DarioHealth Corp. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited financial statements; amounts below are U.S. dollars in thousands, except per-share data and percentages.
Business context
DarioHealth develops and commercializes digital diabetes-management products, including its Dario blood glucose monitoring system and app. The company also describes Dario Engage, a digital care platform, and Dario Intelligence, an intended analytics offering. Sales are primarily through direct-to-consumer channels and distributors.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,879 | $1,375 | $5,694 | $3,592 |
| Gross profit (margin) | $468 (24.9%) | $276 (20.1%) | $1,542 (27.1%) | $742 (20.7%) |
| Operating loss | $(3,931) | $(2,979) | $(12,533) | $(11,302) |
| Net loss | $(4,063) | $(2,973) | $(12,820) | $(12,478) |
| Basic and diluted loss per share | $(0.17) | $(0.30) | $(0.67) | $(1.40) |
- Revenue increased 36.7% in Q3 and 58.5% for the nine-month period, which management attributed mainly to higher product sales, including membership offerings.
- Cost of revenue rose with sales, but fell as a share of revenue: 72.9% versus 75.1% in Q3 and 79.3% versus 79.9% for the nine months. Management cited higher sales volumes and improved manufacturing efficiencies.
- Operating expenses were $4,399 in Q3 and $14,075 for the nine months. Sales and marketing was the largest category ($2,693 and $6,820, respectively); higher marketing and product-development spending contributed to wider operating losses.
- Nine-month cash used in operations was $8,031, versus $8,223 in 2017. Investing activities provided $20; financing activities provided $15,720, principally from equity offerings. Cash and cash equivalents were $11,427 at September 30, 2018, versus $3,718 at year-end 2017.
- At September 30, current assets were $13,528 and current liabilities $3,922. Total liabilities were $3,922; the filing does not report interest-bearing debt. Stockholders’ equity was $10,411, and accumulated deficit was $84,271.
Material changes and unusual items
- Sales and marketing expense increased 60.6% in Q3 and 19.5% for the nine months, reflecting expanded campaigns and sales activity in the United States, Australia, Germany and the United Kingdom. Nine-month G&A expense rose 15.9%, largely due to share-based compensation; Q3 G&A declined 9.2%.
- In Q3, the company began offering U.S. membership plans, including test strips subject to usage, and reported initial revenue from caregivers using Dario Engage. It deferred $335 of Q3 and $385 of nine-month revenue related to multi-month memberships; the balance sheet reported $385 of deferred revenue at September 30.
- February and March 2018 private placements generated approximately $6,623 gross proceeds; September placements generated approximately $10,645 gross proceeds. The September financing included common and Series D preferred shares and warrants to purchase up to 9,462,272 common shares. Series D conversion requires stockholder approval and carries a liquidation preference.
- A May warrant exchange cancelled warrants covering 1,020,357 shares in return for 636,752 restricted shares and resulted in a $493 deemed dividend for the nine-month period. Nine-month loss attributable to common stockholders was $13,313, including this dividend.
- Common shares outstanding were 25,691,724 at quarter-end and 25,936,165 as of November 9, 2018. The filing also reports 1,890,257 Series D preferred shares outstanding at quarter-end, subject to the conversion terms described above.
Outlook, risks and contingencies
Management estimated that existing resources, including anticipated sales inflows, could support operations into March 2020 without additional capital. This is not a guarantee: the company stated it has a significant present need for capital, may consume resources faster than expected, and may be unable to continue without additional financing or changes to its plans. The filing identifies substantial doubt about the company’s ability to continue as a going concern. It reported cumulative losses, ongoing operating losses and negative operating cash flow, and said it had not established recurring revenue sufficient to cover operating costs.
No specific revenue or earnings guidance was provided. Key uncertainties include scaling sales and meeting commercial targets, obtaining financing on acceptable terms, product commercialization and regulatory requirements, manufacturing and marketing execution, and development of Dario Engage and Dario Intelligence. The company reported no off-balance-sheet arrangements and described claims and legal proceedings as arising from time to time, without providing a specific material contingency value. Management stated that disclosure controls were effective at a reasonable-assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the stated runway into March 2020 remains achievable, given operating cash burn and dependence on anticipated sales and potential additional financing.
- Actual growth, retention and margins from product sales and membership plans, including how deferred membership revenue is recognized.
- The terms, potential dilution and stockholder-approval status of Series D preferred shares and the warrants issued in the September financing.
- Progress in scaling Dario Engage and advancing Dario Intelligence, including regulatory, commercial and partner milestones.
- How ongoing marketing and development spending affects losses, cash use and the path toward covering operating costs.