Item 1A. Risk Factors
Investing in our
securities is highly speculative and involves a high degree of risk. You should carefully consider the following factors and other
information in this Annual Report and our other SEC filings before making a decision to invest in our securities. Additional risks
and uncertainties that we are unaware of may become important factors that affect us. If any of the following events occur, our
business, financial conditions and operating results may be materially and adversely affected. In that event, the trading price
of our common stock and warrants may decline, and you could lose all or part of your investment.
Summary of Risk Factors
Our business is subject to a number of
risks, including risks that may adversely affect our business, financial condition and results of operations. These risks are discussed
more fully below and include, but are not limited to, risks related to:
Risks Related to Our Financial Position
and Capital Requirements
● Risks associated with our relatively new business;
Risks Related to Our Business
● the impact of COVID-19 on our operations;
● our risks of basing our business on the sale of our principal technology;
● our reliance on manufacturers and distributors;
● the impact of a failure of our digital marketing efforts;
● our reliance on the Apple App Store and Google’s Android platform;
● the risks associated with conducting business internationally;
● potential errors in our business processes and product offerings;
● the integration of Upright’s business;
Risks Related to Product Development and Regulatory Approval
● the expense and time required to obtain regulatory clearance of our products;
● our ability to complete clinical trials;
● our reliance on third parties to conduct clinical trial work;
● the potential impact of product liability suits;
Risks Related to Our Intellectual Property
● the risks relating to obtaining or maintaining our intellectual property;
● potential litigation relating to the protection of our intellectual property;
● our limited foreign intellectual property rights;
21
Risks Related to Our Industry
● the intense competition we face in the markets we operate;
● our need to respond quickly to technological developments;
● the risks relating to obtaining or maintaining our intellectual property;
Risks Related to Our Operations in Israel
Risks Related to the Ownership of Our Common Stock and Warrants
● the impact of analysts not publishing research or reports about us;
● the expense relating to our requirements as a U.S. public company;
● that we do not intend to pay dividends on our common stock.
Risks Related to Our Financial Position
and Capital Requirements
We were formed in August 2011 and are thus subject
to the risks associated with new businesses.
We were formed in August 2011
as a new business and, commencing from 2015, we entered the commercialization stage of our technology. As such, this limited operating
history may not be adequate to enable you to fully assess our ability to develop and commercialize the Dario Smart Diabetes Management
Solution, achieve market acceptance of the Dario Smart Diabetes Management Solution, develop other products and respond to competition.
We commenced a commercial launch of the free Dario Smart Diabetes Management application in the United Kingdom in late 2013 and
commenced an initial soft launch of the full Dario Smart Diabetes Management Solution (including the app and the Dario Blood Glucose
Monitoring System) in selected jurisdictions in March 2014 with the goal of collecting customer feedback to refine our longer-term
roll-out strategy and continued to scale up launch during 2014 in the United Kingdom, the Netherlands and New Zealand, in 2015
in Australia, Israel and Canada and in 2016 in the United States. These efforts have not generated sufficient revenues, and
we will need to generate additional revenues over the next years. Therefore, we are, and expect for the foreseeable future to be,
subject to all the risks and uncertainties, inherent in a new business and the development and sale of new medical devices and
related software applications. As a result, we may be unable to fully develop, obtain regulatory approval for, commercialize, manufacture,
market, sell and derive material revenues in the timeframes we project, if at all, and our inability to do so would materially
and adversely impact our viability as a company. In addition, we still must establish many functions necessary to operate a business,
including finalizing our managerial and administrative structure, continuing product and technology development, assessing and
commencing our marketing activities, implementing financial systems and controls and personnel recruitment.
Accordingly, you should
consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in their
initial revenue generating stages, particularly those in the medical device and mobile health fields. In particular, potential
investors should consider that there is a significant risk that we will not be able to:
22
● attract, enter into or maintain contracts with, and retain customers.
In the event that we
do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially
and adversely affected.
Given our limited revenue and lack
of positive cash flow, we will need to raise additional capital, which may be unavailable to us or, even if consummated, may cause
dilution or place significant restrictions on our ability to operate.
According to our management’s
estimates, based on our current cash on hand and further based on our budget and the assumption that initial commercial sales
will commence during our anticipated timeframes, we believe that we will have sufficient resources to continue our activities
through 2023.
Since we might be unable
to generate sufficient revenue or cash flow to fund our operations for the foreseeable future, we will need to seek additional
equity or debt financing to provide the capital required to maintain or expand our operations. We may also need additional funding
for developing products and services, increasing our sales and marketing capabilities, and promoting brand identity, as well as
for working capital requirements and other operating and general corporate purposes. Moreover, the regulatory compliance arising
out of being a publicly registered company has dramatically increased our costs.
We do not currently
have any arrangements or credit facilities in place as a source of funds, and there can be no assurance that we will be able to
raise sufficient additional capital on acceptable terms, or at all. If such financing is not available on satisfactory terms, or
is not available at all, we may be required to delay, scale back or eliminate the development of business opportunities and our
operations and financial condition may be materially adversely affected.
If we raise additional
capital by issuing equity securities, the percentage ownership of our existing stockholders may be reduced, and accordingly these
stockholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and
privileges senior to those of our common stock. Given our need for cash and that equity raising is the most common type of fundraising
for companies like ours, the risk of dilution is particularly significant for stockholders of our company.
Debt financing, if
obtained, may involve agreements that include liens on our assets, covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, could increase our expenses and require that our assets be provided as a security for
such debt. Debt financing would also be required to be repaid regardless of our operating results.
If we raise additional
funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or candidate
products, or to grant licenses on terms that are not favorable to us.
Funding from any source
may be unavailable to us on acceptable terms, or at all. If we do not have sufficient capital to fund our operations and expenses,
we may not be able to achieve or maintain competitiveness, which could lead to the failure of our business and the loss of your
investment.
We have incurred significant losses
since inception. As such, you cannot rely upon our historical operating performance to make an investment decision regarding our
company.
Since our inception,
we have engaged primarily in research and development activities and in 2015 entered the commercialization stage. We have financed
our operations primarily through private placements and public offerings of common stock and have incurred losses in each year
since inception including net losses of $29,445,000 and $17,736,000 in 2020 and 2019, respectively.
Our accumulated deficit at December 31, 2020 was approximately $143,248,000. We do not know whether or when we will become profitable.
Our ability to generate revenue and achieve profitability depends upon our ability, alone or with others, to launch Dario in additional
European countries, and elsewhere and manufacture, market and sell Dario where approved. We may be unable to achieve any or all
of these goals.
23
We may be subject to claims for rescission
or damages in connection with certain sales of shares of our securities.
In March 2016,
the Securities and Exchange Commission declared effective a registration statement that we filed to cover 66,667 shares 76,667
warrants to purchase common stock, 76,667 shares of common stock underlying such warrants, and underwriters’ warrants to
purchase up to 7,172 shares of common stock. Sales of approximately 2,778 shares of common stock, approximately 12,778 shares of
common stock underlying warrants and approximately 1,278 shares of common stock underlying underwriters’ warrants may not
have been made in accordance with Section 5 of the Securities Act of 1933, as amended. Accordingly, the purchasers of those
securities may have rescission rights or be entitled to damages. The amount of such liability, if any, is uncertain. In the event
that we are required to make payments to investors as a result of these unregistered sales of securities, our liquidity could be
negatively impacted.
Risks Related to Our Business
We only recently began commercializing
Dario, and our success will depend on the acceptance of Dario in the healthcare market.
Dario
has been CE marked since 2013, enabling us to commercialize in 32 countries across Europe as well as in certain other countries
worldwide. It was also approved by the regulatory authorities in Australia, New Zealand,
Canada, Israel and South Africa, and most recently in December 2015, we received FDA clearance. As a result, we have
a limited history of commercializing Dario and commenced selling Dario in the United States in 2016. We have limited experience
engaging in commercial activities and limited established relationships with physicians and hospitals as well as third-party suppliers
on whom we depend for the manufacture of our product. We are faced with the risk that the marketplace will not be receptive
to Dario over competing products and that we will be unable to compete effectively. Factors that could affect our ability to establish
Dario or any potential future product include:
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.
24
There is no assurance that our DarioEngage
software platform will succeed or be adopted by healthcare providers.
Our product offering
consists of our DarioEngage software platform, where we digitally engage with Dario users, assist them in monitoring their chronic
illnesses and provide them with coaching, support, digital communications, and real-time alerts, trends and pattern analysis. We
expect that the DarioEngage software platform may be leveraged by our potential partners, such as clinics, health care service
providers, employers, and payers for scalable monitoring of people with diabetes in a cost-effective manner, which we expect will
open for us additional revenue streams. However, the success of our DarioEngage software platform will depend entirely on our potential
partners’ adoption of the platform and we cannot assure you that our potential partners will do so, or, if adopted, that
they will continue to use the platform continually and for an extended period of time. If we cannot encourage potential partners
to utilize our DarioEngage software platform we may not succeed in marketing the product to our potential partners, the failure
of which may materially and adversely affect our business and operating results.
A pandemic, epidemic or outbreak
of an infectious disease in the United States, Israel or elsewhere may adversely affect our business.
A regional or global
health pandemic, including COVID-19, could severely affect our business, results of operations and financial condition. A regional
or global health pandemic, depending upon its duration and severity, could have a material adverse effect on our business. For
example, the COVID-19 pandemic has had numerous effects on the global economy and governmental authorities around the world have
implemented measures to reduce the spread of COVID-19. These measures, including shutdowns and “shelter-in-place” orders
suggested or mandated by governmental authorities or otherwise elected by companies as a preventive measure, have adversely affected
workforces, customers, consumer sentiment, economies and financial markets, and, along with decreased consumer spending, have led
to an economic downturn in many of our markets.
As a result of the
COVID-19 pandemic, as near-term measures, we have transitioned many of our employees to remote working arrangements. The transition
has had little impact on our employee productivity and has not caused any interruption to our business. Due to the uncertainty
of COVID-19, we will continue to assess the situation, including abiding by any government-imposed restrictions, market by market.
As a result of the
COVID-19 pandemic, many of our personnel are working remotely, and it is possible that this could have a negative impact on the
execution of our business plans and operations. If a natural disaster, power outage, connectivity issue, or other event occurred
that impacted our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue
our business for a substantial period of time. The increase in remote working may also result in consumer privacy, IT security
and fraud concerns as well as increase our exposure to potential wage and hour issues.
We are unable to accurately
predict the impact that COVID-19 will have on our operations going forward due to uncertainties that will be dictated by the length
of time that the pandemic and related disruptions continue, the impact of governmental regulations that might be imposed in response
to the pandemic and overall changes in consumer behavior. Numerous state and local jurisdictions have imposed, and others in the
future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions
for their residents to control the spread of COVID-19. For example, Israel, federal and state governments in the United States,
and various governments in Europe, continue to impose limitations on gatherings, social distancing measures and restrictions on
movement, only allowing essential businesses to remain open. Such orders or restrictions have and are continuing to result in temporary
store closures, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, any
of which may negatively impact workforces, customers, consumer sentiment and the economies in many of our markets, and as a result,
may adversely affect our operations.
At this point in time, there is significant
uncertainty relating to the potential effect of COVID-19 on our business. As infections may continue to become more widespread,
we could experience a severe negative impact on our business, financial condition and results of operations. To the extent the
COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the
other risks described in this “Risk factors” section.
We may not be successful in launching
Dario Loop and even if we are successful in doing so, there is no assurance that we will be successful in marketing and/or selling
our product in the marketplace.
We intend to launch
our Dario Loop program, which will utilize a large amount of data collected on our servers to develop predictive models and artificial
intelligence algorithms to meet the potential demand of intelligence-driven analytics that healthcare providers may be looking
for to improve their services. However, the launch of Dario Loop will require significant financial and technical resources. There
is no assurance that we will successfully develop or launch Dario Loop. Even if we are successful in doing so, there is no assurance
that the marketplace will accept or adopt the usage of Dario Loop. If we cannot successfully develop Dario Loop, or encourage the
use and adoption of Dario Loop by market participants, our business and operating results may be materially and adversely affected.
25
We cannot accurately predict the
volume or timing of any future sales, making the timing of any revenues difficult to predict.
We may be faced with
lengthy customer evaluation and approval processes associated with Dario. Consequently, we may incur substantial expenses and devote
significant management effort and expense in developing customer adoption of Dario which may not result in revenue generation.
We must also obtain regulatory approvals of Dario in certain jurisdictions as well as approval for insurance reimbursement in order
to initiate sales of Dario, each of which is subject to risk and potential delays, and neither of which may actually occur. As
such, we cannot accurately predict the volume or timing of any future sales.
If Dario fails to satisfy current
or future customer requirements, we may be required to make significant expenditures to redesign the product, and we may have insufficient
resources to do so.
Dario is being designed
to address an evolving marketplace and must comply with current and evolving customer requirements in order to gain market acceptance.
There is a risk that Dario will not meet anticipated customer requirements or desires. If we are required to redesign our products
to address customer demands or otherwise modify our business model, we may incur significant unanticipated expenses and losses,
and we may be left with insufficient resources to engage in such activities. If we are unable to redesign our products, develop
new products or modify our business model to meet customer desires or any other customer requirements that may emerge, our operating
results would be materially adversely affected, and our business might fail.
We expect to derive substantially
all of our revenues from our principal technology, which leaves us subject to the risk of reliance on such technology.
We expect to derive
substantially all of our revenues from sales of products derived from our principal technology. Our initial product utilizing this
technology is Dario. As such, any factor adversely affecting sales of Dario, including the product release cycles, regulatory issues,
market acceptance, product competition, performance and reliability, reputation, price competition and economic and market conditions,
would likely harm our operating results. We may be unable to develop other products utilizing our technology, which would likely
lead to the failure of our business. Moreover, in spite of our efforts related to the registration of our technology, if patent
protection is not available for our principal technology, the viability of Dario and any other products that may be derived from
such technology would likely be adversely impacted to a significant degree, which would materially impair our prospects.
We
are dependent upon third-party manufacturers and suppliers making us vulnerable to supply shortages and problems and price fluctuations,
which could harm our business.
We
do not own or operate manufacturing facilities for clinical or commercial production of the Dario Blood Glucose Monitoring System,
and we lack the resources and the capability to manufacture the Dario Blood Glucose Monitoring System on a commercial scale. Therefore,
we rely on a limited number of suppliers who manufacture and assemble certain components of the Dario Blood Glucose Monitoring
System. Our suppliers may encounter problems during manufacturing for a variety of reasons, including, for example, failure to
follow specific protocols and procedures, failure to comply with applicable legal and regulatory requirements, equipment malfunction
and environmental factors, failure to properly conduct their own business affairs, and infringement of third-party intellectual
property rights, any of which could delay or impede their ability to meet our requirements. Our reliance on these third-party suppliers
also subjects us to other risks that could harm our business, including:
26
● we may have difficulty locating and qualifying alternative suppliers;
We
may not be able to quickly establish additional or alternative suppliers if necessary, in part because we may need to undertake
additional activities to establish such suppliers as required by the regulatory approval process. Any interruption or delay in
obtaining products from our third-party suppliers, or our inability to obtain products from qualified alternate sources at acceptable
prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to switch to competing products.
Given our reliance on certain single-source suppliers, we are especially susceptible to supply shortages because we do not have
alternate suppliers currently available.
We rely in part on a small group
of third-party distributors to effectively distribute our products.
We
depend in part on medical device distributors for the marketing and selling of our products in certain territories in which we
have launched product sales. We depend on these distributors’ efforts to market our products, yet we are unable to control
their efforts completely. These distributors typically sell a variety of other, non-competing products that may limit the resources
they dedicate to selling Dario. In addition, we are unable to ensure that our distributors comply with all applicable laws regarding
the sale of our products. If our distributors fail to effectively market and sell Dario, in full compliance with applicable laws,
our operating results and business may suffer. Recruiting and retaining qualified third-party distributors and training them in
our technology and product offering requires significant time and resources. To develop and expand our distribution, we must continue
to scale and improve our processes and procedures that support our distributors. Further, if our relationship with a successful
distributor terminates, we may be unable to replace that distributor without disruption to our business. If we fail to maintain
positive relationships with our distributors, fail to develop new relationships with other distributors, including in new markets,
fail to manage, train or incentivize existing distributors effectively, or fail to provide distributors with competitive products
on attractive terms, or if these distributors are not successful in their sales efforts, our revenue may decrease and our operating
results, reputation and business may be harmed.
Failure in our online and digital
marketing efforts could significantly impact our ability to generate sales.
In several of our principal
target markets, we utilize online and digital marketing in order to create awareness to Dario. Our management believes that using
online advertisement through affiliate networks and a variety of other pay-for-performance methods will be superior for marketing
and generating sales of Dario rather than utilizing traditional, expensive retail channels. However, there is a risk that our marketing
strategy could fail. Because we plan to use non-traditional retail sales tools and to rely on healthcare providers to educate our
customers about Dario, we cannot predict the level of success, if any, that we may achieve by marketing Dario via the internet.
The failure of our online marketing efforts would significantly and negatively impact our ability to generate sales.
27
Our Dario Smart Diabetes Management
application, which is a key to our business model, is available via Apple’s App Store and via Google’s Android platforms
and maybe in the future via additional platforms. If we are unable to achieve or maintain a good relationship with each of Apple
and Google or similar platforms, or if the Apple App Store or the Google Play Store or any other applicable platform were unavailable
for any prolonged period of time, our business will suffer.
A key component of
the Dario Smart Diabetes Management Solution is an iPhone or Android application which includes tools to help diabetic patients
manage their disease. This application is compatible with Apple’s iOS and with Google’s Android platforms and may in
the future become compatible via additional platforms. If we are unable to make our Dario Smart Diabetes Management application
compatible with these platforms, or if there is any deterioration in our relationship with either Apple or Google or others after
our application is available, our business would be materially harmed.
We are subject to each
of Apple’s and Google’s standard terms and conditions for application developers, which govern the promotion, distribution,
and operation of games and other applications on their respective storefronts. Each of Apple and Google has broad discretion to
change its standard terms and conditions, including changes which could require us to pay to have our Dario Smart Diabetes Management
application available for downloading. In addition, these standard terms and conditions can be vague and subject to changing interpretations
by Apple or Google. We may not receive any advance warning of such changes. In addition, each of Apple and Google has the right
to prohibit a developer from distributing its applications on its storefront if the developer violates its standard terms and conditions.
In the event that either Apple or Google ever determines that we are in violation of its standard terms and conditions, including
by a new interpretation, and prohibits us from distributing our Dario Smart Diabetes Management application on its storefront,
it would materially harm our business.
Additionally, we will
rely on the continued function of the Apple App Store and the Google Play Store as digital storefronts where our Dario Smart Diabetes
Management application may be obtained. There have been occasions in the past when these digital storefronts were unavailable for
short periods of time or where there have been issues with the in-app purchasing functionality within the storefront. In the event
that either the Apple App Store or the Google Play Store is unavailable or if in-app purchasing functionality within the storefront
is non-operational for a prolonged period of time, it would have a material adverse effect on the ability of our customers to secure
the Dario Smart Diabetes Management application, which would materially harm our business.
Our products are subject to technological
changes which may impact their use.
Our Dario Blood Glucose
Monitoring System is currently designed to be plugged into the Lighting jack for Apple devices or the USB-C jack for other mobile
devices. As a result, our products are subject to future technological changes to mobile devices that may occur in the future.
If we are unable to modify our products to keep pace with such technological changes, it would have a material adverse effect the
ability of our customers to use our products, which would materially harm our business.
As we conduct business internationally,
we are susceptible to risks associated with international relationships.
Outside of the United
States, we operate our business internationally, presently in Europe, Australia and Canada. The international operation of our
business requires significant management attention, which could negatively affect our business if it diverts their attention from
their other responsibilities. In the event that we are unable to manage the complications associated with international operations,
our business prospects could be materially and adversely affected. In addition, doing business with foreign customers subjects
us to additional risks that we do not generally face in the United States. These risks and uncertainties include:
28
● delivery, logistics and storage costs;
● difficulties supporting international operations;
● difficulties supporting customer services;
● changes in economic and political conditions;
● impact of trade protection measures;
● complying with import or export licensing requirements;
● exchange rate fluctuations;
● maintaining and servicing computer hardware in distant locations;
● securing or maintaining protection for our intellectual property; and
The occurrence of any
or all of these risks could adversely affect our international business and, consequently, our results of operations and financial
condition.
We expect to be exposed to fluctuations
in currency exchange rates, which could adversely affect our results of operations.
Because we expect
to conduct a material portion of our business outside of the United States but report our financial results in U.S. Dollars, we
face exposure to adverse movements in currency exchange rates. Our foreign operations will be exposed to foreign exchange rate
fluctuations as the financial results are translated from the local currency into U.S. Dollars upon consolidation. Specifically,
the U.S. Dollar cost of our operations in Israel is influenced by any movements in the currency exchange rate of the New Israeli
Shekel (NIS). Such movements in the currency exchange rate may have a negative effect on our financial results. If the U.S. Dollar
weakens against foreign currencies, the translation of these foreign currencies denominated transactions will result in increased
revenue, operating expenses and net income. Similarly, if the U.S. Dollar strengthens against foreign currencies, the translation
of these foreign currencies denominated transactions will result in decreased revenue, operating expenses and net income. As exchange
rates vary, sales and other operating results, when translated, may differ materially from our or the capital market’s expectations.
29
Non-U.S. governments often impose
strict price controls, which may adversely affect our future profitability.
We intend to seek approval
to market Dario and any future product in both the U.S. and in non-U.S. jurisdictions. If we obtain approval in one or more non-U.S.
jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our products. In some countries,
particularly countries of the European Union, each of which has developed its own rules and regulations, pricing may be subject
to governmental control under certain circumstances. In these countries, pricing negotiations with governmental authorities can
take considerable time after the receipt of marketing approval for a medical device candidate. To obtain reimbursement or pricing
approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product
to other available products.If reimbursement of our product candidates is unavailable or limited in scope or amount,
or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
Our Dario Smart Diabetes Management
Solution and associated business processes may contain undetected errors, which could limit our ability to provide our services
and diminish the attractiveness of our service offerings.
The Dario Smart Diabetes
Management Solution may contain undetected errors, defects or bugs. As a result, our customers or end users may discover errors
or defects in our products, software or the systems we design, or the products or systems incorporating our designs and intellectual
property may not operate as expected. We may discover significant errors or defects in the future that we may not be able to fix.
Our inability to fix any of those errors could limit our ability to provide our products, impair the reputation of our brand and
diminish the attractiveness of our product offerings to our customers.
In addition, we may
utilize third-party technology or components in our products, and we rely on those third parties to provide support services to
us. Failure of those third parties to provide necessary support services could materially adversely impact our business.
Our future performance will depend
on the continued engagement of key members of our management team.
Our future performance
depends to a large extent on the continued services of members of our current management including, in particular, Erez Raphael,
our Chief Executive Officer and a member of our Board of Directors and Zvi Ben David, our Chief Financial Officer, Treasurer and
Secretary, Dror Bacher, our Chief Operating Officer, and Richard Anderson, our President and General Manager for North America.
In the event that we lose the continued services of such key personnel for any reason, this could have a material adverse effect
on our business, operations, and prospects.
If we are not able to attract and
retain highly skilled managerial, scientific and technical personnel, we may not be able to implement our business model successfully.
We believe that our
management team must be able to act decisively to apply and adapt our business model in the rapidly changing markets in which we
will compete. In addition, we will rely upon technical and scientific employees or third-party contractors to effectively establish,
manage and grow our business. Consequently, we believe that our future viability will depend largely on our ability to attract
and retain highly skilled managerial, sales, scientific and technical personnel. In order to do so, we may need to pay higher compensation
or fees to our employees or consultants than we currently expect, and such higher compensation payments would have a negative effect
on our operating results. Competition for experienced, high-quality personnel is intense and we cannot assure that we will be able
to recruit and retain such personnel. We may not be able to hire or retain the necessary personnel to implement our business strategy.
Our failure to hire and retain such personnel could impair our ability to develop new products and manage our business effectively.
We may not generate the expected
benefits of our recent acquisition of Upright, and the integration of Upright could disrupt our ongoing business, distract our
management and increase our expenses.
Through
our recent acquisitions of Upright, we expanded our product offering to include solutions for MSK conditions. We believe
that the successful integration of Upright’s business into our operations is important for our future financial performance.
This will require that we integrate more closely the companies’ product offerings and research and development capabilities,
retain key employees, assimilate diverse corporate cultures, further integrate management information systems and consolidate the
acquired operations, each of which could pose significant challenges. The difficulty of combining Upright with our company may
be increased by the need to integrate personnel, and changes effected in the combination may cause key employees to leave.
30
It is possible that
the integration process could take longer than anticipated and could result in the loss of valuable employees, additional and unforeseen
expenses, the disruption of our ongoing business, processes and systems, or inconsistencies in standards, controls, procedures,
practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits
of the acquisitions. The diversion of the attention of management created by the integration process, any disruptions or other
difficulties encountered in the integration process, and unforeseen liabilities or unanticipated problems with the acquired businesses
could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that
these acquisitions will provide the benefits we expect or that we will be able to integrate and develop the operations of Upright
successfully. Any failure to do so could have a material adverse effect on our business, operating results and financial condition.
Risks Related to Product Development
and Regulatory Approval
The
regulatory clearance process which we must navigate is expensive, time-consuming, and uncertain and may prevent us from obtaining
clearance for the commercialization of Darioor our any future product.
We are not permitted
to market Dario until we receive regulatory clearance. To date, we have received regulatory clearance in Australia, Canada, Israel, Italy,
the Netherlands, New Zealand, the United Kingdom, and the United States.
The research, design,
testing, manufacturing, labeling, selling, marketing and distribution of medical devices are subject to extensive regulation by
the FDA and non-U.S. regulatory authorities, which regulations differ from country to country. There
can be no assurance that even after such time and expenditures, we will be able to obtain necessary regulatory approvals for clinical
testing or for the manufacturing or marketing of any products. In addition, during the regulatory process, other companies
may develop other technologies with the same intended use as our products.
We are also subject
to numerous post-marketing regulatory requirements, which include labeling regulations and medical device reporting regulations,
which may require us to report to different regulatory agencies if our device causes or contributes to a death or serious injury,
or malfunctions in a way that would likely cause or contribute to a death or serious injury. In addition, these regulatory requirements
may change in the future in a way that adversely affects us. If we fail to comply with present or future regulatory requirements
that are applicable to us, we may be subject to enforcement action by regulatory agencies, which may include, among others, any
of the following sanctions:
● customer notification, or orders for repair, replacement or refunds;
● voluntary or mandatory recall or seizure of our current or future products;
● imposing operating restrictions, suspension or shutdown of production;
● criminal prosecution.
The occurrence of any
of these events may have a material adverse effect on our business, financial condition and results of operations.
31
In addition, on September 23,
2013, the FDA issued final guidance (which we refer to herein as the Guidance) for developers of mobile medical applications, or
apps, which are software programs that run on mobile communication devices and perform the same functions as traditional medical
devices. The Guidance outlines the FDA’s tailored approach to mobile apps. The FDA plans to exercise enforcement discretion
(meaning it will not enforce requirements under the Federal Food, Drug and Cosmetic Act) for the majority of mobile apps as they
pose minimal risk to consumers. The FDA plans to focus its regulatory oversight on a subset of mobile medical apps that present
a greater risk to patients if they do not work as intended. We anticipate that the Dario Smart Diabetes Management application
will be subject to FDA regulation as a “mobile medical app.”
We
have conducted limited clinical studies of Dario. Clinical and pre-clinical data is susceptible to varying interpretations, which
could delay, limit or prevent additional regulatory clearances.
To
date, we have conducted limited clinical studies on Dario. There can be no assurance that we will successfully complete
additional clinical studies necessary to receive additional regulatory approvals in certain jurisdictions. While studies conducted
by us have produced results we believe to be encouraging and indicative of the potential efficacy of Dario, data already obtained,
or in the future obtained, from pre-clinical studies and clinical studies do not necessarily predict the results that will be obtained
from later pre-clinical studies and clinical studies. Moreover, pre-clinical and clinical data are susceptible to varying interpretations,
which could delay, limit or prevent additional regulatory approvals. A number of companies in the medical device and pharmaceutical
industries have suffered significant setbacks in advanced clinical studies, even after promising results in earlier studies. The
failure to adequately demonstrate the safety and effectiveness of an intended product under development could delay or prevent
regulatory clearance of the device, resulting in delays to commercialization, and could materially harm our business. Even
though we have received CE mark and FDA clearance of Dario, there can be no assurance that we will be able to receive approval
for other potential applications of our principal technology, or that we will receive regulatory clearances from other targeted
regions or countries.
We may be unable to complete required
clinical trials, or we may experience significant delays in completing such clinical trials, which could significantly delay our
targeted product launch timeframe and impair our viability and business plan.
The completion of any
future clinical trials for Dario or other trials that we may be required to undertake in the future could be delayed, suspended
or terminated for several reasons, including:
If our clinical trial
is delayed it will take us longer to further commercialize Dario and generate additional revenues. Moreover, our development costs
will increase if we have material delays in our clinical trial or if we need to perform more or larger clinical trials than planned.
We may be faced with similar risks in connection with future trials we conduct. See “Business - Clinical Trials” for
a description of our clinical trials performed to date.
32
If we or our manufacturers fail to
comply with the FDA’s Quality System Regulation or any applicable state equivalent, our operations could be interrupted, and
our operating results could suffer.
We, our manufacturers
and suppliers must, unless specifically exempt by regulation, follow the FDA’s Quality System Regulation (QSR) and are also
subject to the regulations of foreign jurisdictions regarding the manufacturing process. If our affiliates, our manufacturers or
suppliers are found to be in significant non-compliance or fail to take satisfactory corrective action in response to adverse QSR
inspectional findings, the FDA could take enforcement actions against us and our manufacturers which could impair our ability to
produce our products in a cost-effective and timely manner in order to meet our customers’ demands. Accordingly, our operating
results could suffer.
We are subject to the risk of reliance
on third parties to conduct our clinical trial work.
We depend on independent
clinical investigators to conduct our clinical trials. Contract research organizations may also assist us in the collection and
analysis of data. These investigators and contract research organizations will not be our employees and we will not be able to
control, other than by contract, the number of resources, including the time that they devote to products that we develop. If independent
investigators fail to devote sufficient resources to our clinical trials, or if their performance is substandard, it will delay
the approval or clearance and commercialization of any products that we develop. Further, the FDA and other regulatory bodies around
the world require that we comply with standards, commonly referred to as good clinical practice, for conducting, recording and
reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity, and
confidentiality of trial subjects are protected. If our independent clinical investigators and contract research organizations
fail to comply with good clinical practice, the results of our clinical trials could be called into question and the clinical development
of our product candidates could be delayed. Failure of clinical investigators or contract research organizations to meet their
obligations to us or comply with federal regulations could adversely affect the clinical development of our product candidates
and harm our business. Moreover, we intend to have several clinical trials in order to support our marketing efforts and business
development purposes. Such clinical trials will be conducted by third parties as well. Failure of such clinical trials to meet
their primary endpoints could adversely affect our marketing efforts.
Legislative
reforms to the United States healthcare system may adversely affect our revenues and business.
From
time to time, legislative reform measures are proposed or adopted that would impact healthcare expenditures for medical services,
including the medical devices used to provide those services. For example, in March 2010, U.S. President Barack Obama signed
the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred
to as the Affordable Care Act. The Affordable Care Act made a number of substantial changes in the way health care is financed
by both governmental and private insurers and the way that Medicare providers are reimbursed. Among other things, the Affordable
Care Act requires certain medical device manufacturers and importers to pay an excise tax equal to 2.3% of the price for which
such medical devices are sold, beginning January 1, 2013.
In
addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2,
2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee
on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted
deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction
to several government programs. This includes reductions to Medicare payments to providers of 2.0% per fiscal year. On January 2,
2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months
the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. On March 1, 2013, the President
signed an executive order implementing sequestration, and on April 1, 2013, the 2% Medicare payment reductions went into effect.
The Bipartisan Budget Act of 2013, enacted on December 26, 2013, extends these cuts to 2023. The ATRA also, among other things,
reduced Medicare payments to several providers, including hospitals, imaging centers, and cancer treatment centers, and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years. In December 2014,
Congress passed an omnibus funding bill (the Consolidated and Further Continuing Appropriations Act, 2015) and a tax extenders
bill, both of which may negatively impact coverage and reimbursement of healthcare items and services. We expect that additional
state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and
state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional
pricing pressure. For example, former U.S. President Donald Trump publicly indicated an intent to lower healthcare costs through
various potential initiatives. In addition, former President Trump and other U.S. lawmakers have made statements about potentially
repealing and/or replacing the Affordable Care Act, although specific legislation for such repeal or replacement has not yet been
introduced. While we are unable to predict what changes may ultimately be enacted, to the extent that future changes affect how
our products are paid for and reimbursed by government and private payers our business could be adversely impacted.
33
Government
and private sector initiatives to limit the growth of health care costs, including price regulation, competitive pricing, coverage
and payment policies, comparative effectiveness reviews of therapies, technology assessments, and managed-care arrangements, are
continuing. Government programs, including Medicare and Medicaid, private health care insurance and managed-care plans have attempted
to control costs by limiting the amount of reimbursement they will pay for particular procedures or treatments, tying reimbursement
to outcomes, and other mechanisms designed to constrain utilization and contain costs, including delivery reforms such as expanded
bundling of services. Hospitals are also seeking to reduce costs through a variety of mechanisms, which may increase price sensitivity
among customers for our products, and adversely affect sales, pricing, and utilization of our products. Some third-party payors
must also approve coverage for new or innovative devices or therapies before they will reimburse health care providers who use
medical devices or therapies. We cannot predict the potential impact of cost-containment trends on future operating results.
We may be subject to federal, state
and foreign healthcare fraud and abuse laws and regulations.
Many federal, state
and foreign healthcare laws and regulations apply to the BGMS business and medical devices. We may be subject to certain federal
and state regulations, including the federal healthcare programs’ Anti-Kickback Law, the federal Health Insurance Portability
and Accountability Act of 1996, and other federal and state false claims laws. The medical device industry has been under heightened
scrutiny as the subject of government investigations and enforcement actions involving manufacturers who allegedly offered unlawful
inducements to potential or existing customers in an attempt to procure their business, including arrangements with physician consultants.
If our operations or arrangements are found to be in violation of such governmental regulations, we may be subject to civil and
criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment of our operations. All
of these penalties could adversely affect our ability to operate our business and our financial results.
Product liability suits, whether
or not meritorious, could be brought against us due to an alleged defective product or for the misuse of Dario or our potential
future products. These suits could result in expensive and time-consuming litigation, payment of substantial damages, and an increase
in our insurance rates.
If Dario or any of
our future products are defectively designed or manufactured contain defective components or are misused, or if someone claims
any of the foregoing, whether or not meritorious, we may become subject to substantial and costly litigation. Misusing our device
or failing to adhere to the operating guidelines or the device producing inaccurate meter readings could cause significant harm
to patients, including death. In addition, if our operating guidelines are found to be inadequate, we may be subject to liability.
Product liability claims could divert management’s attention from our core business, be expensive to defend and result in
sizable damage awards against us. While we maintain product liability insurance, we may not have sufficient insurance coverage
for all future claims. Any product liability claims brought against us, with or without merit, could increase our product liability
insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and could reduce revenue.
Product liability claims in excess of our insurance coverage would be paid out of cash reserves harming our financial condition
and adversely affecting our results of operations.
If we are found to have violated
laws protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties, which could
increase our liabilities and harm our reputation or our business.
Part of our business
plan includes the storage and potential monetization of medical data of users of Dario. There are a number of federal and state
laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and
disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient
privacy rules under the Health Insurance Portability and Accountability Act of 1996 (which we refer to as HIPAA). These privacy
rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals
the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health
information to the minimum amount reasonably necessary to accomplish the intended purpose. We may face difficulties in holding
such information in compliance with applicable law. If we are found to be in violation of the privacy rules under HIPAA, we
could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material
adverse effect on our business, financial condition and results of operations.
34
Risks Related to Our Intellectual Property
The failure to obtain or maintain
patents, licensing agreements and other intellectual property could materially impact our ability to compete effectively.
In order for our business
to be viable and to compete effectively, we need to develop and maintain, and we will heavily rely on, our proprietary position
with respect to our technologies and intellectual property. We filed a Patent Cooperation Treaty (or PCT) application for a “Fluids
Testing Apparatus and Methods of Use” in May 2011 which incorporates two U.S. provisional applications submitted in
the preceding year. The PCT covers the specific processes related to blood glucose level measurement as well as more general methods
of rapid tests of body fluids and has subsequently been converted into several national phase patent applications. We have also
filed patent applications for other aspects of the Dario Blood Glucose Monitoring Solution. We have also obtained numerous Web
domains.
However, to date, we
have only been issued four patents (three of which were issued in the United States) relating to how the Dario Blood Glucose Monitoring
System draws power from and transmits data to a smartphone via the audio jack port. None of our other patents have been granted
by a patent office. In addition, there are significant risks associated with our actual or proposed intellectual property. The
risks and uncertainties that we face with respect to our pending patent and other proprietary rights principally include the following: