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, 2019. 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, 2019 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, or DTx, company revolutionizing the way people manage their health across the chronic condition spectrum
to live a better and healthier life. By delivering personalized evidence-based interventions that are driven by data, high-quality
software, easy-to-use medical devices and coaching, we empower individuals to make healthy adjustments to their daily lifestyle
choices in a personalized way and improve their overall health. Our cross-functional team operates at the intersection of life
sciences, behavioral science and software technology to deliver highly engaging therapeutic interventions. The DarioTM Blood
Sugar Monitor is among the most downloaded healthcare apps, with 4.9/5.0 stars from 9,000+ reviews on the Apple App Store as of
March 2020. We are rapidly moving into new chronic conditions such as hypertension, using a performance-based approach to improve
the health of users managing chronic disease.
We attempt to drive
behavioral change by creating highly personalized, closed-loop interactions that support our customers, who become members of our
services, via connected FDA cleared monitoring devices, just-in-time health information and real-time coaching. This highly scalable
infrastructure results in members with significant improvement in their health conditions at a modest price-point. The Dario solution
is intended to stretch across various health conditions and ailments. We currently focus our efforts on diabetes and hypertension,
and we plan to expand our focus into additional chronic conditions during 2020, including hypertension.
Our solution goes beyond
being simply a device. We are a modular platform that allows for customized implementations by segment and within each segment.
Core components of our solution include:
|
·
|
Dario Smart Tools – member-facing devices and integrated smartphone application.
|
|
·
|
DarioEngage Platform – population management tool that enables scalable engagement and clinical support by coaches and clinicians, remotely and in real-time.
|
|
·
|
Dario Journey Engine – a software-based platform that enables cross-channel communication of highly personalized and deeply customized/configurable journeys for each user starting from member enrollment process and continuing through on-going engagement leading to successful maintenance of health gains.
|
We make our services
available directly to consumers via online marketplaces, including Amazon, Walmart, Best Buy and the Google and Apple app stores.
In 2020, we plan to focus on expanding our offering to include providers, payers and employers. We believe that these represent
significant growth opportunities for our business.
We have designed our
DTx platform with a ‘user-first’ strategy, focusing on user’s needs first and foremost, along with user experience
and satisfaction. User satisfaction drives all company processes, including our technology design. This approach, which disrupts
the traditional approach among healthcare companies, has taken us to a place where MyDarioTM is loved by customers
in the diabetes arena. In order to obtain firsthand data and feedback from our users, we decided to launch our product directly
to our customers, and initially commenced sales in the United States in March 2016. This user-focused approach led us into a continuous
process of product upgrades and improvements in an agile, interactive way to achieve finetuned user satisfaction. Our success is
reinforced by the fact that most of our users choose to purchase our solution out of pocket.
We have designed our
DTx platform as an open platform that allows us to enable our partners to offer their customers a customized, evidence-based digital
therapy solution, which takes advantage of the real-time connectivity of our platform with its users. We believe that our data-evidenced
proof of the medical outcomes resulting from the use of our DTx platform represents an attractive return on investment model to
healthcare providers in the United States and other geographic regions.
In addition, we have
been carefully monitoring the COVID-19 pandemic and its impact on our business. In that regard, we have continued to sell our DarioTM Blood
Sugar Monitor and have not experienced disruptions in our supply chains. With respect to our DTx platform, we have observed that
some of our business-to-business prospective partners have been addressing their business needs as a result of the COVID-19 pandemic,
which has resulted in a slowdown of negotiations and discussions with some of these potential partners. In addition, we have also
seen an increase in interest from other business-to-business prospective partners in our DTx platform, as certain parties are seeking
tele-health products, as exhibited with our April 2020 announcement regarding our partnership with MediOrbis relating to the expansion
of our existing service offering with a full suite of telemedicine capabilities.
We expect the significance
of the COVID-19 pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among
other things, its duration, the success of efforts to contain it and the impact of actions taken in response. While we are not
able at this time to estimate the impact of the COVID-19 pandemic on our financial and operational results, it could be material.
According to a Business
Insider Intelligence report published in October 2019, DTx are a new class of treatments disrupting the entire healthcare value
chain with their promise to tackle chronic diseases, and which, according to estimates by Business Insider, represents up to $3.3
trillion on chronic disease expenditure in 2018 in the United States alone. Digital therapeutics deliver evidence-based therapies
for an array of chronic conditions via software, like mobile health (mHealth) apps and can either replace or complement existing
drug treatments. According to a report released by the Rand Corporation, Sixty percent of the United States population suffers
from at least one chronic condition, and these diseases come with a hefty price tag, as exemplified by the Business Insider report.
DTx companies have shown early evidence of their treatments’ efficacy and ability to slash the costs associated with chronic
disease care, which is fueling the global DTx market to become a $9 billion opportunity by 2025 according to the Business Insider
Intelligence report.
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.
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 September 2021 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 alteration 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, 2019 (filed on March 17, 2020) 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, 2019.
Results of Operations
Comparison of the three months ended March 31, 2020 and
2019 (dollar amounts in thousands)
Revenues
Revenues for the three
months ended March 31, 2020, amounted to $1,667, a decrease of 25.6% compared to $2,242 of revenues during the three months ended
March 31, 2019. The decrease in revenues for the three months ended March 31, 2020, compared to the three months ended March 31,
2019, is due to a decrease in our direct to consumer (“D2C”) acquisitions in the first quarter of 2020.
Revenues were derived
mainly from the sales of Dario’s components, including the Dario Blood Glucose Monitoring System itself and our membership
offering, through D2C acquisitions 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, 2020 we recorded cost of revenues in the amount of $888, a decrease of 47.3% as compared to $1,684 of recorded
cost of revenues during the three months ended March 31, 2019. The decrease in cost of revenues in three months ended March 31,
2020, compared to the three months ended March 31, 2019, are mainly as a result of a decrease in the sales of our products in the
first quarter of 2020.
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, 2020, amounted to $779 (46.7% of revenues) compared to $558 (24.9% of revenues) during the three months
ended March 31, 2019. The increase in gross profit for the three months ended March 31, 2020, compared to the three months ended
March 31, 2019, is mainly as a result of the increase in the portion of our membership offering as a percentage of our revenues.
Research and Development Expenses
Our research and development
expenses increased by $229, or 23% to $1,231 for the three months ended March 31, 2020, compared to $1,002 for the three months
ended March 31, 2019. This increase was mainly due to an increase in our equity based compensation to $337 for the three months
ended March 31, 2020, compared to $45 for the three months ended March 31, 2019. Our research and development expenses excluding
equity based compensation for the three months ended March 31, 2020 were $894 compared to $957 for the three months ended March
31, 2019, a decrease of $63. This decrease is resulting mainly from the reduction in development costs.
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 $145, or 3.7% to $4,091 for the three months ended March 31, 2020, compared to $3,946 for the three months
ended March 31, 2019. This increase was mainly due to an increase in our equity based compensation to $1,551 for the three months
ended March 31, 2020, compared to $49 for the three months ended March 31, 2019.Our marketing expenses excluding equity based compensation
for the three months ended March 31, 2020 were $2,540 compared to $3,897 for the three months ended March 31, 2019, a decrease
of $1,357. This decrease is resulting mainly from the reduction of our digital marketing activity.
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 $4,598, or 473%, to $5,571 for the three months ended March 31, 2020, compared to $973 for the three months
ended March 31, 2019. This increase was mainly due to an increase in our equity based compensation to $4,453 for the three months
ended March 31, 2020, compared to $149 for the three months ended March 31, 2019. Our general and administrative expenses excluding
equity based compensation for the three months ended March 31, 2020 were $1,118 compared to $824 for the three months ended March
31, 2019, an increase of $294. This increase is resulting mainly from the increase in consulting and insurance expenses.
Our general and administrative
expenses consist mainly of payroll and stock-based compensation expenses for management, employees, directors and consultants,
legal fees, directors’ and officers’ insurance, patent registration, expenses related to investor relations, as well
as our office rent and related expenses.
Financial Income (Expenses), net
Our financial income
for the three months ended March 31, 2020, was $222, an increase of 1808% compared to finance expenses of $13 for three months
ended March 31, 2019. This increase was mainly due to foreign currency translation differences and interest income.
Financial expenses
include mainly bank charges, interest income, lease liability translation differences and foreign currency translation differences.
Net loss
Net loss increased
by $4,516, or 84%, to $9,892 for the three months ended March 31, 2020, compared to a net loss of $5,376 for the three months ended
March 31, 2019. The increase in net loss for the three months ended March 31, 2020, compared to the three months ended March 31,
2019, was mainly due to the increase of our equity based compensation as detailed above.
Non-GAAP Financial Measures
The factors described
above resulted in net loss attributable to common stockholders of $11,167 and $5,376 for the three months ended March 31, 2020
and 2019, 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 March 31,
(in thousands)
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders – as reported
|
|
$
|
(9,892
|
)
|
|
$
|
(5,376
|
)
|
|
$
|
(4,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
46
|
|
|
|
46
|
|
|
|
-
|
|
Other financial (income) expenses, net
|
|
|
(222
|
)
|
|
|
13
|
|
|
|
(235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(10,068
|
)
|
|
|
(5,317
|
)
|
|
|
(4,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expenses
|
|
|
6,356
|
|
|
|
257
|
|
|
|
6,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted loss
|
|
$
|
(3,712
|
)
|
|
$
|
(5,060
|
)
|
|
$
|
1,348
|
|
Liquidity and Capital Resources (amounts
in thousands except for share and share amounts)
As of March 31, 2020,
we had approximately $15,826 in cash and cash equivalents compared to $20,395 at December 31, 2019.
We have experienced
cumulative losses of $121,312 from inception (August 11, 2011) through March 31, 2020 and have a stockholders’ equity of
$15,426 at March 31, 2020. 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 $96,426 as of March 31, 2020.
On May 24, 2019, we
closed on a firm commitment, underwritten public offering consisting of 242,768 shares of common stock and pre-funded warrants
to purchase 358,779 shares of our 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 $12.00 per share
and the pre-funded warrants were sold at a public offering price of $11.998 per pre-funded warrant, for aggregate gross proceeds
of approximately $7,218.
On November 27, 2019,
we entered into subscription agreements with accredited investors relating to an offering with respect to the sale of an aggregate
of 8,361 shares of newly designated Series A Convertible Preferred Stock and an aggregate of 5,200 shares of newly designated
Series A-1 Convertible Preferred Stock, at a purchase price of $1,000 for each share of Series A Preferred Stock and Series A-1
Preferred Stock, for aggregate gross proceeds to the Company of $13,561. The initial conversion price for the Series A and Series
A-1 Convertible Preferred Stock to Common Stock is $4.05. The initial closing of the offering took place on November 27, 2019.
The Series A and Series A-1 Convertible Preferred Stock issued are convertible into up to 3,349,567 shares of Common Stock. On
December 3, 2019, we entered into subscription agreements with accredited investors relating to an offering and the sale of an
aggregate of 1,915 shares of newly designated Series A-2 Convertible Preferred Stock, at a purchase price of $1,000 for each share,
for aggregate gross proceeds to the Company of $1,915. The initial conversion price for the Series A-2 Convertible Preferred Stock
to Common Stock is $4.28. The Series A-2 Convertible Preferred Stock issued are convertible into up to 448,110 shares of Common
Stock. On December 4, 2019, we into subscription agreements with accredited investors relating to an offering and the sale of
an aggregate of 3,808 shares of newly designated Series A-3 Convertible Preferred Stock, at a purchase price of $1,000 for each
share, for aggregate gross proceeds to the Company of $3,808.The initial conversion price for the Series A-3 Convertible Preferred
Stock to Common Stock is $4.98. The Series A-3 Convertible Preferred Stock issued are convertible into up to 765,408 shares of
Common Stock. On December 5, 2019, we entered into subscription agreements with accredited investors relating to an offering and
the sale of an aggregate of 745 shares of newly designated Series A-4 Convertible Preferred Stock, at a purchase price of $1,000
for each share, for aggregate gross proceeds to the Company of $745.The initial conversion price for the Series A-4 Convertible
Preferred Stock to Common Stock is $5.90. The Series A-4 Convertible Preferred Stock issued are convertible into up to 126,650
shares of Common Stock. On December 19, 2019, we entered into subscription agreements with accredited investors relating to an
offering and the sale of an aggregate of 1,346 shares of newly designated Series A-3 Convertible Preferred Stock, at a purchase
price of $1,000 for each share, for aggregate gross proceeds to the Company of $1,346. The initial conversion price for the Series
A-3 Convertible Preferred Stock to Common Stock is $4.98. The Series A-3 Convertible Preferred Stock issued are convertible into
up to 270,546 shares of Common Stock. The total aggregate gross proceeds of the offering described above, together with gross
proceeds from the closing of the offering of Series A Convertible Preferred Stock, Series A-1 Convertible Preferred Stock, Series
A-2 Convertible Preferred Stock, Series A-3 Convertible Preferred Stock and Series A-4 Convertible Preferred Stock was $21,375,
and the total amount of Common Stock issuable upon conversion of all the shares of Convertible Preferred Stock is up to 4,960,281
shares of Common Stock. As of May 9, 2020, certain Convertible Preferred Stock holders converted 2,790 shares of various classes
of the Company’s A Preferred Stock to 644,860 shares of Common Stock.
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 September 2021 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 (2) our efforts to obtain regulatory clearances or approvals necessary to be able to
commercially launch Dario, DarioEngage and Dario Intelligence, (3) expenses which will be required in order to expand manufacturing
of our products, (4) sales and marketing efforts and (5) general working capital. Such funding may be unavailable to us on acceptable
terms, or at all. Our failure to obtain such funding when needed could create a negative impact on our stock price or could potentially
lead to the failure of our company. This would particularly be the case if we are unable to commercially distribute our products
and services in the jurisdictions and in the timeframes we expect.
Cash Flows (dollar amounts in thousands)
The following table
sets forth selected cash flow information for the periods indicated:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
Cash used in operating activities:
|
|
|
(4,545
|
)
|
|
|
(3,989
|
)
|
Cash provided by (used in) investing activities:
|
|
|
(28
|
)
|
|
|
(45
|
)
|
Cash provided by financing activities:
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(4,573
|
)
|
|
|
(4,034
|
)
|
Net cash used in operating activities
Net cash used in operating
activities was $4,545 for the three months ended March 31, 2020 an increase of 14% compared to $3,989 used in operations for the
same period in 2019. Cash used in operations increased mainly due to the decrease in our sales to customers.
Net cash used in investing activities
Net cash used for investing
activities was $28 for the three months ended March 31, 2020, a decrease of 38% compared to cash derived from investing activities
of $45 for the same period in 2019. Cash used for investing activities decreased mainly due to the decrease in purchase of property
and equipment.
Net cash provided by financing
activities
Net cash provided by
financing activities was $0 for the three months ended March 31, 2020, as well as for the same period in 2019.
Off-Balance Sheet Arrangements
As of March 31, 2020,
we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.