Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Readers are advised
to review the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial
statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2018. Some of the information
contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to
our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary
Note Regarding Forward-Looking Statements”. You should review the “Risk Factors” section of our Annual Report
for the fiscal year ended December 31, 2018 for a discussion of important factors that could cause actual results to differ materially
from the results described in or implied by the forward-looking statements contained in the following discussion and analysis
.
The following financial
data in this narrative are expressed in
thousands
, except for stock and stock data or as otherwise noted.
We are a global digital
health (mHealth) company serving our users with dynamic mobile health solutions. We employ what we believe to be a revolutionary
approach to health management. We have developed unique ways for people to analyze and personalize their chronic disease management
as it relates to diabetes. We have accomplished this through the combination of wearable technology and health monitoring. In addition,
our solution is changing the way people with diabetes can manage their condition as a result of us providing them with continuous,
as opposed to periodic, data.
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 to track and monitor all facets of diabetes, combined with
a stylish, ‘all-in-one’, pocket-sized, blood glucose monitoring device, which we call the Dario Blood Glucose Monitoring
System, that essentially turns a smartphone into a glucometer. In addition, our product offerings will focus on the newly launched
Dario Engage 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. The Dario Engage
platform can 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. Finally,
we intend to utilize the data we obtain from our Dario Smart Diabetes Management Solution and Dario Engage platform to develop
our upcoming healthcare analytics program, Dario Intelligence. As such our solutions will span the full spectrum of disease monitoring,
user-centric engagement, coaching tools, and big data and intelligence solutions. We have obtained regulatory clearance or approval
for the Dario Blood Glucose Monitoring System in the U.S., Canada, the E.U., Israel and Australia, among others. We believe that
our targeted health platform is a highly personalized preventative and proactive approach to health improvement based on individual
behavior and treatment, tailored to each person’s unique profile.
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.
We commenced a commercial
launch of our free application in the United Kingdom in late 2013 and commenced an initial soft launch of the full Dario solution
(including the app and the Dario Blood Glucose Monitoring System) in selected jurisdictions in March 2014. We continued to scale
up launch during 2014 in the United Kingdom, the Netherlands and New Zealand, and during 2015 in Australia, Israel and Canada,
with the goal of collecting customer feedback to refine our longer-term roll-out strategy. We are consistently adding new additional
features and functionality in making Dario the new standard of care in diabetes data management.
Through our Israeli
subsidiary, Labstyle Innovation Ltd., our plan of operations is to continue the development of our software and hardware offerings
and related technology. During 2015, we successfully launched the Dario Smart Diabetes Management Solution according to plan and
are currently expanding the launch to other jurisdictions. In 2016, we established our direct to consumer model in the U.S. to
achieve higher and faster penetration into the market during the launch phase. We have invested in a robust digital marketing department
with in-house platforms, experienced personnel and robust infrastructures to support expected growth of users and online subscribers
in this market. During the third quarter of 2016 we expanded these efforts to include Australia as well. In 2017, we expanded our
direct to consumer marketing efforts in the United Kingdom in cooperation with our local distributor and launched similar marketing
efforts in Germany. In support of these goals, we intend to utilize our funds for the following activities:
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ramp up of mass production, marketing and distribution and sales efforts related to the Dario Smart Diabetes Management Solution and the DarioEngage platform;
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develop our customer support and telemarketing services in order to support the expect growth of our revenues and the increase of user, and service provider who will use our platform to better serve people with diabetes and improve their clinical outcome;
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continued product and software development, and related activities (including costs associated with application development and data storage capabilities as well as any necessary design modifications to the various elements of the Dario Smart Diabetes Management Solution, the DarioEngage platform and the Dario Intelligence tools and capabilities);
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continued work on registration of our patents worldwide;
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regulatory and quality assurance matters;
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professional fees associated with being a publicly reporting company; and
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general and administrative matters.
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Readers are cautioned
that, according to our management’s estimates, based on our budget and the initial launch of our commercial sales, we believe
that we will have sufficient resources to continue our activity into January 2020 without raising additional capital. This includes
an amount of anticipated inflows from sales of Dario through direct sales in the United States and through distribution partners.
As such, we have a significant present need for capital. If we are unable to scale up our commercial launch of Dario or meet our
commercial sales targets (or if we are unable to ramp up revenues), and if we are unable to obtain additional capital resources
in the near term, we may be unable to continue activities, absent a material alterations in our business plans and our business
might fail.
Critical Accounting Policies
Please see Note 2 of Part I, Item 1 of
this Quarterly Report on Form 10-Q for the summary of significant accounting policies. In addition, reference is made to Part
I, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on
Form 10-K for the year ended December 31, 2018 (filed on March 25, 2019) with respect to our Critical Accounting Policies. There
have been no other material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for
the year ended December 31, 2018.
Results of Operations
Comparison of the three months ended March 31, 2019 and
2018 (dollar amounts in thousands)
Revenues
Revenues for the three
months ended March 31, 2019, amounted to $2,242, an increase of 27.7% compared to $1,756 of revenues during the three months ended
March 31, 2018. The increase in revenues for the three months ended March 31, 2019, compared to the three months ended March 31,
2018, is mainly as a result of an increase in the sales of our products including our membership offering.
Revenues were derived
mainly from the sales of Dario’s components, including the Dario Blood Glucose Monitoring System itself and the membership
offering, through direct sales to consumers located mainly in the United States and Australia, through our on-line store and through
distributors.
Cost of Revenues
During the three months
ended March 31, 2019, we recorded cost of revenues in the amount of $1,684, an increase of 40% as compared to $1,204 of recorded
cost of revenues during the three months ended March 31, 2018. The increase in cost of revenues in three months ended March 31,
2019, compared to the three months ended March 31, 2018, are mainly as a result of an increase in the sales of our products in
the first quarter of 2019.
Cost of revenues consist
mainly of cost of device production, employees' salaries and related overhead costs, depreciation of production line and related
cost of equipment used in production, shipping and handling costs and inventory write-downs.
Gross Profit
Gross profit for the
three months ended March 31, 2019, amounted to $558 (24.9% of revenues) compared to $552 (31.4% of revenues) during the three
months ended March 31, 2018. The increase in gross profit for the three months ended March 31, 2019, compared to the three months
ended March 31, 2018, is mainly as a result of the increase in product sales partially offset by the deferral of a portion of
the revenues generated from our membership offering.
Research and Development Expenses
Our research and development
expenses increased by $260, or 35% to $1,002 for the three months ended March 31, 2019, compared to $742 for the three months ended
March 31, 2018. This increase was mainly due to increases in salaries, and other research and development costs relating primarily
to software development.
Research and development
expenses consist mainly of payroll expenses to employees involved in research and development activities, expenses related to our
Dario software application and related Dario Blood Glucose Monitoring System device, labor contractors and engineering expenses,
depreciation and maintenance fees related to equipment and software tools used in research and development, clinical trials performed
in the United States to satisfy the FDA product approval requirements and facilities expenses associated with and allocated to
research and development activities.
Sales and Marketing Expenses
Our sales and marketing
expenses increased by $2,082, or 112% to $3,946 for the three months ended March 31, 2019, compared to $1,864 for the three months
ended March 31, 2018. These increases were mainly due to an increase in our headcount related to our sales and marketing activities
in the U.S. and an increase in costs of online marketing campaigns.
Sales and marketing
expenses consist mainly of payroll expenses, online marketing campaigns of the Dario, trade show expenses, customer support expenses
and marketing consultants and subcontractors.
General and Administrative Expenses
Our general and administrative
expenses increased by $112, or 13%, to $973 for the three months ended March 31, 2019, compared to $861 for the three months ended
March 31, 2018. This increase was mainly due to an increase in various consulting and services expenses.
Our general and administrative
expenses consist mainly of payroll and stock-based compensation expenses for management, employees, directors and consultants,
legal fees, patent registration, expenses related to investor relations, as well as our office rent and related expenses.
Financial Income (Expenses), net
Our financial expenses for the three months
ended March 31, 2019, were $13, an increase of 225% compared to finance expenses of $4 for three months ended March 31, 2018. This
increase was mainly due to the first time inclusion of lease liability translation differences partially offset by other translation
differences.
Financial expenses
include mainly bank charges, lease liability translation differences and foreign currency translation differences.
Net loss
Net loss increased
by $2,457, or 84%, to $5,376 for the three months ended March 31, 2019, compared to a net loss of $2,919 for the three months ended
March 31, 2018.
The increase in net
loss for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, was mainly due to the increase
in our operating expenses.
Non-GAAP Financial Measures
The factors described
above resulted in net loss attributable to common stockholders of $5,376 and $2,919 for the three months ended March 31, 2019 and
2018, respectively.
To supplement our unaudited
condensed consolidated financial statements presented in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) within this Quarterly Report on Form 10-Q, management provides certain non-GAAP financial
measures (“NGFM”) of the Company’s financial results, including such amounts captioned: “net loss before
interest, taxes, depreciation, and amortization” or “EBITDA”, and “Non-GAAP Adjusted Loss”, as presented
herein below. Importantly, we note the NGFM measures captioned “EBITDA” and “Non-GAAP Adjusted Loss” are
not recognized terms under U.S. GAAP, and as such, they are not a substitute for, considered superior to, considered separately
from, nor as an alternative to, U.S. GAAP and /or the most directly comparable U.S. GAAP financial measures.
Such NGFM are presented
with the intent of providing greater transparency of information used by us in our financial performance analysis and operational
decision-making. Additionally, we believe these NGFM provide meaningful information to assist investors, shareholders, and other
readers of our unaudited condensed consolidated financial statements, in making comparisons to our historical financial results,
and analyzing the underlying financial results of our operations. The NGFM are provided to enhance readers’ overall understanding
of our current financial results and to provide further information to enhance the comparability of results between the current
year period and the prior year period.
We believe the NGFM
provide useful information by isolating certain expenses, gains, and losses, which are not necessarily indicative of our operating
financial results and business outlook. In this regard, the presentation of the NGFM herein below, is to help the reader of our
unaudited condensed consolidated financial statements to understand the effects of the non-cash impact on our (U.S. GAAP) unaudited
condensed consolidated statement of operations of the revaluation of the warrants and the expense related to stock-based compensation,
each as discussed herein above.
A reconciliation to
the most directly comparable U.S. GAAP measure to NGFM, as discussed above, is as follows:
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Three Months Ended March 31,
(in thousands)
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2019
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2018
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$ Change
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Net Loss Reconciliation
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Net loss attributable to common stockholders – as reported
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$
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(5,376
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$
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(2,919
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)
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$
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(2,457
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)
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Adjustments
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Depreciation expense
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46
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53
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(7
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)
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Other financial expenses, net
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13
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4
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9
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EBITDA
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(5,317
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(2,862
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(2,455
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)
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Stock-based compensation expenses
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257
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230
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27
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Revaluation of warrants
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-
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(1
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)
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1
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Non-GAAP adjusted loss
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$
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(5,060
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$
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(2,633
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)
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$
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(2,427
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)
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Liquidity and Capital Resources
(amounts
in thousands except for share and share amounts)
As of March 31, 2019,
we had approximately $6,958 in cash and cash equivalents compared to $10,997 at December 31, 2018.
We have experienced
cumulative losses of $94,630 from inception (August 11, 2011) through March 31, 2019 and have a stockholders’ equity of $3,865
at March 31, 2019. In addition, we have not completed our efforts to establish a stable recurring source of revenues sufficient
to cover our operating costs and expect to continue to generate losses for the foreseeable future. There are no assurances that
we will be able to obtain an adequate level of financing needed for our near term requirements or the long-term development and
commercialization of our product. These conditions raise substantial doubt about our ability to continue as a “going concern”.
Since inception, we
have financed our operations primarily through private placements and public offerings of our common stock and warrants to purchase
shares of our common stock, receiving aggregate net proceeds totaling $71,179 as of March 31, 2019.
On February 28, 2018
and March 6, 2018, we closed two concurrent private placements offerings consisting of 2,262,269 shares of our common stock at
$1.40 per share, 1,234,080 shares of our Series C Convertible Preferred Stock at $2.80 per share and warrants to purchase up to
3,784,351 shares of common stock for aggregate gross proceeds of approximately $6,623.
On September 13, 2018
and September 26, 2018, we closed two concurrent private placements offerings consisting of 4,266,800 shares of our common stock
at $0.90 per share, 1,890,257 shares of our Series D Convertible Preferred Stock at $3.60 per share, and warrants to purchase up
to 9,462,272 shares of common stock at an exercise price of $1.25 per share, for aggregate gross proceeds of approximately $10,645.
On December 13, 2018
and December 27, 2018, we closed a private placement offering of 3,050,000 shares of our common stock at a purchase price of $1.00
per share and warrants to purchase up to 3,050,000 shares of our common stock at an exercise price of $1.25 per share, for aggregate
gross proceeds of approximately $3,050.
According to our management’s
estimates, based on our budget and our commercial sales, we believe that we will have sufficient resources to continue our activity
into January 2020 without raising additional capital. This includes an amount of anticipated inflows from sales of Dario through
distribution partners and to direct customers.
As such, we have a
significant present need for capital. If we are unable to scale up our commercial launch of Dario or meet our commercial sales
targets (or if we are unable to generate any revenue at all), and if we are unable to obtain additional capital resources in the
near term, we may be unable to continue activities absent material alterations in our business plans and our business might fail.
Additionally, readers
are advised that available resources may be consumed more rapidly than currently anticipated, resulting in the need for additional
funding sooner than expected. Should this occur, we will need to seek additional capital earlier than anticipated in order to fund
(1) further development and, if needed, testing of our Dario Smart Diabetes Management Solution, (2) our efforts to obtain
regulatory clearances or approvals necessary to be able to commercially launch Dario, DarioEngage and Dario Intelligence, (3) expenses
which will be required in order to expand production of Dario, (4) sales and marketing efforts and (5) general working capital.
Such funding may be unavailable to us on acceptable terms, or at all. Our failure to obtain such funding when needed could create
a negative impact on our stock price or could potentially lead to the failure of our company. This would particularly be the case
if we are unable to commercially launch Dario, DarioEngage and Dario Intelligence in the jurisdictions and in the timeframes we
expect.
Cash Flows (dollar amounts
in thousands
)
The following table
sets forth selected cash flow information for the periods indicated:
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March 31,
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2019
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2018
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$
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$
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Cash used in operating activities:
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(3,987
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)
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(2,766
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)
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Cash provided by (used in) investing activities:
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(52
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)
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55
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Cash provided by financing activities:
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-
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6,034
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(4,039
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)
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3,323
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Net cash used in operating activities
Net cash used in operating
activities was $3,987 for the three months ended March 31, 2019, an increase of 44% compared to $2,766 used in operations for the
same period in 2018. Cash used in operations increased due to the increase in our operating loss.
Net cash used in investing activities
Net cash used for investing
activities was $52 for the three months ended March 31, 2019, an increase of 195% compared to cash derived from investing activities
of $55 for the same period in 2018. Cash used for investing activities increased mainly due to investments in property and equipment.
Net cash provided by financing
activities
Net cash provided by
financing activities was $0 for the three months ended March 31, 2019, a decrease of 100% compared to $6,034 for the same period
in 2018. During the three months ended March 31, 2018, we raised net proceeds of approximately $6,034. This decrease was due to
the fact that no funds were raised from the sale of our equity securities during the three months ended March 31, 2019.
Off-Balance Sheet Arrangements
As of March 31, 2019,
we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.