DarioHealth Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; interim financial statements are unaudited. Unless otherwise noted, financial amounts are in U.S. dollars thousands. DarioHealth develops and commercializes the Dario mobile diabetes-management app and blood glucose monitoring device.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $1,007 | $568 |
| Cost of revenue | $901 | $670 |
| Gross profit (loss) | $106 | $(102) |
| Gross margin | 10.5% | (18.0%) |
| Operating expenses | $4,311 | $1,821 |
| Operating loss | $(4,205) | $(1,923) |
| Net profit (loss) | $3,242 | $(2,368) |
| Net cash used in operations | $(3,082) | $(2,105) |
| Cash and cash equivalents at period end | $2,817 | $8,267 |
Revenue increased 77%, mainly from continued U.S. and Australian market penetration. Sales and marketing expense rose 252% to $1,825, and general and administrative expense increased 123% to $2,017. Research and development expense increased 18% to $469. Management attributed much of the general and administrative increase to share-based compensation, including $1,029 of expense for shares issued to the CEO and CFO. Total stock-based compensation and shares issued for services were $1,585, versus $324 a year earlier.
Reported net profit was driven by a $7,460 noncash gain from revaluing warrants, after a price-protection feature expired on March 8, 2017. The warrant liability fell from $7,488 at December 31, 2016 to $28 at quarter end. Excluding that gain, the company remained loss-making; the filing does not provide an adjusted net-loss figure.
Liquidity, capital and balance sheet
At March 31, 2017, total current assets were $5,085 and current liabilities were $2,724; stockholders’ equity was $3,233, compared with a deficiency of $6,541 at year-end 2016. The company reported no conventional borrowings in the supplied financial statements; current liabilities consisted of trade payables and other payables/accruals, in addition to the warrant liability.
Operating cash use was $3,082; investing cash use was $9; financing provided $4,816, primarily from stock issuances. Cash increased by $1,724 during the quarter. Q1 private placements generated $4,816 net proceeds and increased issued common shares to 7,976,521 from 5,713,383 at year-end 2016. A subsequent public offering closed April 5, raising $3,840 net from 1,450,000 shares; underwriters also received a 45-day over-allotment option for up to 217,500 shares, which had not been exercised as of the filing.
Outlook, risks and notable matters
Management estimated that available liquidity, including expected sales inflows, would fund planned operations only into January 2018 without additional capital. The filing states that recurring revenue is not yet sufficient to cover operating costs and that substantial doubt exists about the company’s ability to continue as a going concern. Management is seeking further public or private funding and aims to increase commercial sales; there is no assurance financing will be available or that sales targets will be met. No specific numerical revenue or earnings guidance is provided.
Key risks include continued cash burn, the ability to scale sales and production, obtain regulatory clearances (including FDA requirements), maintain partner relationships, and fund product development and commercialization. Inventory write-offs were $22 in Q1 2017, compared with $315 for full-year 2016. The filing notes involvement in claims and legal proceedings from time to time but gives no clear amount or specific material contingency. Management reported disclosure controls effective at a reasonable assurance level and no material quarter-on-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the April offering proceeds and subsequent cash usage support the stated runway through January 2018, and whether further financing is required.
- Whether revenue growth converts into improved gross margins and sustainable operating cash flow.
- The warrant-related $7,460 gain is noncash and materially drives reported quarterly profitability.
- The extent of dilution from Q1 stock issuances, warrants, options and the April public offering; the filing reported 9,582,377 common shares outstanding as of May 12, 2017.
- Progress on U.S. and other regulatory requirements, commercial sales targets, and distributor/channel execution.