DarioHealth Corp. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; it does not provide a clear standalone fourth-quarter income statement or cash-flow summary. Financial amounts below are in U.S. dollars unless otherwise noted.
Business context
DarioHealth develops and commercializes digital diabetes-management products, combining a smartphone-connected glucose meter and app with consumables such as test strips. The company also began offering U.S. membership plans in the second half of 2018. DarioEngage is intended to provide digital monitoring and coaching tools to healthcare organizations; Dario Intelligence, a planned analytics offering, was still under development. The company reported that most revenue came from the United States.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $7.394 million | $5.170 million | Up 43% |
| Cost of revenue | $5.629 million | $3.859 million | Up 46% |
| Gross profit | $1.765 million | $1.311 million | Up 35% |
| Gross margin | 23.9% | 25.4% | Down 1.5 percentage points |
| Operating expenses | $19.453 million | $15.730 million | Up 24% |
| Operating loss | $17.688 million | $14.419 million | Loss widened |
| Net loss | $17.803 million | $15.743 million | Loss widened 13% |
| Net loss attributable to common stockholders | $18.296 million | $15.998 million | Loss widened |
| Operating cash used | $11.470 million | $10.619 million | Use increased |
| Cash and cash equivalents at year-end | $10.997 million | $3.718 million | Up $7.279 million |
Sales and marketing was the largest operating expense at $10.309 million, followed by general and administrative expense of $5.468 million and research and development expense of $3.676 million. Management attributed increased spending primarily to commercialization, including digital marketing, and product and software development. Net loss per share was $0.78, compared with $1.64 in 2017; weighted-average shares increased to 23.4 million from 9.6 million.
Liquidity and obligations: Current assets were $13.313 million and current liabilities were $5.164 million, implying working capital of approximately $8.149 million and a current ratio of about 2.6. The balance sheet reported no warrant liability at year-end and no material interest-bearing debt was identified in the filing text. Contractual lease and purchase obligations totaled $2.145 million, including $1.160 million in purchasing obligations. Cumulative deficit was $89.254 million; stockholders’ equity was $8.925 million.
Financing activities provided $18.743 million in 2018, principally from equity and warrant offerings. The company reported 36.6 million common shares outstanding at year-end and 18.2 million warrants outstanding. The number of shares outstanding had increased substantially from 14.1 million at the end of 2017.
Material changes and unusual items
- Revenue growth reflected expanded commercialization; the company also introduced membership plans that included test strips and digital progress reports. Year-end deferred revenue was $736,000, versus none reported in 2017.
- Gross margin declined despite higher gross profit, as cost of revenue grew faster than sales.
- Net finance expense fell to $115,000 from $1.324 million, largely because 2017 included a $1.168 million warrant revaluation expense. 2018 also included a $493,000 deemed dividend related to a warrant exchange; this increased the loss attributable to common stockholders, not reported net loss.
- The company raised gross proceeds through 2018 private placements, including approximately $10.645 million in September and $3.050 million in December, as well as earlier 2018 financing. These transactions and stock-based compensation increased the share count and potential dilution.
- Stock-based compensation expense was $3.758 million in 2018. The company also issued shares to employees, directors and service providers in lieu of cash compensation.
Outlook, risks and contingencies
Management estimated that available resources, assuming planned sales and budget expectations, would fund operations only into March 2020. The independent auditor’s report highlighted substantial doubt about the company’s ability to continue as a going concern. The company said it would need additional capital and cautioned that funding might not be available on acceptable terms, or at all. No quantified revenue or profit guidance was provided.
- Key execution risks include achieving sales growth, market acceptance and user adoption; scaling DarioEngage; and developing and commercializing the planned Dario Intelligence platform.
- The company relies on third-party manufacturers and a limited number of suppliers and distributors, and faces competition from established device makers and digital-health companies.
- Regulatory compliance, reimbursement coverage, product performance, data privacy, intellectual-property protection, foreign exchange and operations in Israel are among the disclosed risks.
- On December 28, 2018, Nasdaq notified the company that its share price had been below $1 for 30 consecutive business days. The filing warned that renewed noncompliance could lead to delisting.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements. Management said disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not audit internal controls.
Important facts for investors to verify
- Whether the company secured enough additional financing after the filing date to support operations beyond management’s March 2020 runway estimate, and how actual cash burn compared with the estimate.
- Whether revenue growth and membership adoption translated into improved gross margins, recurring revenue and lower operating cash use.
- The status and commercial traction of DarioEngage partnerships, and the development timetable and funding needs for Dario Intelligence.
- The potential dilution from outstanding warrants, options, future equity needs and compensation paid in shares. The filing reports 18.2 million warrants outstanding at December 31, 2018.
- The filing contains inconsistent common-share counts: the balance sheet reports 36,607,755 shares outstanding at December 31, 2018, while the equity roll-forward reports 36,607,775. Confirm the correct figure and subsequent share changes.
- The status of Nasdaq’s minimum-bid-price compliance and any subsequent listing notices or corrective actions.