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, 2016. 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, 2016 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 digital health
(mHealth) company that is developing and commercializing a patented and proprietary technology providing consumers with laboratory-testing
capabilities using smart phones and other mobile devices. Our principal operating subsidiary, LabStyle Innovation Ltd., is an Israeli
company with its headquarters in Caesarea, Israel. We were formed on August 11, 2011 as a Delaware corporation. Our flagship product,
Dario™, is a mobile, real-time, cloud-based, diabetes management solution based on an innovative, multi-feature software
application combined with a stylish, ‘all-in-one’, pocket-sized, blood glucose monitoring device, which we call the
Dario™ Smart Meter.
We commenced a commercial
launch of the free Dario™ application in the United Kingdom in late 2013 and commenced an initial soft launch of the full
Dario™ solution (including the app and the Smart Meter) in selected jurisdictions in March 2014 and 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. We currently have approximately
56,000 installs of our iOS app and over 11,000 installs of our Android app.
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 effort to include Australia as well. 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™ application, Smart Meters and test strips;
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continued product 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™ solution);
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continued work on registration of our patents worldwide;
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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 only into January 2018 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 continue the market penetration 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 alternations in our business plans and our
business might fail.
Critical Accounting Policies
Reference is made to 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, 2016 (filed on March 22, 2017) with respect to our Critical Accounting Policies, which have not
changed.
Results of Operations
Comparison of the three months ended March 31 2017 and 2016(in
thousands)
Revenues
Revenues for the three
months ended March 31, 2017 amounted to $1,007, compared to $568 of revenues during the three months ended March 31, 2016. The
increase in revenues in the three months ended March 31, 2017 compared to the three months ended March 31, 2016 is mainly a result
of an increase in sales due to our continued market penetration into the United States and Australia.
Revenues were derived mainly
from the sales of Dario™’s components, including the Smart Meter itself, through direct sales to consumers located
mainly in the United States and Australia, through our on-line store and through distributors. This increase in revenues is attributable
to additional commercialization and launch of sales during the relevant period.
Cost of Revenues and
ramp up of manufacturing
During the three months
ended March 31, 2017 we recorded costs related to revenues in the amount of $901. During the three months ended March 31, 2016,
we recorded costs related to revenues in the amount of $670 out of which $32 was recorded to write off deferred inventory as a
result of a legal settlement with a former distributor, $62 was recorded to cover inventory write-downs due to net realized value
which was lower than original cost and $14 was recorded in respect of a write off of manufacturing equipment that was disposed
during the period. The increase in cost of revenues during the three months ended March 31, 2017 compared to the three months ended
March 31, 2016 is due to the increase in the volume of revenue during the quarter and an increase in stock based compensation.
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.
Research and Development Expenses
Our research and development expenses increased
by $72, or 18%, to $469 for the three months ended March 31, 2017 compared to $397 for the three months ended March 31, 2016. This
increase was mainly due to an increase in salaries, stock based compensation and costs associated with clinical trials.
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 Smart Meter 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
$1,306, or 252%, to $1,825 for the three months ended March 31, 2017 compared to $519 for the three months ended March 31, 2016.
These increases were mainly due to our sales and marketing efforts in the United States and Australia, an increase in costs of
online marketing campaigns, the costs relating to sales and marketing consultants, the costs associated with subcontractors and
employee payroll.
Sales and marketing expenses consist mainly
of payroll expenses, online marketing campaigns of the Dario
TM
, trade show expenses, customer support expenses and marketing
consultants and subcontractors.
General and Administrative Expenses
Our general and administrative expenses increased
by $1,112, or 123%, to $2,017 for the three months ended March 31, 2017 compared to $905 for the three months ended March 31,
2016. This increase was mainly due to an increase in share based compensation resulting from shares issued to management during
the quarter. On January 30, 2017, the Compensation Committee of the Board of Directors approved the grant of shares and options
to members of management under our Amended and Restated 2012 Share Incentive Plan. In that regard, we issued 227,616 shares
of common stock to our Chairman and CEO and 74,896 shares of common stock to our Chief Financial Officer. These share grants were
accounted for as expenses according to the closing price of our shares of common stock on January 30, 2017 ($3.40 per share) amounting
to an expense of $1,029 in the aggregate and included in the share based compensation expenses for the period.
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 income, net for the three months
ended March 31, 2017 was $7,447 compared to financial expenses of $445 for the three months ended March 31, 2016. This change
was mainly due to reversing the warrant revaluation expense recorded in the fourth quarter of 2016, due to a price protection feature
included in such warrants issued to investors in March and August of 2016. This price protection feature expired on March 8, 2017,
and as a result we cancelled the liability related to these warrants by recording financing income of $7,460 during the period.
Finance income includes mainly the results of
revaluation of warrants to investors, which are recorded as a liability and presented as fair value for each reporting period.
Net profit (loss)
Net profit increased by $5,610, or 237%, to
$3,242 for the three months ended March 31, 2017 compared to a loss of $2,368 for the three months ended March 31, 2016. This increase
was mainly due to financial income related to revaluation of warrants.
Liquidity and Capital Resources
As of March 31, 2017, we
had approximately $2,817 in cash and cash equivalents compared to $1,093 at December 31, 2016.
We have experienced cumulative
losses of $51,718 from inception (August 11, 2011) through March 31, 2017, and have a stockholders’ equity of $3,233 at March
31, 2017. 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 is 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 $43,545 as of March 31, 2017.
On March 3, 2016, we conducted
a public offering, pursuant to which we issued 1,333,333 shares of common stock and warrants exercisable for an aggregate of 1,333,333
shares of common stock for an aggregate net consideration of $5,038.
Concurrently with our public
offering, on March 3, 2016, we conducted a concurrent private placement pursuant to which we issued 555,555 units, with each unit
consisting of one share of common stock and one warrant to purchase 1.2 shares of common stock, such that an aggregate of 555,555
shares of common stock and a warrant to exercisable for an aggregate of 666,666 shares of common stock was issued and sold for
an aggregate net consideration of approximately $2,500.
On January 9, 2017, we
commenced a private placement offering of up to $5,100 consisting of up to 1,821,437 shares of common stock and warrants to purchase
up to 1,821,437 shares of common stock. The warrants are exercisable after the six-month anniversary of each respective closing
and will expire on the 5-year anniversary of their issuance. On January 9, 2017, we held the initial closing of the offering with
a lead investor and an additional investor and issued and sold 1,113,922 shares of common stock and warrants to purchase 1,113,922
shares of common stock for aggregate gross proceeds of approximately $3,119. On January 11, 2017, we entered into securities purchase
agreements with 18 investors for the future issuance and sale of 707,515 shares of common stock and warrants to purchase 707,515
shares of common stock, provided that the issuance and sale of such securities shall only occur upon our obtaining stockholder
approval, pursuant to Nasdaq rules. On March 9, 2017, following receipt of stockholder approval, we issued and sold 707,515 shares
of common stock and warrants to purchase 707,515 shares of common stock to the 18 investors for gross proceeds of $1,981.
On
March 31, 2017, we entered into an underwriting agreement with Aegis Capital Corp., as representative of the underwriters named
therein for a firm commitment public offering of 1,450,000 shares of common stock at a price to the public of $3.10 per share for
aggregate gross proceeds of approximately $4,500.
On April 5, 2017, the Company closed a public
offering of 1,450,000 shares of common stock, at a purchase price of $3.10 per share, for aggregate consideration of $3,840, net
of issuance costs.
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 2018
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 Meter and its related application and data storage components,
(2) our efforts to obtain regulatory clearances or approvals necessary to be able to commercially launch Dario™, (3)
expenses which will be required in order to start and 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™ in the jurisdictions and in the time frames we expect.
Cash Flows
The following tables sets forth selected cash
flow information for the periods indicated:
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March 31
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2017
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2016
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$
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$
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Cash used in operating activities:
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(3,082
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(2,105
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)
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Cash used in investing activities:
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(9
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)
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(27
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)
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Cash provided by financing activities:
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4,816
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7,728
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1,724
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5,596
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Net cash used in operating activities
Net cash used in operating activities was $3,082
for the three months ended March 31, 2017 compared to $2,105 used in operations for the same period in 2016. Cash used in operations
increased due to increase in the volume of our operations.
Net cash used in investing activities
Net cash used in investing activities was $9
for the three months ended March 31, 2017 compared to $27 for the same period in 2016. Cash used in investing activities decreased
due to a reduction in investment in fixed assets.
Net cash provided by financing
activities
Net cash provided by financing activities was
$4,816 for the three months ended March 31, 2017 compared to $7,728 for the same period in 2016. This decrease was due to the lower
amounts raised during the first quarter of 2017 in a private placement compared to the amounts raised in the public offering during
the first quarter of 2016.
Off-Balance Sheet Arrangements
As of March 31, 2017, we
did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.