurately predict the volume
or timing of any future sales, making the timing of any revenues difficult to predict.
We may be faced with lengthy
customer evaluation and approval processes associated with Dario™. Consequently, we may incur substantial expenses and devote
significant management effort and expense in developing customer adoption of Dario™, which may not result in revenue generation.
We must also obtain regulatory approvals of Dario™ in certain jurisdictions as well as approval for insurance reimbursement
in order to initiate sales of Dario™, each of which is subject to risk and potential delays, and neither of which may actually
occur. As such, we cannot accurately predict the volume or timing of any future sales.
If Dario™ fails to satisfy current
or future customer requirements, we may be required to make significant expenditures to redesign the product, and we may have insufficient
resources to do so.
Dario™ is being designed
to address an evolving marketplace and must comply with current and evolving customer requirements in order to gain market acceptance.
There is a risk that Dario™ will not meet anticipated customer requirements or desires. If we are required to redesign our
products to address customer demands or otherwise modify our business model, we may incur significant unanticipated expenses and
losses, and we may be left with insufficient resources to engage in such activities. If we are unable to redesign our products,
develop new products or modify our business model to meet customer desires or any other customer requirements that may emerge,
our operating results would be materially adversely affected and our business might fail.
We expect to derive substantially all
of our revenues from our principal technology, which leaves us subject to the risk of reliance on such technology.
We expect to derive substantially
all of our revenues from sales of products derived from our principal technology. Our initial product utilizing this technology
is Dario™. As such, any factor adversely affecting sales of Dario™, including the product release cycles, regulatory
issues, market acceptance, product competition, performance and reliability, reputation, price competition and economic and market
conditions, would likely harm our operating results. We may be unable to develop other products utilizing our technology, which
would likely lead to the failure of our business. Moreover, in spite of our efforts related to the registration of our technology,
if patent protection is not available for our principal technology, the viability of Dario™ and any other products that may
be derived from such technology would likely be adversely impacted to a significant degree, which would materially impair our prospects.
We
are dependent upon third-party manufacturers and suppliers making us vulnerable to supply shortages and problems and price fluctuations,
which could harm our business.
We
do not own or operate manufacturing facilities for clinical or commercial production of Dario™ and we lack the resources
and the capability to manufacture Dario™ on a commercial scale. Therefore, we rely on a limited number of suppliers who manufacture
and assemble certain components of Dario™. Our suppliers may encounter problems during manufacturing for a variety of reasons,
including, for example, failure to follow specific protocols and procedures, failure to comply with applicable legal and regulatory
requirements, equipment malfunction and environmental factors, failure to properly conduct their own business affairs, and infringement
of third-party intellectual property rights, any of which could delay or impede their ability to meet our requirements. Our reliance
on these third-party suppliers also subjects us to other risks that could harm our business, including:
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we are not a major customer
of many of our suppliers, and these suppliers may therefore give other customers’ needs higher priority than ours;
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third parties may threaten or enforce their intellectual property rights against our suppliers, which may cause disruptions or delays in shipment, or may force our suppliers to cease conducting business with us;
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we may not be able to obtain an adequate supply in a timely manner or on commercially reasonable terms;
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our suppliers, especially new suppliers, may make errors in manufacturing that could negatively affect the efficacy or safety of Dario™ or cause delays in shipment;
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we may have difficulty locating and qualifying alternative suppliers;
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switching components or suppliers may require product redesign and possibly submission to FDA, European Economic Area Notified Bodies, or other foreign regulatory bodies, which could significantly impede or delay our commercial activities;
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one or more of our sole- or single-source suppliers may be unwilling or unable to supply components of Dario™;
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other customers may use fair or unfair negotiation tactics and/or pressures to impede our use of the supplier;
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the occurrence of a fire, natural disaster or other catastrophe impacting one or more of our suppliers may affect their ability to deliver products to us in a timely manner; and
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our suppliers may encounter financial or other business hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.
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We
may not be able to quickly establish additional or alternative suppliers if necessary, in part because we may need to undertake
additional activities to establish such suppliers as required by the regulatory approval process. Any interruption or delay in
obtaining products from our third-party suppliers, or our inability to obtain products from qualified alternate sources at acceptable
prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to switch to competing products.
Given our reliance on certain single-source suppliers, we are especially susceptible to supply shortages because we do not have
alternate suppliers currently available.
We
rely in part on a small group of third-party distributors to effectively distribute our products.
We
depend in part on medical device distributors for the marketing and selling of our products in certain territories in which we
have launched product sales. We depend on these distributors’ efforts to market our products, yet we are unable to control
their efforts completely. These distributors typically sell a variety of other, non-competing products that may limit the resources
they dedicate to selling Dario™. In addition, we are unable to ensure that our distributors comply with all applicable laws
regarding the sale of our products. If our distributors fail to effectively market and sell Dario™, in full compliance with
applicable laws, our operating results and business may suffer. Recruiting and retaining qualified third-party distributors and
training them in our technology and product offering requires significant time and resources. To develop and expand our distribution,
we must continue to scale and improve our processes and procedures that support our distributors. Further, if our relationship
with a successful distributor terminates, we may be unable to replace that distributor without disruption to our business. If we
fail to maintain positive relationships with our distributors, fail to develop new relationships with other distributors, including
in new markets, fail to manage, train or incentivize existing distributors effectively, or fail to provide distributors with competitive
products on attractive terms, or if these distributors are not successful in their sales efforts, our revenue may decrease and
our operating results, reputation and business may be harmed.
Failure in our online and digital marketing
efforts could significantly impact our ability to generate sales.
In several of our principal
target markets, we utilize online and digital marketing in order to create awareness to Dario™. Our management believes that
using online advertisement through affiliate networks and a variety of other pay-for-performance methods will be superior for marketing
and generating sales of Dario™ rather than utilizing traditional, expensive retail channels. However, there is a risk that
our marketing strategy could fail. Because we plan to use non-traditional retail sales tools and to rely on healthcare providers
to educate our customers about Dario™, we cannot predict the level of success, if any, that we may achieve by marketing Dario™
via the Internet. The failure of our online marketing efforts would significantly and negatively impact our ability to generate
sales.
Our Dario™ smart mobile application,
which is a key to our business model, is available via Apple’s iOS and via Google’s Android platforms and maybe in
the future via additional platforms. If we are unable to achieve or maintain a good relationship with each of Apple and Google
or similar platforms, or if the Apple App Store or the Google Play Store or any other applicable platform were unavailable for
any prolonged period of time, our business will suffer.
A key component of the
Dario™ solution is an iPhone or Android application which includes tools to help diabetic patients manage their disease.
This application is compatible with Apple’s iOS and with Google’s Android platforms and may in the future become compatible
via additional platforms. If we are unable to make our Dario™ application compatible with these platforms, or if there is
any deterioration in our relationship with either Apple or Google or others after our application is available, our business would
be materially harmed.
We are subject to each
of Apple’s and Google’s standard terms and conditions for application developers, which govern the promotion, distribution
and operation of games and other applications on their respective storefronts. Each of Apple and Google has broad discretion to
change its standard terms and conditions, including changes which could require us to pay to have our Dario™ application
available for downloading. In addition, these standard terms and conditions can be vague and subject to changing interpretations
by Apple or Google. We may not receive any advance warning of such changes. In addition, each of Apple and Google have the right
to prohibit a developer from distributing its applications on its storefront if the developer violates its standard terms and conditions.
In the event that either Apple or Google ever determines that we are in violation of its standard terms and conditions, including
by a new interpretation, and prohibits us from distributing our Dario™ application on its storefront, it would materially
harm our business.
Additionally, we will rely
on the continued function of the Apple App Store and the Google Play Store as digital storefronts where our Dario™ application
may be obtained. There have been occasions in the past when these digital storefronts were unavailable for short periods of time
or where there have been issues with the in-app purchasing functionality within the storefront. In the event that either the Apple
App Store or the Google Play Store is unavailable or if in-app purchasing functionality within the storefront is non-operational
for a prolonged period of time, it would have a material adverse effect on the ability of our customers to secure the Dario™
application, which would materially harm our business.
Our products are subject to technological
changes which may impact their use.
Our Dario™ Smart
Meter is currently designed to be plugged into the audio jack of a mobile device. In addition, we have recently completed the development
of a version of the Dario™ Smart Meter that connects to an iPhone 7 through the lightning jack instead of the missing audio
jack. As a result, our products are subject to future technological changes to mobile devices that may occur in the future. If
we are unable to modify our products to keep pace with such technological changes, it would have a material adverse effect the
ability of our customers to use our products, which would materially harm our business.
As we conduct business internationally,
we are susceptible to risks associated with international relationships.
Outside of the United States,
we operate our business internationally, presently in Europe, Australia, New Zealand, Canada and Israel. The international operation
of our business requires significant management attention, which could negatively affect our business if it diverts their attention
from their other responsibilities. In the event that we are unable to manage the complications associated with international operations,
our business prospects could be materially and adversely affected. In addition, doing business with foreign customers subjects
us to additional risks that we do not generally face in the United States. These risks and uncertainties include:
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management, communication
and integration problems resulting from cultural differences and geographic dispersion;
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localization of products and services, including translation of foreign languages;
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delivery, logistics and storage costs;
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longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
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difficulties supporting international operations;
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difficulties supporting customer services;
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changes in economic and political conditions;
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impact of trade protection measures;
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complying with import or export licensing requirements;
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exchange rate fluctuations;
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competition from companies with international operations, including large international competitors and entrenched local companies;
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potentially adverse tax consequences, including foreign tax systems and restrictions on the repatriation of earnings;
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maintaining and servicing computer hardware in distant locations;
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keeping current and complying with a wide variety of foreign laws and legal standards, including local labor laws;
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securing or maintaining protection for our intellectual property; and
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reduced or varied protection for intellectual property rights, including the ability to transfer such rights to third parties, in some countries.
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The occurrence of any or
all of these risks could adversely affect our international business and, consequently, our results of operations and financial
condition.
We expect to be exposed to fluctuations
in currency exchange rates, which could adversely affect our results of operations.
Because we expect to conduct
a material portion of our business outside of the United States but report our financial results in U.S. Dollars, we face exposure
to adverse movements in currency exchange rates. Our foreign operations will be exposed to foreign exchange rate fluctuations as
the financial results are translated from the local currency into U.S. Dollars upon consolidation. Specifically, the U.S. Dollar
cost of our operations in Israel is influenced by any movements in the currency exchange rate of the New Israeli Shekel (NIS).
Such movements in the currency exchange rate may have a negative effect on our financial results. If the U.S. Dollar weakens against
foreign currencies, the translation of these foreign currency denominated transactions will result in increased revenue, operating
expenses and net income. Similarly, if the U.S. Dollar strengthens against foreign currencies, the translation of these foreign
currency denominated transactions will result in decreased revenue, operating expenses and net income. As exchange rates vary,
sales and other operating results, when translated, may differ materially from our or the capital market’s expectations.
Non-U.S. governments often impose strict
price controls, which may adversely affect our future profitability.
We intend to seek approval
to market Dario™ and any future product in both the U.S. and in non-U.S. jurisdictions. If we obtain approval in one or more
non-U.S. jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our products. In some countries,
particularly countries of the European Union, each of which has developed its own rules and regulations, pricing may be subject
to governmental control under certain circumstances. In these countries, pricing negotiations with governmental authorities can
take considerable time after the receipt of marketing approval for a medical device candidate. To obtain reimbursement or pricing
approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product
to other available products.
If reimbursement of our product candidates is unavailable or limited in scope or amount,
or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
Our Dario™ Smart Meter, software
application and associated business processes may contain undetected errors, which could limit our ability to provide our services
and diminish the attractiveness of our service offerings.
Dario™ (including
the Smart Meter and software application) may contain undetected errors, defects or bugs. As a result, our customers or end users
may discover errors or defects in our products, software or the systems we design, or the products or systems incorporating our
designs and intellectual property may not operate as expected. We may discover significant errors or defects in the future that
we may not be able to fix. Our inability to fix any of those errors could limit our ability to provide our products, impair the
reputation of our brand and diminish the attractiveness of our product offerings to our customers.
In addition, we may utilize
third party technology or components in our products and we rely on those third parties to provide support services to us. Failure
of those third parties to provide necessary support services could materially adversely impact our business.
Our future performance will depend on
the continued engagement of key members of our management team.
Our future performance
depends to a large extent on the continued services of members of our current management including, in particular, Erez Raphael,
our Chief Executive Officer and Chairman of our Board of Directors, and Zvi Ben David, our Chief Financial Officer, Treasurer and
Secretary. In the event that we lose the continued services of such key personnel for any reason, this could have a material adverse
effect on our business, operations and prospects.
If we are not able to attract and retain
highly skilled managerial, scientific and technical personnel, we may not be able to implement our business model successfully.
We believe that our management
team must be able to act decisively to apply and adapt our business model in the rapidly changing markets in which we will compete.
In addition, we will rely upon technical and scientific employees or third party contractors to effectively establish, manage and
grow our business. Consequently, we believe that our future viability will depend largely on our ability to attract and retain
highly skilled managerial, sales, scientific and technical personnel. In order to do so, we may need to pay higher compensation
or fees to our employees or consultants than we currently expect and such higher compensation payments would have a negative effect
on our operating results. Competition for experienced, high-quality personnel is intense and we cannot assure that we will be able
to recruit and retain such personnel. We may not be able to hire or retain the necessary personnel to implement our business strategy.
Our failure to hire and retain such personnel could impair our ability to develop new products and manage our business effectively.
Risks Related to Product Development and
Regulatory Approval
The regulatory clearance process which
we must navigate is expensive, time-consuming, and uncertain and may prevent us from obtaining clearance for the commercialization
of Dario™
or our any future product.
We are not permitted to
market Dario™ until we receive regulatory clearance. To date, we have received regulatory clearance in Australia, Canada,
Israel, the Netherlands, New Zealand, the United Kingdom and the United States and we are currently seeking approval in India.
The research, design, testing,
manufacturing, labeling, selling, marketing and distribution of medical devices are subject to extensive regulation by the FDA
and non-U.S. regulatory authorities, which regulations differ from country to country.
There
can be no assurance that, even after such time and expenditures, we will be able to obtain necessary regulatory approvals for clinical
testing or for the manufacturing or marketing of any products. In addition, during the regulatory process, other companies
may develop other technologies with the same intended use as our products.
We are also subject to
numerous post-marketing regulatory requirements, which include labeling regulations and medical device reporting regulations, which
may require us to report to different regulatory agencies if our device causes or contributes to a death or serious injury, or
malfunctions in a way that would likely cause or contribute to a death or serious injury. In addition, these regulatory requirements
may change in the future in a way that adversely affects us. If we fail to comply with present or future regulatory requirements
that are applicable to us, we may be subject to enforcement action by regulatory agencies, which may include, among others, any
of the following sanctions:
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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
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customer notification, or orders for repair, replacement or refunds;
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voluntary or mandatory recall or seizure of our current or future products;
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imposing operating restrictions, suspension or shutdown of production;
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refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses or modifications to Dario™ or future products;
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rescinding 510(k) clearance or suspending or withdrawing pre-market approvals that have already been granted; and
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The occurrence of any of
these events may have a material adverse effect on our business, financial condition and results of operations.
In addition, on September
23, 2013, the FDA issued final guidance (which we refer to herein as the Guidance) for developers of mobile medical applications,
or apps, which are software programs that run on mobile communication devices and perform the same functions as traditional medical
devices. The Guidance outlines the FDA’s tailored approach to mobile apps. The FDA plans to exercise enforcement discretion
(meaning it will not enforce requirements under the Federal Food, Drug and Cosmetic Act) for the majority of mobile apps as they
pose minimal risk to consumers. The FDA plans to focus its regulatory oversight on a subset of mobile medical apps that present
a greater risk to patients if they do not work as intended. We anticipate that the Dario™ application will be subject to
the FDA regulation as a “mobile medical app.”
We
have conducted limited clinical studies of Dario™. Clinical and pre-clinical data is susceptible to varying interpretations,
which could delay, limit or prevent additional regulatory clearances.
To
date, we have conducted limited clinical studies on Dario™. There can be no assurance that we will successfully
complete additional clinical studies necessary to receive additional regulatory approvals in certain jurisdictions. While studies
conducted by us have produced results we believe to be encouraging and indicative of the potential efficacy of Dario™, data
already obtained, or in the future obtained, from pre-clinical studies and clinical studies do not necessarily predict the results
that will be obtained from later pre-clinical studies and clinical studies. Moreover, pre-clinical and clinical data are susceptible
to varying interpretations, which could delay, limit or prevent additional regulatory approvals. A number of companies in the medical
device and pharmaceutical industries have suffered significant setbacks in advanced clinical studies, even after promising results
in earlier studies. The failure to adequately demonstrate the safety and effectiveness of an intended product under development
could delay or prevent regulatory clearance of the device, resulting in delays to commercialization, and could materially harm
our business. Even though we have received CE mark and FDA clearance of Dario™, there can be no assurance that
we will be able to receive approval for other potential applications of our principal technology, or that we will receive regulatory
clearances from other targeted regions or countries.
We may be unable to complete required
clinical trials, or we may experience significant delays in completing such clinical trials, which could significantly delay our
targeted product launch timeframe and impair our viability and business plan.
The completion of any future
clinical trials for Dario™ or other trials that we may be required to undertake in the future could be delayed, suspended
or terminated for several reasons, including:
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our failure or inability to conduct the clinical trial in accordance with regulatory requirements;
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sites participating in the trial may drop out of the trial, which may require us to engage new sites for an expansion of the number of sites that are permitted to be involved in the trial;
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patients may not enroll in, remain in or complete, the clinical trial at the rates we expect; and
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clinical investigators may not perform our clinical trial on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices.
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If our clinical trial is
delayed it will take us longer to ultimately commercialize Dario™ and generate revenues. Moreover, our development costs
will increase if we have material delays in our clinical trial or if we need to perform more or larger clinical trials than planned.
We may be faced with similar risks in connection with future trials we conduct. See “Business - Clinical Trials” for
a description of our clinical trials performed to date.
If we or our manufacturers fail to comply
with the FDA’s Quality System Regulation or any applicable state equivalent, our operations could be interrupted and our
operating results could suffer.
We, our manufacturers and
suppliers must, unless specifically exempt by regulation, follow the FDA’s Quality System Regulation (QSR) and are also subject
to the regulations of foreign jurisdictions regarding the manufacturing process. If our affiliates, our manufacturers or suppliers
are found to be in significant non-compliance or fail to take satisfactory corrective action in response to adverse QSR inspectional
findings, the FDA could take enforcement actions against us and our manufacturers which could impair our ability to produce our
products in a cost-effective and timely manner in order to meet our customers’ demands. Accordingly, our operating results
could suffer.
We are subject to the risk of reliance
on third parties to conduct our clinical trial work.
We depend on independent
clinical investigators to conduct our clinical trials. Contract research organizations may also assist us in the collection and
analysis of data. These investigators and contract research organizations will not be our employees and we will not be able to
control, other than by contract, the amount of resources, including time that they devote to products that we develop. If independent
investigators fail to devote sufficient resources to our clinical trials, or if their performance is substandard, it will delay
the approval or clearance and commercialization of any products that we develop. Further, the FDA and other regulatory bodies around
the world require that we comply with standards, commonly referred to as good clinical practice, for conducting, recording and
reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and
confidentiality of trial subjects are protected. If our independent clinical investigators and contract research organizations
fail to comply with good clinical practice, the results of our clinical trials could be called into question and the clinical development
of our product candidates could be delayed. Failure of clinical investigators or contract research organizations to meet their
obligations to us or comply with federal regulations could adversely affect the clinical development of our product candidates
and harm our business. Moreover, we intend to have several clinical trials in order to support our marketing efforts and business
development purposes. Such clinical trials will be conducted by third parties as well. Failure of such clinical trials to meet
their primary endpoints could adversely affect our marketing efforts.
Legislative
reforms to the United States healthcare system may adversely affect our revenues and business.
From
time to time, legislative reform measures are proposed or adopted that would impact healthcare expenditures for medical services,
including the medical devices used to provide those services. For example, in March 2010, U.S. President Barack Obama signed the
Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred
to as the Affordable Care Act. The Affordable Care Act made a number of substantial changes in the way health care is financed
by both governmental and private insurers and the way that Medicare providers are reimbursed. Among other things, the Affordable
Care Act requires certain medical device manufacturers and importers to pay an excise tax equal to 2.3% of the price for which
such medical devices are sold, beginning January 1, 2013.
In
addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2,
2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee
on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted
deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction
to several government programs. This includes reductions to Medicare payments to providers of 2.0% per fiscal year. On January 2,
2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months
the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. On March 1, 2013, the President
signed an executive order implementing sequestration, and on April 1, 2013, the 2% Medicare payment reductions went into effect.
The Bipartisan Budget Act of 2013, enacted on December 26, 2013, extends these cuts to 2023. The ATRA also, among other things,
reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years. In December
2014, Congress passed an omnibus funding bill (the Consolidated and Further Continuing Appropriations Act, 2015) and a tax extenders
bill, both of which may negatively impact coverage and reimbursement of healthcare items and services. We expect that additional
state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and
state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional
pricing pressure. For example, U.S. President Donald Trump has recently publicly indicated an intent to lower healthcare costs
through various potential initiatives. In addition, President Trump and other U.S. lawmakers have made statements about potentially
repealing and/or replacing the Affordable Care Act, although specific legislation for such a repeal or replacement has not yet
been introduced. While we are unable to predict what changes may ultimately be enacted, to the extent that future changes affect
how our products are paid for and reimbursed by government and private payers our business could be adversely impacted.
Government
and private sector initiatives to limit the growth of health care costs, including price regulation, competitive pricing, coverage
and payment policies, comparative effectiveness reviews of therapies, technology assessments, and managed-care arrangements, are
continuing. Government programs, including Medicare and Medicaid, private health care insurance and managed-care plans have attempted
to control costs by limiting the amount of reimbursement they will pay for particular procedures or treatments, tying reimbursement
to outcomes, and other mechanisms designed to constrain utilization and contain costs, including delivery reforms such as expanded
bundling of services. Hospitals are also seeking to reduce costs through a variety of mechanisms, which may increase price sensitivity
among customers for our products, and adversely affect sales, pricing, and utilization of our products. Some third-party payors
must also approve coverage for new or innovative devices or therapies before they will reimburse health care providers who use
the medical devices or therapies. We cannot predict the potential impact of cost-containment trends on future operating results.
We may be subject to federal, state and
foreign healthcare fraud and abuse laws and regulations.
Many federal, state and
foreign healthcare laws and regulations apply to the BGMS business and medical devices. We may be subject to certain federal and
state regulations, including the federal healthcare programs’ Anti-Kickback Law, the federal Health Insurance Portability
and Accountability Act of 1996, and other federal and state false claims laws. The medical device industry has been under heightened
scrutiny as the subject of government investigations and enforcement actions involving manufacturers who allegedly offered unlawful
inducements to potential or existing customers in an attempt to procure their business, including arrangements with physician consultants.
If our operations or arrangements are found to be in violation of such governmental regulations, we may be subject to civil and
criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment of our operations. All
of these penalties could adversely affect our ability to operate our business and our financial results.
Product liability suits, whether or not
meritorious, could be brought against us due to an alleged defective product or for the misuse of Dario™ or our potential
future products. These suits could result in expensive and time-consuming litigation, payment of substantial damages, and an increase
in our insurance rates.
If Dario™ or any
of our future products are defectively designed or manufactured contain defective components or are misused, or if someone claims
any of the foregoing, whether or not meritorious, we may become subject to substantial and costly litigation. Misusing our device
or failing to adhere to the operating guidelines or the device producing inaccurate meter readings could cause significant harm
to patients, including death. In addition, if our operating guidelines are found to be inadequate, we may be subject to liability.
Product liability claims could divert management’s attention from our core business, be expensive to defend and result in
sizable damage awards against us. While we maintain product liability insurance, we may not have sufficient insurance coverage
for all future claims. Any product liability claims brought against us, with or without merit, could increase our product liability
insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and could reduce revenue.
Product liability claims in excess of our insurance coverage would be paid out of cash reserves harming our financial condition
and adversely affecting our results of operations.
If we are found to have violated laws
protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties, which could increase
our liabilities and harm our reputation or our business.
Part of our business plan
includes the storage and potential monetization of medical data of users of Dario™. There are a number of federal and state
laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and
disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient
privacy rules under the Health Insurance Portability and Accountability Act of 1996 (which we refer to as HIPAA). These privacy
rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the
right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information
to the minimum amount reasonably necessary to accomplish the intended purpose. We may face difficulties in holding such information
in compliance with applicable law. If we are found to be in violation of the privacy rules under HIPAA, we could be subject to
civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on our
business, financial condition and results of operations.
Risks Related to Our Intellectual Property
The failure to obtain or maintain patents, licensing agreements
and other intellectual property could materially impact our ability to compete effectively.
In order for our business
to be viable and to compete effectively, we need to develop and maintain, and we will heavily rely on, our proprietary position
with respect to our technologies and intellectual property. We filed a Patent Cooperation Treaty (or PCT) application for a “Fluids
Testing Apparatus and Methods of Use” in May 2011 which incorporates two U.S. provisional applications submitted in the preceding
year. The PCT covers the specific processes related to blood glucose level measurement as well as more general methods of rapid
tests of body fluids and has subsequently been converted into several national phase patent applications. We have also filed a
significant number of other patent applications for aspects of both the Dario™ Smart Meter and software. We have also obtained
numerous Web domains.
However, to date, we have
only been issued two patents (which were issued in the United States) relating to how the Dario™ blood glucose monitor draws
power from and transmits data to a smart phone via the audio jack port. None of our other patents have been granted by a patent
office. In addition, there are significant risks associated with our actual or proposed intellectual property. The risks and uncertainties
that we face with respect to our pending patent and other proprietary rights principally include the following:
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pending patent applications we have filed or will file may not result in issued patents or may take longer than we expect to result in issued patents;
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we may be subject to interference proceedings;
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we may be subject to opposition proceedings in foreign countries;
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any patents that are issued to us may not provide meaningful protection;
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we may not be able to develop additional proprietary technologies that are patentable;
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other companies may challenge patents licensed or issued to us;
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other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies;
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other companies may design their technologies around technologies we have licensed or developed; and
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enforcement of patents is complex, uncertain and very expensive.
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We cannot be certain that
patents will be issued as a result of any of our pending or future applications, or that any of our patents, once issued, will
provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared
invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in scientific or patent literature
often lags behind actual discoveries, we cannot be certain that we were the first to make our inventions or to file patent applications
covering those inventions.
It is also possible that
others may have or may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses
requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that
we have licensed, our rights depend on maintaining our obligations to the licensor under the applicable license agreement, and
we may be unable to do so.
Costly litigation may be necessary to
protect our intellectual property rights and we may be subject to claims alleging the violation of the intellectual property rights
of others.
We may face significant
expense and liability as a result of litigation or other proceedings relating to patents and intellectual property rights of others.
In the event that another party has also filed a patent application or been issued a patent relating to an invention or technology
claimed by us in pending applications, we may be required to participate in an interference proceeding declared by the United States
Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and costs for us,
even if the eventual outcome was favorable to us. We, or our licensors, also could be required to participate in interference proceedings
involving issued patents and pending applications of another entity. An adverse outcome in an interference proceeding could require
us to cease using the technology, substantially modify it or to license rights from prevailing third parties.
The cost to us of any patent
litigation or other proceeding relating to our licensed patents or patent applications, even if resolved in our favor, could be
substantial, especially given our early stage of development. Our ability to enforce our patent protection could be limited by
our financial resources, and may be subject to lengthy delays. A third party may claim that we are using inventions claimed by
their patents and may go to court to stop us from engaging in our normal operations and activities, such as research, development
and the sale of any future products. Such lawsuits are expensive and would consume significant time and other resources. There
is a risk that a court will decide that we are infringing the third party’s patents and will order us to stop the activities
claimed by the patents. In addition, there is a risk that a court will order us to pay the other party damages for having infringed
their patents.
Moreover, there is no guarantee
that any prevailing patent owner would offer us a license so that we could continue to engage in activities claimed by the patent,
or that such a license, if made available to us, could be acquired on commercially acceptable terms. In addition, third parties
may, in the future, assert other intellectual property infringement claims against us with respect to our services, technologies
or other matters.
We have limited foreign intellectual
property rights and may not be able to protect our intellectual property rights throughout the world.
We have limited intellectual
property rights outside the United States. Filing, prosecuting and defending patents on devices in all countries throughout the
world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be
less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property
to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our
inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into
the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patents
to develop their own products and further, may export otherwise infringing products to territories where we have patents, but enforcement
is not as strong as that in the United States.
Many companies have encountered
significant problems in protecting and defending intellectual property in foreign jurisdictions. The legal systems of certain countries,
particularly China and certain other developing countries, do not favor the enforcement of patents, trade secrets and other intellectual
property, particularly those relating to medical devices and biopharmaceutical products, which could make it difficult for us to
stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. To date,
we have not sought to enforce any issued patents in these foreign jurisdictions. Proceedings to enforce our patent rights in foreign
jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could
put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could
provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other
remedies awarded, if any, may not be commercially meaningful. The requirements for patentability may differ in certain countries,
particularly developing countries. Certain countries in Europe and developing countries, including China and India, have compulsory
licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we and our licensors
may have limited remedies if patents are infringed or if we or our licensors are compelled to grant a license to a third party,
which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly,
our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage
from the intellectual property that we develop or license.
We rely on confidentiality agreements
that could be breached and may be difficult to enforce, which could result in third parties using our intellectual property to
compete against us.
Although we believe that
we take reasonable steps to protect our intellectual property, including the use of agreements relating to the non-disclosure of
confidential information to third parties, as well as agreements that purport to require the disclosure and assignment to us of
the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we employ them, the agreements
can be difficult and costly to enforce. Although we seek to enter into these types of agreements with our contractors, consultants,
advisors and research collaborators, to the extent that employees and consultants utilize or independently develop intellectual
property in connection with any of our projects, disputes may arise as to the intellectual property rights associated with our
technology. If a dispute arises, a court may determine that the right belongs to a third party. In addition, enforcement of our
rights can be costly and unpredictable. We also rely on trade secrets and proprietary know-how that we seek to protect in part
by confidentiality agreements with our employees, contractors, consultants, advisors or others. Despite the protective measures
we employ, we still face the risk that:
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these agreements may be breached;
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these agreements may not provide adequate remedies for the applicable type of breach;
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our proprietary know-how will otherwise become known; or
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our competitors will independently develop similar technology or proprietary information.
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We may be subject to claims challenging
the inventorship of our patents and other intellectual property.
We may be subject to claims
that former employees, collaborators or other third parties have an interest in our patents or other intellectual property as an
inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of consultants or others
who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging
inventorship. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual
property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a
material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in
substantial costs and be a distraction to management and other employees. In addition, the Israeli Supreme Court ruled in 2012
that an employee who receives a patent or contributes to an invention during his employment may be allowed to seek compensation
for such contributions from his or her employer, even if the employee’s contract of employment specifically states otherwise
and the employee has transferred all intellectual property rights to the employer. The Israeli Supreme Court ruled that the fact
that a contract revokes an employee’s right for royalties and compensation, does not rule out the right of the employee to
claim their right for royalties. As a result, it is unclear whether and, if so, to what extent our employees may be able to claim
compensation with respect to our future revenue. We may receive less revenue from future products if any of our employees successfully
claim for compensation for their work in developing our intellectual property, which in turn could impact our future profitability.
Risks Related to Our Industry
We face intense competition in the self-monitoring of blood
glucose market, and as a result we may be unable to effectively compete in our industry.
With our first product,
Dario™, we compete directly and primarily with large pharmaceutical and medical device companies such as Abbott Laboratories,
Bayer Healthcare Division, Johnson & Johnson LifeScan, Roche Diagnostics and Sanofi. The first four of these companies have
more than 90% combined market share of the BGMS business and strong research and development capacity for next generation products.
Their dominant market position since the late 1990s and significant control over the market could significantly limit our ability
to introduce Dario™ or effectively market and generate sales of the product. We will also compete with numerous second-tier
and third-tier competitors.
We only recently commenced
sales of our products, and most of our competitors have long histories and strong reputations within the industry. They have significantly
greater brand recognition, financial and human resources than we do. They also have more experience and capabilities in researching
and developing testing devices, obtaining and maintaining regulatory clearances and other requirements, manufacturing and marketing
those products than we do. There is a significant risk that we may be unable to overcome the advantages held by our competition,
and our inability to do so could lead to the failure of our business and the loss of your investment.
Competition in the BGMS
markets is extremely intense, which can lead to, among other things, price reductions, longer selling cycles, lower product margins,
loss of market share and additional working capital requirements. To succeed, we must, among other critical matters, gain consumer
acceptance for Dario™ and potential future devices incorporating our principal technology and offer better strategic concepts,
technical solutions, prices and response time, or a combination of these factors, than those of other competitors. If our competitors
offer significant discounts on certain products, we may need to lower our prices or offer other favorable terms in order to compete
successfully. Moreover, any broad-based changes to our prices and pricing policies could make it difficult to generate revenues
or cause our revenues, if established, to decline. Some of our competitors may bundle certain software products offering competing
applications for diabetes management at low prices for promotional purposes or as a long-term pricing strategy. These practices
could significantly reduce demand for Dario™ or potential future products or constrain prices we can charge. Moreover, if
our competitors develop and commercialize products that are more effective or desirable than Dario™ or the other products
that we may develop, we may not convince our customers to use our products. Any such changes would likely reduce our commercial
opportunity and revenue potential and could materially adversely impact our operating results.
If we fail to respond quickly to technological
developments our products may become uncompetitive and obsolete.
The BGMS market and other
markets in which we plan to compete experience rapid technology developments, changes in industry standards, changes in customer
requirements and frequent new product introductions and improvements. If we are unable to respond quickly to these developments,
we may lose competitive position, and Dario™ or any other device or technology may become uncompetitive or obsolete, causing
revenues and operating results to suffer. In order to compete, we must develop or acquire new devices and improve our existing
device on a schedule that keeps pace with technological developments and the requirements for products addressing a broad spectrum
and designers and designer expertise in our industries. We must also be able to support a range of changing customer preferences.
For instance, as non-invasive technologies become more readily available in the market, we may be required to adopt our platform
to accommodate the use of non-invasive or continuous blood glucose sensors. We cannot guarantee that we will be successful in any
manner in these efforts.
If
third-party payors do not provide adequate coverage and reimbursement for the use of Dario™, our revenue will be negatively
impacted.
In
the United States and in other jurisdictions such as Germany and England, we expect that Dario™’s test strips
should generally be available for full or partial patient reimbursement by third-party payers. Our success in marketing Dario™
depends and will depend in large part on whether U.S. and international government health administrative authorities, private health
insurers and other organizations adequately cover and reimburse customers for the cost of our products.
In
the United States, we expect to derive nearly all our sales from sales of Dario™ from direct to consumer cash sales as well
as retail pharmacy and DME distributors who typically bill various third-party payors, including Medicare, Medicaid, private commercial
insurance companies, health maintenance organizations and other healthcare-related organizations, to cover all or a portion of
the costs and fees associated with Dario™ and bill patients for any applicable deductibles or co-payments. Access to adequate
coverage and reimbursement for Center for Medicare and Medicaid Services (CMS) procedures using Dario™ (and our other products
in development) by third-party payors is essential to the acceptance of our products by our customers.
Third-party
payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling
healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medical device products
and services exists among third-party payors. Therefore, coverage and reimbursement for medical device products and services can
differ significantly from payor to payor. In addition, payors continually review new technologies for possible coverage and can,
without notice, deny coverage for these new products and procedures. As a result, the coverage determination process is often a
time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to
each payor separately, with no assurance that coverage and adequate reimbursement will be obtained, or maintained if obtained.
Reimbursement
systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals
must be obtained on a country-by-country basis. In many international markets, a product must be approved for reimbursement before
it can be approved for sale in that country. Further, many international markets have government-managed healthcare systems that
control reimbursement for new devices and procedures. For example, the governmental healthcare system in the Netherlands, New Zealand
and Israel have not yet approved reimbursement of Dario™. In most markets there are private insurance systems as well as
government-managed systems. If sufficient coverage and reimbursement is not available for our current or future products, in either
the United States or internationally, the demand for our products and our revenues will be adversely affected.
Risks Related to Our Operations in Israel
Potential political, economic and military
instability in the State of Israel, where our management team and our research and development facilities are located, may adversely
affect our results of operations.
Our operating subsidiary,
along with our management team and our research and development facilities, is located in Israel. Accordingly, political, economic
and military conditions in Israel and the surrounding region may directly affect our business and operations. Since the establishment
of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any
hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely
affect our operations and results of operations. The hostilities involved missile strikes against civilian targets in various parts
of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions
in Israel. Our offices, located in Caesarea, Israel, are within the range of the missiles and rockets that have been fired at Israeli
cities and towns from Gaza sporadically since 2006, with escalations in violence (such as the recent escalation in July 2014) during
which there were a substantially larger number of rocket and missile attacks aimed at Israel. In addition, since February 2011,
Egypt has experienced political turbulence and an increase in terrorist activity in the Sinai Peninsula. Such political turbulence
and violence may damage peaceful and diplomatic relations between Israel and Egypt, and could affect the region as a whole. Similar
civil unrest and political turbulence has occurred in other countries in the region, including Syria which shares a common border
with Israel, and is affecting the political stability of those countries. This instability and any outside intervention may lead
to deterioration of the political and economic relationships that exist between the State of Israel and some of these countries,
and may have the potential for causing additional conflicts in the region. In addition, Iran has threatened to attack Israel and
is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in
the region, such as Hamas in Gaza, Hezbollah in Lebanon, and various rebel militia groups in Syria. Additionally, a violent jihadist
group named Islamic State of Iraq and Levant (ISIL) is involved in hostilities in Iraq and Syria and have been growing in influence.
Although ISIL’s activities have not directly affected the political and economic conditions in Israel, ISIL’s stated
purpose is to take control of the Middle East, including Israel. These situations may potentially escalate in the future to more
violent events which may affect Israel and us. Any armed conflicts, terrorist activities or political instability in the region
could adversely affect business conditions and could harm our results of operations and could make it more difficult for us to
raise capital. Parties with whom we do business may decline to travel to Israel during periods of heightened unrest or tension,
forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the
political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming
that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still
restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse
impact on our operating results, financial condition or the expansion of our business.
Our commercial insurance
does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although
the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts
of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could have
a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect
business conditions and could harm our results of operations.
Further, the State of Israel
and Israeli companies have been subjected to an economic boycott. Several countries still restrict business with the State of Israel
and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial
condition or the expansion of our business.
Our operations may be disrupted as a
result of the obligation of Israeli citizens to perform military service.
Many Israeli citizens are
obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of
40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict,
may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of
military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted
by such call-ups, which may include the call-up of members of our management. Such disruption could materially adversely affect
our business, financial condition and results of operations.
Investors may have difficulties enforcing
a U.S. judgment, including judgments based upon the civil liability provisions of the U.S. federal securities laws, against us,
or our executive officers and directors or asserting U.S. securities laws claims in Israel.
Certain of our directors
and officers are not residents of the United States and whose assets may be located outside the United States. Service of process
upon us or our non-U.S. resident directors and officers and enforcement of judgments obtained in the United States against us or
our non-U.S. our directors and executive officers may be difficult to obtain within the United States. We have been informed by
our legal counsel in Israel that it may be difficult to assert claims under U.S. securities laws in original actions instituted
in Israel or obtain a judgment based on the civil liability provisions of U.S. federal securities laws. Israeli courts may refuse
to hear a claim based on a violation of U.S. securities laws against us or our officers and directors because Israel may not be
the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine
that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable
U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be
governed by Israeli law. There is little binding case law in Israel addressing the matters described above. Israeli courts might
not enforce judgments rendered outside Israel, which may make it difficult to collect on judgments rendered against us or our officers
and directors.
Moreover, among other reasons,
including but not limited to, fraud or absence of due process, or the existence of a judgment which is at variance with another
judgment that was given in the same matter if a suit in the same matter between the same parties was pending before a court or
tribunal in Israel, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws do not provide for
the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the
sovereignty or security of the State of Israel.
Risks Related to the Ownership of Our Common
Stock and Warrants
Our officers, directors and founding stockholders may exert
significant influence over our affairs, including the outcome of matters requiring stockholder approval.
As of the date of
this Annual Report, our officers, directors and affiliated stockholders (including
Dicilyon
Consulting and Investment Ltd., or Dicilyon,
an affiliate of David Edery, and OurCrowd Digital Health, L.P.)
collectively have an approximately 44.7% beneficial ownership of our company. As a result, such individuals will have the
ability, acting together, to control the election of our directors and the outcome of corporate actions requiring stockholder
approval, such as: (i) a merger or a sale of our company, (ii) a sale of all or substantially all of our assets, and (iii)
amendments to our certificate of incorporation and bylaws. This concentration of voting power and control could have a
significant effect in delaying, deferring or preventing an action that might otherwise be beneficial to our other
stockholders and be disadvantageous to our stockholders with interests different from those individuals. Certain of these
individuals also have significant control over our business, policies and affairs as officers or directors of our company.
Therefore, you should not invest in reliance on your ability to have any control over our company.
OurCrowd Digital Health L.P. has the right to appoint up to
two members of our Board of Directors, which affords such investor the potential for control over our business.
OurCrowd Digital Health
L.P., an investor that participated in our January 2017 private placement transaction, has the right, for so long as such investor
holds 13% and 5% of our outstanding shares of common stock, to appoint, respectively, two or one member of our Board of Directors.
To date, such investor has appointed two members of our Board of Directors (Allen Kamer and
Yossi
Bahagon). As a result, such investor has significant influence over the composition of our Board of Directors which, in
turn, affords such investor the potential for material control over our business.
Our common stock has less liquidity than
many other stocks listed on the NASDAQ Global Market.
Historically, the trading
volume of our common stock has been relatively low when compared to larger companies listed on the NASDAQ Capital Market or other
stock exchanges. While we have experienced increased liquidity in our stock during the year ended December 31, 2016, we cannot
say with certainty that a more active and liquid trading market for our common stock will continue to develop. Because of this,
it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could
sell a smaller number of shares.
If securities or industry analysts do
not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations
regarding our common stock or warrants adversely, the price of our common stock or warrants and trading volume could decline.
The trading market for
our common stock or warrants may be influenced by the research and reports that securities or industry analysts may publish about
us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding
our common stock or warrants adversely, or provide more favorable relative recommendations about our competitors, the price of
our common stock or warrants would likely decline. If any analyst who may cover us were to cease coverage of our company or fail
to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price of our
common stock or warrants or trading volume to decline.
The market price of our common stock and warrants may be significantly
volatile.
The market price for our
common stock and warrants may be significantly volatile and subject to wide fluctuations in response to factors including the following:
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actual or anticipated fluctuations in our quarterly or annual operating results;
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changes in financial or operational estimates or projections;
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conditions in markets generally;
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changes in the economic performance or market valuations of companies similar to ours; and
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general economic or political conditions in the United States or elsewhere.
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In particular, the market
prices for securities of mHealth and medical device have historically been particularly volatile. Some of the factors that may
cause the market price of our common stock and warrants to fluctuate include:
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any delay in or the results of our clinical trials;
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any delay in manufacturing of our products;
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any delay with the approval for reimbursement for the patients from their insurance companies;
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our failure to comply with regulatory requirements;
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the announcements of clinical trial data, and the investment community’s perception of and reaction to those data;
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the results of clinical trials conducted by others on products that would compete with ours;
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any delay or failure to receive clearance or approval from regulatory agencies or bodies;
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our inability to commercially launch products or market and generate sales of our products, including Dario™;
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failure of Dario™ or any other products, even if approved for marketing, to achieve any level of commercial success;
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our failure to obtain patent protection for any of our technologies and products (including those related to Dario™)
or the issuance of third party patents that cover our proposed technologies or products;
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developments or disputes concerning our product’s intellectual property rights;
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our or our competitors’ technological innovations;
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general and industry-specific economic conditions that may affect our expenditures;
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changes in market valuations of similar companies;
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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital
commitments, new technologies, or patents;
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failure to adequately manufacture Dario™ or any other products through third parties;
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future sales of our common stock or other securities, including shares issuable upon the exercise of outstanding warrants or
otherwise issued pursuant to certain contractual rights;
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period-to-period fluctuations in our financial results; and
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low or high trading volume of our common stock due to many factors, including the terms of our financing arrangements.
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In addition, if we fail
to reach an important research, development or commercialization milestone or result by a publicly expected deadline, even if by
only a small margin, there could be significant impact on the market price of our common stock and warrants. Additionally, as we
approach the announcement of anticipated significant information and as we announce such information, we expect the price of our
common stock and warrants to be particularly volatile, and negative results would have a substantial negative impact on the price
of our common stock and warrants.
In some cases, following
periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities
litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management
attention and resources, which could significantly harm our business operations and reputation.
Shares eligible for future sale may adversely affect the market
for our common stock and warrants.
From time to time, certain
of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions
in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant
to Rule 144, after satisfying a six month holding period: (i) affiliated stockholder (or stockholders whose shares are aggregated)
may, under certain circumstances, sell within any three month period a number of securities which does not exceed the greater of
1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks
prior to such sale and (ii) non-affiliated stockholders may sell without such limitations, provided we are current in our public
reporting obligations. Rule 144 also permits the sale of securities by non-affiliates that have satisfied a one year holding period
without any limitation or restriction. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale
report may have a material adverse effect on the market price of our securities.
The right of the lead investor in our January 2017 Private
Placement to participate in future financings of ours could impair our ability to raise capital.
Under the securities purchase
agreement with the lead investor in our January 2017 private placement offering, in the event that we seek to raise money through
the offer and sale of debt or equity securities, we must first offer such investor a right to participate in at least 13% of the
securities we propose to offer in such funding. The existence of such right of participation, or the exercise of such rights, may
deter potential investors from providing us needed financing, or may deter investment banks from working with, which would have
a material adverse effect on our ability to finance our company which, in turn, could lead to our inability to continue our business.
As an “emerging growth company” under applicable
law, we will be subject to lessened disclosure requirements, which could leave our stockholders without information or rights available
to stockholders of more mature companies.
For as long as we remain
an “emerging growth company” as defined in the JOBS Act, we have elected to take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not “emerging growth companies”
including, but not limited to:
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not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
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taking advantage of an extension of time to comply with new or revised financial accounting standards;
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reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
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exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of
any golden parachute payments not previously approved.
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We expect to take advantage
of these reporting exemptions until we are no longer an “emerging growth company”. Because of these lessened regulatory
requirements, our stockholders would be left without information or rights available to stockholders of more mature companies.
Because we have elected
to use the extended transition period for complying with new or revised accounting standards for an “emerging growth company”
our financial statements may not be comparable to companies that comply with public company effective dates.
We have elected to use
the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act.
This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public
and private companies until those standards apply to private companies. While we are not currently delaying the implementation
of any relevant accounting standards, in the future we may avail ourselves of this rights, and as a result of this election, our
financial statements may not be comparable to companies that comply with public company effective dates. Because our financial
statements may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating
or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on
the value and liquidity of our common stock.
Our compliance with complicated U.S.
regulations concerning corporate governance and public disclosure is expensive. Moreover, our ability to comply with all applicable
laws, rules and regulations is uncertain given our management’s relative inexperience with operating U.S. public companies.
As a publicly reporting
company, we are faced with expensive and complicated and evolving disclosure, governance and compliance laws, regulations and standards
relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd-Frank Act, and, to the extent
we complete our anticipated public offering, the rules of the NASDAQ Stock Market. New or changing laws, regulations and standards
are subject to varying interpretations in many cases due to their lack of specificity, and, as a result, their application in practice
may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result,
our efforts to comply with evolving laws, regulations and standards of a U.S. public company are likely to continue to result in
increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities
to compliance activities.
Moreover, our executive
officers have little experience in operating a U.S. public company, which makes our ability to comply with applicable laws, rules
and regulations uncertain. Our failure to company with all laws, rules and regulations applicable to U.S. public companies could
subject us or our management to regulatory scrutiny or sanction, which could harm our reputation and stock price.
If we fail to maintain effective internal
control over financial reporting, the price of our common stock may be adversely affected.
Our internal control over
financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may
have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal control
over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely
affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition,
management’s assessment of internal control over financial reporting may identify weaknesses and conditions that need to
be addressed in our internal control over financial reporting or other matters that may raise concerns for investors. Any
actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure
of management’s assessment of our internal control over financial reporting may have an adverse impact on the price of our
common stock.
Anti-takeover provisions in our charter
documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price
of our common stock and warrants.
We are a Delaware corporation
and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by
prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person
becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our
certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders
may consider favorable. Our certificate of incorporation and bylaws:
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authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to thwart
a takeover attempt;
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provide that vacancies on our Board of Directors, including newly created directorships, may be filled only by a majority vote
of directors then in office;
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provide that special meetings of stockholders may only be called by our Chairman, Chief Executive Officer and/or President
or other executive officer, our Board of Directors or a super-majority (66 2/3%) of our stockholders;
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place restrictive requirements (including advance notification of stockholder nominations and proposals) on how special meetings
of stockholders may be called by our stockholders;
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do not provide stockholders with the ability to cumulate their votes; and
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provide that our Board of Directors or a super-majority of our stockholders (66 2/3%) may amend our bylaws.
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We do not currently intend to pay dividends
on our common stock in the foreseeable future, and consequently, your ability to achieve a return on your investment will depend
on appreciation in the price of our common stock.
We have never declared
or paid cash dividends on our common stock and do not anticipate paying any cash dividends to holders of our common stock in the
foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never
occur, as the only way to realize any future gains on their investments. There is no guarantee that shares of our common stock
will appreciate in value or even maintain the price at which our stockholders have purchased their shares.