DarioHealth Corp. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This filing reports full-year results, not standalone fourth-quarter results. Figures below are U.S. dollars; financial statement amounts are reported in thousands unless stated otherwise.
Business context
DarioHealth develops and commercializes the Dario mobile diabetes-management solution: a smartphone app, cloud-based services and a proprietary blood-glucose meter with compatible strips and other consumables. The company began U.S. commercialization in March 2016 and relied on direct online sales and distributors. Revenue is principally from device components and recurring consumables. The app had approximately 50,000 iOS installs and more than 10,000 Android installs, but installs are not equivalent to paying customers.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $2.803 million | $0.823 million |
| Gross loss | $0.830 million | $0.855 million |
| Gross margin | Approximately -29.6% | Approximately -103.9% |
| Operating loss | $11.101 million | $7.698 million |
| Net loss | $10.887 million | $7.142 million |
| Net loss attributable to common shareholders | $11.607 million | $7.296 million |
| Basic and diluted loss per share | $2.09 | $3.84 |
| Cash used in operating activities | $8.379 million | $6.277 million |
| Cash and cash equivalents at year-end | $1.093 million | $2.671 million |
Revenue grew approximately 241%, but remained below cost of revenues. Sales and marketing costs rose to $4.739 million from $1.330 million, mainly reflecting U.S. launch marketing; R&D fell to $2.154 million from $2.565 million, while general and administrative expense increased to $3.378 million from $2.948 million. A $0.269 million production-line impairment was recorded separately from cost of revenues; inventory write-offs were $0.315 million.
At December 31, 2016, current assets were $2.936 million and current liabilities $2.925 million. Cash plus short-term bank deposits totaled $1.318 million. The company reported a $7.488 million warrant liability and a $6.541 million stockholders’ deficit; the filing does not identify conventional funded debt as a major balance-sheet item. The auditor cited recurring losses and limited liquidity as raising substantial doubt about the company’s ability to continue as a going concern.
Changes, outlook, risks and unusual items
- Commercial sales expansion drove revenue growth, while operating cash use increased by $2.102 million year over year. Investing cash use rose to $0.947 million, principally for manufacturing-related investment.
- Management estimated, based on year-end resources, its budget and anticipated sales, that funds would support planned activity only into July 2017 without further capital. This estimate preceded the subsequent financing and depended on commercial sales assumptions.
- After year-end, the company conducted a private placement: an initial closing generated approximately $3.1 million gross proceeds in January 2017, and the remaining securities were issued after stockholder approval in March. The offering was for up to approximately $5.1 million in total; the filing does not give a clear final net-proceeds figure for the completed offering.
- Management planned continued product development, broader distribution and marketing, and further market expansion. A Lightning-connector meter version had been developed, but marketing was contingent on regulatory clearance. No quantified revenue or profitability guidance was provided.
- Key risks include continued need for financing and potential dilution; uncertain customer adoption and reimbursement; strong competition; dependence on third-party manufacturers and distributors; regulatory and product-performance requirements; technology changes to smartphones; and privacy, intellectual-property, foreign-exchange and Israel-related risks.
- Warrant fair-value accounting generated $0.214 million of net finance income in 2016, including a $0.260 million warrant revaluation gain. Separately, deemed dividends of $0.455 million and $0.265 million increased the loss attributable to common shareholders. The warrant liability was $7.488 million at year-end; certain warrant price-adjustment features expired in March 2017, after which those warrants were no longer accounted for as liabilities.
- The company reported no material pending litigation and no off-balance-sheet arrangements. Management concluded disclosure controls and internal control over financial reporting were effective at year-end.
Most important facts for investors to verify
- Whether the post-year-end financing provides adequate runway, and how actual cash burn compares with management’s forecast.
- Whether revenue growth converts into positive product-level gross margins, particularly given FY2016 cost of revenues exceeded revenue.
- Sales quality and traction: paying customers, repeat consumables purchases, distributor sell-through, and reimbursement access by market.
- The size, terms and potential dilution from outstanding warrants and options, and the effect of warrant accounting changes after March 2017.
- Required regulatory clearance for product changes and the company’s ability to maintain reliable manufacturing and distribution.