DarioHealth Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial amounts are in U.S. dollars in thousands unless otherwise noted; statements are unaudited. DarioHealth develops digital therapeutics, including its diabetes-management device and software, DarioEngage, and planned Dario Intelligence offerings.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,651 | $2,059 | $3,893 | $3,815 |
| Gross profit / margin | $326 / 19.7% | $522 / 25.4% | $884 / 22.7% | $1,074 / 28.2% |
| Operating expenses | $5,688 | $6,315 | $11,609 | $9,782 |
| Operating loss | $(5,362) | $(5,793) | $(10,725) | $(8,708) |
| Net loss | $(5,382) | $(5,838) | $(10,758) | $(8,757) |
| Basic and diluted loss per share | $(0.13) | $(0.32) | $(0.27) | $(0.52) |
- Q2 revenue declined 20%; first-half revenue rose 2%. Management attributed the quarterly decrease mainly to lower direct-to-consumer acquisition as resources shifted toward business-to-business channels, and to increased deferral of membership revenue.
- First-half product revenue was $3,071 and services revenue was $822; the comparable 2018 periods reported product revenue only. The company adopted ASC 606 in 2019 using the modified retrospective method; it said adoption had no significant financial-statement impact.
- Gross margin fell in both comparisons. Management cited lower Q2 product sales and deferral of some membership revenue. First-half cost of revenue increased 10% while revenue increased 2%.
- Sales and marketing expense increased 26% in Q2 and 64% for the first half, mainly from expanded U.S. activity, online marketing, and payroll. First-half R&D rose 14%; G&A fell 29%, mainly due to lower share-based compensation.
- Cash and cash equivalents were $7,986 at June 30, versus $10,997 at December 31, 2018. Current assets were $10,822 and current liabilities $5,723, giving reported working capital of $5,099. Stockholders’ equity was $6,094; accumulated deficit was $100,012.
- First-half operating cash use was $9,491, compared with $4,794 in 2018; investing cash use was $78, and financing provided $6,558. Cash decreased $3,011 over the period.
- No borrowings are identified in the presented balance sheet. Operating lease liabilities totaled $786, including $277 current and $509 non-current.
Material changes and capital
- On May 24, 2019, the company completed an offering of 4,855,341 common shares and pre-funded warrants for 7,175,525 shares, raising approximately $6,558 net. The warrants have a $0.0001 exercise price and are subject to ownership limitations. Common shares outstanding increased from about 36.6 million at year-end 2018 to 42.9 million at June 30, 2019; the filing reports 43,601,280 outstanding as of August 12.
- During the first half, shares were also issued in lieu of cash salary, fees, or bonuses, and shares and options were granted under the company’s equity plan. Further equity issuance or warrant exercise could dilute existing holders.
- ASC 842 lease accounting was adopted January 1, 2019, adding operating lease right-of-use assets and liabilities; adoption did not materially affect the financial statements. The company reported no off-balance-sheet arrangements.
Outlook, risks, and unusual items
- The filing states that operating losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. It has not established recurring revenue sufficient to cover operating costs and expects losses to continue.
- Management says additional liquidity is needed and is being pursued through financing and increased commercial sales; there is no assurance funding will be available on acceptable terms or at all. The filing gives differing runway estimates: one passage says resources may last into January 2020 without additional capital, while a later passage says into April 2020. Both depend partly on anticipated sales and partner inflows.
- Management warns that slower sales, failure to meet commercial targets, faster-than-expected cash use, or inability to obtain funding could force changes to business plans or threaten continued operations. Forward-looking plans also depend on commercializing Dario, DarioEngage, and Dario Intelligence; partnerships; regulatory clearances; product development; and market acceptance.
- The filing describes claims and legal proceedings in general terms but provides no specific material case or quantified contingency in the supplied text. It reports disclosure controls and procedures were effective at a reasonable-assurance level and no material changes in internal control during the quarter.
Important facts for investors to verify
- Reconcile the differing January 2020 and April 2020 management cash-runway estimates, and assess the assumptions for sales, cash burn, and financing.
- Monitor operating cash use, revenue growth, deferred revenue, and whether the shift toward business-to-business channels improves acquisition costs and margins.
- Evaluate the company’s ability to raise additional capital and the dilution implications of pre-funded warrants, equity compensation, and subsequent share issuance.
- Confirm the timing, regulatory status, commercial traction, and funding needs for DarioEngage and Dario Intelligence, and review any updated going-concern disclosures.