Dariohealth Corp. annual report, FY2019

DarioHealth Corp. — 2019 Form 10-K Summary

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; it is not a standalone fourth-quarter report. DarioHealth develops and sells a connected diabetes-management device, app, consumables and membership services, and is developing remote-monitoring and analytics offerings. The company also expanded its platform to support blood-pressure measurements. Figures below are in U.S. dollars; financial-statement amounts are generally in thousands. Share and per-share figures reflect the November 2019 1-for-20 reverse stock split.

Financial performance and liquidity

Metric20192018Change / context
Revenue$7.559 million$7.394 millionUp 2.2%; growth was attributed mainly to membership services.
Gross profit$2.597 million$1.765 millionUp $0.832 million; gross margin improved to 34.4% from 23.9%.
Operating expenses$20.302 million$19.453 millionUp $0.849 million, mainly from sales and marketing.
Operating loss$17.705 million$17.688 millionEssentially unchanged.
Net loss$17.736 million$17.803 millionImproved by $0.067 million.
Net loss attributable to common stockholders$20.891 million$18.296 millionIncludes deemed dividends of $3.155 million in 2019 and $0.493 million in 2018.
Cash used in operating activities$15.725 million$11.470 millionCash burn increased by $4.255 million.
Cash and cash equivalents at year-end$20.395 million$10.997 millionIncreased following financing; an additional $0.140 million was restricted cash in 2019.

Revenue mix. Product revenue was $5.490 million and service revenue was $2.069 million in 2019, versus $7.158 million and $0.236 million, respectively, in 2018. Separately, the filing reports consumer products and other revenue of $4.478 million and membership-services revenue of $2.930 million for 2019. Deferred revenue rose to $1.223 million from $0.736 million.

Expenses and margins. Cost of revenue declined to $4.962 million from $5.629 million. Research and development was $3.692 million versus $3.676 million; sales and marketing was $11.127 million versus $10.309 million; and general and administrative expense was $5.483 million versus $5.468 million. The filing reports no conventional borrowing debt. Year-end operating-lease liabilities totaled $0.772 million, of which $0.317 million was current.

Liquidity and capital. Current assets were $22.939 million and current liabilities were $5.220 million at year-end. Financing activities provided $25.247 million in 2019, including net proceeds from offerings; investing activities used $0.113 million. The company reported $18.894 million of stockholders’ equity and an accumulated deficit of $110.145 million. Management estimated that available resources, including expected sales, would fund operations only into June 2021 without further capital.

Material changes versus 2018

  • Revenue rose modestly, while the business mix shifted substantially toward services and memberships and away from product revenue.
  • Lower cost of revenue lifted gross profit and gross margin, but higher operating expenses meant the operating loss remained approximately flat.
  • Operating cash use increased materially despite the slightly smaller reported net loss.
  • The company raised $21.375 million gross through Series A preferred-stock offerings in late 2019 and reported $25.247 million of net financing cash inflows for the year. Preferred-stock terms include conversion and stock-dividend features; the company recorded a $3.155 million deemed dividend.

Outlook, risks and unusual items

  • Outlook and funding: No formal revenue or earnings guidance is provided. Management’s estimated runway to June 2021 depends partly on achieving expected commercial sales. Management says additional capital is needed; financing may not be available on acceptable terms or at all.
  • Going concern: The independent auditor issued an unmodified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. The statements include no adjustments that might result from that uncertainty.
  • Commercial execution: DarioEngage adoption by providers, payers and employers, growth in recurring memberships, expansion beyond direct-to-consumer sales, and development of Dario Intelligence are uncertain. The latter remains a planned offering.
  • COVID-19: The filing, dated March 2020, says the company was assessing potential effects. It identified possible disruption to manufacturing and supply, employee operations, and interactions with healthcare professionals; the eventual impact was not then clear.
  • Other significant risks: Reliance on third-party manufacturers and distributors; intense competition; reimbursement and regulatory uncertainty; reliance on Apple and Google app platforms; foreign-exchange exposure; protection of health data and intellectual property; and political, security and operational risks in Israel.
  • Unusual capital and share items: A 1-for-20 reverse split took effect in November 2019. Preferred shares, warrants and options create potential dilution; the filing’s share and warrant disclosures should be reviewed alongside the preferred-stock conversion terms. Inventory write-offs were $62,000 in 2019, compared with $41,000 in 2018.
  • Controls and contingencies: Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2019. The company reported no material pending litigation and no off-balance-sheet arrangements.

Important facts for investors to verify

  • Confirm the preferred-stock conversion, dividend, voting and ownership-limitation provisions, and calculate potential dilution from preferred shares, warrants and equity awards.
  • Assess whether operating cash burn, commercial growth and financing capacity support the stated June 2021 runway; the auditor’s going-concern emphasis makes this central.
  • Verify the drivers and sustainability of the improved gross margin, including the shift toward membership and service revenue, and reconcile the different revenue-category presentations in the filing.
  • Track provider, payer and employer adoption of DarioEngage and whether the planned analytics offering becomes a commercial revenue source.
  • Monitor COVID-19 effects on suppliers, manufacturing, sales channels and operations, as well as reimbursement, regulatory and data-privacy developments.