DarioHealth Corp. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial amounts below are in U.S. dollars in thousands, unless stated otherwise. DarioHealth develops and commercializes digital diabetes-management products, including its Dario Smart Diabetes Management Solution; it also describes Dario Engage and planned Dario Intelligence offerings.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2,059 | $1,210 | $3,815 | $2,217 |
| Gross profit (margin) | $522 (25.4%) | $360 (29.8%) | $1,074 (28.2%) | $466 (21.0%) |
| Operating expenses | $6,249 | $4,478 | $9,676 | $8,789 |
| Operating loss | $(5,727) | $(4,118) | $(8,602) | $(8,323) |
| Net loss | $(5,838) | $(4,092) | $(8,757) | $(9,505) |
Revenue increased 70.1% in Q2 and 72% for the first half, mainly from higher product sales. Cost of revenue rose 80.8% in Q2 and 56.5% year to date. Gross margin improved year to date but declined in Q2; Q2 cost of revenue included a $128 write-off of an old cartridge mold and $31 for a new mold. Sales and marketing remained greater than revenue: $2,303 in Q2 and $4,127 for the first half. Q2 general and administrative expense rose to $2,936 from $1,089, primarily reflecting stock-based compensation; the filing cites $1,612 of such expense in its G&A discussion and $1,779 in its discussion of Q2 loss, an inconsistency to verify.
For the first half, cash used in operations was $4,794, versus $5,826 in 2017; investing activities provided $53, primarily from maturing bank deposits; and financing provided $6,034, versus $8,669 in 2017. Cash increased by $1,293 to $5,011. At June 30, current assets were $7,266 and current liabilities were $3,944; total assets were $8,099 and stockholders’ equity was $4,155. The balance sheet reports no interest-bearing debt; liabilities shown include trade payables, deferred revenue, and accrued expenses.
Material changes and capital structure
- First-half net loss narrowed by $748, mainly reflecting higher gross profit and lower warrant-revaluation expense, partly offset by higher operating expenses. Q2 net loss widened by $1,746, largely due to increased stock-based compensation and other expenses.
- In February and March 2018, the company raised approximately $6,623 gross, or $6,034 net, through common and Series C preferred stock offerings and warrants. The preferred shares converted to common stock after shareholder approval. Common shares outstanding rose to 21,081,393 at June 30 from 14,074,238 at year-end 2017.
- In May, warrant holders surrendered warrants for 1,020,357 shares in exchange for 636,752 restricted common shares. The company recorded a $493 deemed dividend, increasing the loss attributable to common stockholders to $6,331 for Q2 and $9,250 for the first half.
- The company issued shares to directors, executives, employees, and service providers in lieu of cash compensation or fees. July 2018 subsequent events included additional share issuances in lieu of compensation and fees.
Outlook, liquidity, and risks
Management estimated that available liquidity would support planned activity only into March 2019, assuming anticipated sales and no additional capital. The filing states that operating losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. DarioHealth expected to keep incurring losses and said it needed additional funding while seeking financing and expanding commercial sales; there is no assurance funding will be available on acceptable terms or that sales targets will be achieved.
Management’s stated priorities included expanding production, sales and marketing, customer support, software and product development, and regulatory and quality activities. Forward-looking plans depend on commercialization and market acceptance of Dario, Dario Engage and Dario Intelligence; partner relationships; regulatory clearances; and access to capital. The filing provides no specific revenue or profitability guidance. Disclosure controls were deemed effective as of June 30, 2018, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the company obtained sufficient financing or sales growth to extend the stated March 2019 liquidity runway, and how actual cash burn compared with management’s estimates.
- The apparent inconsistency in reported Q2 stock-based compensation amounts ($1,612 and $1,779) and its effect on reported operating results.
- Whether revenue growth translated into sustainable gross-margin improvement, given Q2 margin decline and the continued scale of sales and marketing expense.
- The terms, potential dilution, and exercise status of warrants issued with the 2018 placements, and the effects of compensation-related share issuances.
- Progress on commercial adoption, partner channels, and any required regulatory clearances for the company’s product offerings.