DarioHealth Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statement amounts are in U.S. dollars in thousands, unless stated otherwise. DarioHealth develops and commercializes digital diabetes-management products, including the Dario Smart Diabetes Management Solution; it also describes Dario Engage and planned Dario Intelligence offerings.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparator |
|---|---|---|
| Revenue | $1,756 | $1,007; up 74% |
| Cost of revenue | $1,204 | $901 |
| Gross profit / margin | $552 / approximately 31% | $106 / approximately 11% |
| Operating expenses | $3,427 | $4,311 |
| Operating loss | $(2,875) | $(4,205) |
| Net loss | $(2,919) | $(5,413) |
| Basic and diluted loss per share | $(0.20) | $(0.75) |
| Cash used in operating activities | $(2,766) | $(3,083) in cash flow statement |
| Cash provided by financing activities | $6,034 | $4,816 |
Cash and cash equivalents were $7,041 at March 31, 2018, versus $3,718 at December 31, 2017. Total current assets were $8,907 and current liabilities $2,409. Total assets were $9,780, and stockholders’ equity was $7,371. The balance sheet lists trade payables and accrued expenses but no borrowings; the filing does not provide a separate debt metric.
Material changes and financing
- Revenue growth was attributed mainly to increased product sales, primarily through direct-to-consumer sales and distributors. Cost of revenue rose 34%, slower than revenue, and gross margin improved.
- Research and development expense increased 58% to $742, mainly due to salaries and software-development costs. Sales and marketing was essentially unchanged at $1,824. General and administrative expense fell 57% to $861, mainly due to lower share-based compensation.
- Net financial expense declined to $44 from $1,208, principally because Q1 2017 included $1,195 of warrant revaluation expense.
- February and March 2018 private placements generated approximately $6,623 gross and $6,034 net proceeds. They included 2,262,269 common shares, 1,234,080 Series C preferred shares and warrants to purchase up to 3,784,351 common shares. The preferred shares are convertible into 2,468,160 common shares, subject to stockholder approval, and carry a liquidation preference.
Outlook, risks and unusual items
Management estimated that available resources, including anticipated sales, would fund planned operations into March 2019. The company nevertheless reported cumulative losses of $73,877 and stated that it needs additional capital to support commercialization and research and development. The filing says these conditions raise substantial doubt about its ability to continue as a going concern. Funding may not be available on acceptable terms or at all; slower sales, faster-than-expected cash use, or delays in product commercialization or regulatory clearances could worsen the shortfall.
The company’s forward-looking plans include expanding product sales and distribution, developing Dario Engage and Dario Intelligence, and continuing product, software and regulatory work. These are plans, not assured outcomes. The filing identifies risks involving capital needs, market acceptance, manufacturing and sales execution, partner relationships, regulatory approvals, intellectual property and retention of key personnel. Management stated disclosure controls were effective at a reasonable-assurance level and reported no material changes to internal control over financial reporting during the quarter.
Subsequent events included April share issuances in lieu of cash compensation and, in May, an approved warrant exchange under which holders could surrender warrants for 1,020,357 shares in exchange for 636,752 common shares.
Important facts for investors to verify
- Whether the company secured further financing and whether its March 2019 cash-runway estimate was achieved.
- Whether revenue growth and improved gross margin were sustained, and whether sales can cover the company’s operating-cost base.
- The status of stockholder approval and conversion of Series C preferred shares, and the effect of outstanding warrants and subsequent share issuances on dilution.
- Commercialization, regulatory and partner progress for Dario, Dario Engage and Dario Intelligence.
- The filing’s cash-flow comparison reports Q1 2017 operating cash use as $3,083 in the financial statements and $3,082 in the MD&A; investors should confirm the underlying value.