DarioHealth Corp. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020; filed May 11, 2020. Financial amounts below are in U.S. dollars in thousands unless otherwise noted. Results are unaudited.
Business context
DarioHealth develops digital therapeutics and connected health products, primarily for diabetes, with plans to expand into hypertension and business-to-business offerings. Revenue came mainly from its blood glucose monitoring products and membership services.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $1,667 | $2,242; down 25.6% |
| Gross profit / margin | $779 / 46.7% | $558 / 24.9% |
| Operating expenses | $10,893 | $5,921 |
| Operating loss | $(10,114) | $(5,363) |
| Net loss | $(9,892) | $(5,376) |
| Net loss attributable to common stockholders | $(11,167) | $(5,376) |
| Net loss per share, basic and diluted | $(1.57) | $(2.92) |
| Cash used in operating activities | $(4,545) | $(3,989) |
- Product revenue was $1,185 versus $1,836; service revenue was $482 versus $406. Membership services represented a larger share of sales, contributing to the higher gross margin.
- Cash and cash equivalents were $15,826 at March 31, down from $20,395 at year-end 2019. Current assets were $18,493 and current liabilities $4,230. Stockholders’ equity was $15,426.
- Total liabilities were $4,901, including $671 of operating lease liabilities. The filing reports no off-balance-sheet arrangements and shows no cash proceeds from financing activities in the quarter.
- Stock-based compensation was $6,356, versus $257 a year earlier, and was a major driver of higher operating expenses and net loss. The company reported non-GAAP adjusted loss of $3,712; this measure is not a substitute for GAAP results.
Material changes and unusual items
- Revenue declined primarily because of fewer direct-to-consumer acquisitions. Cost of revenue fell 47.3%, reflecting lower product sales; gross profit nevertheless increased because membership services made up a greater proportion of revenue.
- General and administrative expense rose to $5,571 from $973, largely reflecting stock-based compensation of $4,453. Sales and marketing expense included $1,551 of stock-based compensation; excluding equity compensation, the company said marketing costs fell, mainly from reduced digital marketing.
- The company recorded a $1,275 deemed dividend related to preferred stock and warrant transactions, resulting in common-stockholder loss exceeding consolidated net loss. It also recorded $1,131 of warrant compensation expense for service providers.
- Common shares outstanding increased from 2,235,649 at December 31, 2019 to 3,103,570 at March 31, 2020. At May 9, certain preferred holders had converted shares into 644,860 common shares. Preferred stock issued in 2019 was convertible into up to 4,960,281 common shares, subject to its terms.
Outlook, risks, and contingencies
- Going concern: Management said additional liquidity is required and disclosed substantial doubt about the company’s ability to continue as a going concern. Management estimated resources could support operations into September 2021, assuming expected sales and other inflows; this is not assured. The filing warns that funding may not be available on acceptable terms or at all.
- COVID-19: The company reported continued monitor sales and no supply-chain disruption as of the filing, but some prospective business partners slowed negotiations while others showed increased telehealth interest. The company could not estimate the pandemic’s financial impact and said it could be material. Israeli offices had been closed since mid-March, with employees working remotely.
- The company cited commercialization, sales execution, financing, product development and regulatory clearances, partner relationships, and manufacturing expansion as important risks. It gave no formal financial guidance; interim results may not indicate full-year performance.
- Subsequent events included an April 2020 announcement of a MediOrbis telemedicine partnership and additional stock issuances. The filing describes potential legal claims generally but does not identify a specific material contingency or quantified exposure.
Most important facts for investors to verify
- Cash runway assumptions, actual cash burn, financing needs, and progress toward the estimated September 2021 runway.
- Whether sales recover from the year-over-year decline and whether recurring membership and business-to-business revenues grow.
- The extent to which expenses and losses reflect noncash equity compensation, and the potential dilution from preferred conversions, warrants, and equity awards.
- COVID-19 effects on partner negotiations, customer demand, operations, and supply availability, as well as execution of the telehealth partnership and planned product expansion.