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
69,000 installs of our iOS app and over 12,000 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 the 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 and six months ended June 30,
2017 and 2016 (in thousands)
Revenues
Revenues for the three
and six months ended June 30, 2017 amounted to $1,210 and $2,217, respectively, compared to $669 and $1,237 of revenues during
the three and six months ended June 30, 2016. The increases in revenues in the three and six months ended June 30, 2017 compared
to the six months ended June 30, 2016 are mainly as a result of an increase in the sales of our products.
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.
Cost of Revenues
During the three and
six months ended June 30, 2017 we recorded costs related to revenues in the amount of $850 and $1,751, respectively, as compared
to $826 and $1,496 of recorded costs related to revenues during the three and six months ended June 30, 2016. The increases in
costs related to revenues in the three and six months ended June 30, 2017, compared to the three and six months ended June 30,
2016, are mainly as a result of an increase in the sales of our products.
Cost of revenues consist
mainly of the 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 $663, or 127%, to $1,184 for the three months ended June 30, 2017 compared to $521 for the three months ended
June 30, 2016, and increased by $735, or 80%, to $1,653 for the six months ended June 30, 2017 compared to $918 for the six months
ended June 30, 2016. These increases were mainly due to increases 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 $1,063, or 93%, to $2,205 for the three months ended June 30, 2017 compared to $1,142 for the three months
ended June 30, 2016 and increased by $2,369, or 143%, to $4,030 for the six months ended June 30, 2017 compared to $1,661 for the
six months ended June 30, 2016. These increases were mainly due to expanding our sales and marketing activities in the United States
and Australia, an increase in costs of online marketing campaigns, the cost related to marketing consultants and 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 $286, or 36%, to $1,089 for the three months ended June 30, 2017 compared to $803 for the three months ended
June 30, 2016, and increased by $1,398, or 82%, to $3,106 for the six months ended June 30, 2017 compared to $1,708 for the six
months ended June 30, 2016. These increases were mainly due to an increase in share based compensation resulting from shares issued
to management during the period. On January 30, 2017 the Compensation Committee of the Board of Directors approved the grant of
shares and options to members of management pursuant to our Amended and Restated 2012 Equity 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
on January 30, 2017. 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. On April 20, 2017, the Compensation Committee of the Board of Directors approved the grant of shares to
management, pursuant to our Amended and Restated 2012 Equity Incentive Plan as a bonus payment for the Company’s achievements
during the year ending December 31, 2016. In that regard, we issued 50,000 shares of common stock to our Chairman and CEO and 20,000
shares of common stock to our Chief Financial Officer on April 20, 2017. These share grants were accounted for as expenses according
to the closing price of our shares of common stock on April 19, 2017 ($2.73 per share) amounting to an expense of $191 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 finance expense (income) for the three
and six months ended June 30, 2017 were $26 and $7,473, respectively, compared to finance expense of $1,434 and $1,869 for the
three and six months ended June 30, 2016, respectively. This change was mainly due to the reversing of the warrant revaluation
expense during the first quarter of 2017, which was initially recorded during the fiscal year ended 2016, due to a price protection
feature included in 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.
Financial expense (income)
includes mainly the results of a revaluation of warrants to investors and a former placement agent, which were recorded as a liability
and presented at fair value each reporting period.
Net loss
Net loss increased
by $46, or 1%, to $4,092 for the three months ended June 30, 2017 compared to a loss of $4,057 for the three months ended June
30, 2016 and decreased by $6,020, or 88%, to $850 for the six months ended June 30, 2017 compared to $6,870 for the six months
ended June 30, 2016.
The decrease in net
loss for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 was mainly due to our financial income
related to revaluation of warrants.
Liquidity and Capital Resources
As of June 30, 2017,
we had approximately $3,898 in cash and cash equivalents compared to $1,093 at December 31, 2016.
We have experienced
cumulative losses of $55,810 from inception (August 11, 2011) through June 30, 2017, and have a stockholders’ equity of $3,953
at June 30, 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 $47,400 as of June 30, 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 $3,855, 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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June 30
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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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(5,826
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)
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(3,798
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)
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Cash used in investing activities:
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(38
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)
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(245
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)
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Cash provided by financing activities:
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8,669
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7,748
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2,805
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3,705
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Net cash used in operating activities
Net cash used in operating
activities was $5,826 for the six months ended June 30, 2017 compared to $3,798 used in operations for the same period in 2016.
Cash used in operations increased due to the increase in the volume of our operations.
Net cash used in investing activities
Net cash used in investing
activities was $38 for the six months ended June 30, 2017 compared to $245 for the same period in 2016. Cash used in investing
activities decreased mainly due to a reduction in investment in fixed assets.
Net cash provided by financing
activities
Net cash provided by
financing activities was $8,669 for the six months ended June 30, 2017 compared to $7,748 for the same period in 2016. During the
six months ended June 30, 2017, we raised net proceeds of approximately $8,669 through our January 2017 private placement and March
2017 underwritten public offering. During the six months ended June 30, 2016 we raised net proceeds of approximately $7,538 through
our March 2016 public offering and private placement transactions and $210 was raised through proceeds from exercise of warrants.
This increase was due to higher amount raised during the first six month of 2017.
Off-Balance Sheet Arrangements
As of June 30, 2017,
we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.