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 leading Global
Digital Therapeutics (DTx) company revolutionizing the way people manage their health across the chronic condition spectrum by
delivering evidence-based interventions that are driven by precision data analytics, high quality software, and personalized coaching.
We have developed a novel approach that empowers individuals to adjust their lifestyle in a unique and holistic way. Our cross-functional
team operates at the intersection of life science, behavioral science, and software technology to deliver seamlessly integrated
and highly engaging therapeutic interventions. Already one of the highest-rated diabetes solutions, its user-centric approach is
loved by tens of thousands of customers around the globe. We are rapidly expanding solutions for additional chronic conditions
such as hypertension, using a performance-based approach to improve the health of users managing chronic disease.
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:
|
·
|
ramp up of mass production, marketing and distribution and sales efforts related to the Dario Smart Diabetes Management Solution and the DarioEngage platform;
|
|
·
|
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;
|
|
·
|
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);
|
|
·
|
continued work on registration of our patents worldwide;
|
|
·
|
regulatory and quality assurance matters;
|
|
·
|
professional fees associated with being a publicly reporting company; and
|
|
·
|
general and administrative matters.
|
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 six months ended June 30, 2019 and 2018
(dollar amounts in thousands)
Revenues
Revenues for the three
and six months ended June 30, 2019, amounted to $1,651 and $3,893, respectively, compared to revenues of $2,059 and $3,815 during
the three and six months ended June 30, 2018, representing a decrease of 20% and an increase of 2%, respectively. The decrease
in revenues for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, is due to a decrease in
our direct to consumer (“D2C”) acquisition in the second quarter of 2019, and an increase in our provision for deferred
income. The decision to decrease D2C acquisition is a result of our efforts to shift resources from direct to consumer sales to
sales through business to business channels that are with lower cost per acquisition. The increase in revenues for the six months
ended June 30, 2019, compared to the six months ended June 30, 2018, is mainly as a result of higher revenues in the first quarter
of 2019 compared to the first quarter of 2018.
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 distributors.
Cost of Revenues
During the three and six
months ended June 30, 2019, we recorded costs related to revenues in the amount of $1,325 and $3,009 respectively, compared to
recorded costs related to revenues of $1,537 and $2,741 during the three and six months ended June 30, 2018, representing a decrease
of 14% and an increase of 10%, respectively. The decrease in costs related to revenues in the three months ended June 30, 2019,
compared to three months ended June 30, 2018, is mainly a result of a decrease in the sales of our products during that period.
The increase in costs related to revenues in the six months ended June 30, 2019, compared to the six months ended June 30, 2018,
is mainly as a result of an increase in the sales of our products during 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
and six months ended June 30, 2019, amounted to $326 (19.7% of revenues) and $884 (22.7% of revenues), respectively, compared to
$522 (25.4% of revenues) and $1,074 (28.2% of revenues) during the three and six months ended June 30, 2018. The decrease in gross
profit for the three and six months ended June 30, 2019, compared to the three and six months ended June 30, 2018, is mainly as
a result of the decrease in product sales in the second quarter and the deferral of a portion of the revenues generated from our
membership offering.
Research and Development Expenses
Our research and development
expenses decreased by $19, or 2%, to $991 for the three months ended June 30, 2019, compared to $1,010 for the three months ended
June 30, 2018, and increased by $241, or 14%, to $1,993 for the six months ended June 30, 2019 compared to $1,752 for the six months
ended June 30, 2018. The second quarter decrease for the three months ended June 30, 2019, compared to the three months ended June
30, 2018, was mainly due to decreases in stock-based compensation, mostly offset by an increase in payroll and other research and
development costs relating primarily to product development. The second quarter increase for the six months ended June 30, 2019,
compared to the six months ended June 30, 2018, was mainly due to increases in payroll and other research and development costs
relating primarily to product 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 $624, or 26%, to $2,993 for the three months ended June 30, 2019, compared to $2,369 for the three months
ended June 30, 2018, and increased by $2,706, or 64%, to $6,939 for the six months ended June 30, 2019, compared to $4,233 for
the six months ended June 30, 2018. These increases were mainly due to expanding our sales and marketing activities in the United
States, increases in costs of online marketing campaigns, and the costs associated with employee payroll.
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 decreased by $1,232, or 42%, to $1,704 for the three months ended June 30, 2019, compared to $2,936 for the three months
ended June 30, 2018, and decreased by $1,120, or 29%, to $2,677 for the six months ended June 30, 2019, compared to $3,797 for
the six months ended June 30, 2018. These decreases were mainly due to decreases in share-based compensation.
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 Expenses, net
Our financial expenses
for the three months ended June 30, 2019, were $20, representing a decrease of 56%, compared to finance expenses of $45 for the
three months ended June 30, 2018. Our financial expenses for the six months ended June 30, 2019, were $33, representing a decrease
of 33%, compared to finance expenses $49 for the six months ended June 30, 2018. The decreases in financial expenses for the three
months ended June 30, 2019, as compared to the three months ended June 30, 2018, and for the six months ended June 30, 2019, as
compared to the six months ended June 30, 2018, are mainly attributable to differences in foreign currency translation expenses.
Financial expenses include
mainly bank charges, lease liability translation differences and foreign currency translation differences.
Net loss
Net loss decreased by $456,
or 8%, to $5,382 for the three months ended June 30, 2019, compared to a net loss of $5,838 for the three months ended June 30,
2018, and increased by $2,001, or 22.9%, to $10,758 for the six months ended June 30, 2019, compared to $8,757 for the six months
ended June 30, 2018.
The decrease in net loss
for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, was mainly due to a decrease in our
operating expenses recorded in the three months ended June 30, 2019, compared to the three months ended June 30, 2018. The increase
in net loss for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, was mainly due to the increase
in operating expenses recorded in the six months ended June 30, 2019, compared to the six months ended June 30, 2018.
Non-GAAP Financial Measures
The factors described above
resulted in net loss attributable to common stockholders of $10,758 and $8,757 for the six months ended June 30, 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:
|
|
Three Months Ended June 30,
(in thousands)
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders – as reported
|
|
$
|
(5,382
|
)
|
|
$
|
(6,331
|
)
|
|
$
|
949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend – related to warrant exchange
|
|
|
|
|
|
|
493
|
|
|
|
(493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss as reported
|
|
|
(5,382
|
)
|
|
|
(5,838
|
)
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
47
|
|
|
|
48
|
|
|
|
(1
|
)
|
Other financial expenses, net
|
|
|
20
|
|
|
|
45
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(5,315
|
)
|
|
|
(5,745
|
)
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expenses
|
|
|
1,053
|
|
|
|
2,421
|
|
|
|
(1,368
|
)
|
Revaluation of warrants
|
|
|
-
|
|
|
|
(* -
|
|
|
|
(* -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted loss
|
|
$
|
(4,262
|
)
|
|
$
|
(3,324
|
)
|
|
$
|
(938
|
)
|
|
|
Six Months Ended June 30,
(in thousands)
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders – as reported
|
|
$
|
(10,758
|
)
|
|
$
|
(9,250
|
)
|
|
$
|
(1,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend – related to warrant exchange
|
|
|
|
|
|
|
493
|
|
|
|
(493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss as reported
|
|
|
(10,758
|
)
|
|
|
(8,757
|
)
|
|
|
(2,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
93
|
|
|
|
101
|
|
|
|
(8
|
)
|
Other financial expenses, net
|
|
|
33
|
|
|
|
50
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(10.632
|
)
|
|
|
(8,606
|
)
|
|
|
(2,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expenses
|
|
|
1,310
|
|
|
|
2,651
|
|
|
|
(1,341
|
)
|
Revaluation of warrants
|
|
|
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted loss
|
|
$
|
(9,322
|
)
|
|
$
|
(5,956
|
)
|
|
$
|
(3,366
|
)
|
Liquidity and Capital Resources
(amounts
in thousands except for share and share amounts)
As of June 30, 2019, we
had approximately $7,986 in cash and cash equivalents compared to $10,997 at December 31, 2018.
We have experienced cumulative
losses of $100,012 from inception (August 11, 2011) through June 30, 2019, and have a stockholders’ equity of $6,094 at June
30, 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 $77,737 as of June 30, 2019.
On May 24, 2019, the Company
closed on its a firm commitment, underwritten public offering consisting of 4,855,341 shares of common stock and pre-funded warrants
to purchase 7,175,525 shares of its common stock, pursuant to an underwriting agreement entered into with Craig-Hallum Capital
Group LLC, as representative of the underwriters. The shares of common stock were sold at a public offering price of $0.60 per
share and the pre-funded warrants were sold at a public offering price of $0.5999, for aggregate gross proceeds of approximately
$6,558.
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 April 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:
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Cash used in operating activities:
|
|
|
(9,491
|
)
|
|
|
(4,794
|
)
|
Cash provided by (used in) investing activities:
|
|
|
(78
|
)
|
|
|
53
|
|
Cash provided by financing activities:
|
|
|
6,558
|
|
|
|
6,034
|
|
|
|
|
(3,011
|
)
|
|
|
1,293
|
|
Net cash used in operating activities
Net cash used in operating
activities was $9,491 for the six months ended June 30, 2019, an increase of 98% compared to $4,794 used in operations for the
same period in 2018. Cash used in operations increased due to the increase in our operating loss, and a decrease in trade payables,
other accounts payables and accrued expenses.
Net cash used in investing activities
Net cash used for investing
activities was $78 for the six months ended June 30, 2019, an increase of 247% compared to cash derived from investing activities
of $53 for the same period in 2018. Cash used for investing activities increased mainly due to investments in property and equipment
and investments in restricted cash.
Net cash provided by financing activities
Net cash provided by financing
activities was $6,558 for the six months ended June 30, 2019, an increase of 9% compared to $6,034 for the same period in 2018.
This increase was due to a higher amount of funds raised from the sale of our equity securities.
Off-Balance Sheet Arrangements
As of June 30, 2019, we
did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.