DarioHealth Corp. (formerly LabStyle Innovations Corp.) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited; dollar amounts below are in thousands unless stated otherwise. The company changed its name to DarioHealth effective July 28, 2016.
Business context and results
DarioHealth develops and commercializes the Dario mobile diabetes-management solution, combining an app with a blood-glucose meter and related supplies. It began U.S. commercialization in March 2016; the company reported sales through distributors and its U.S. e-store. Its U.S. product received FDA 510(k) clearance in December 2015 for the listed system components and Apple iOS app.
- Revenue: Q2 2016 revenue was $669, up from $175 in Q2 2015. First-half revenue was $1,237, versus $242. Management attributed growth to sales of meters and disposables in several markets, including the United States.
- Gross profit and margins: Gross loss was $157 in Q2 and $259 for the first half, compared with $235 and $465, respectively, in 2015. Implied gross margins were approximately -23% for Q2 2016 and -21% for the first half, versus approximately -134% and -192% in the comparable 2015 periods.
- Operating expenses and losses: Q2 operating expenses were $2,466 and operating loss was $2,623; first-half figures were $4,287 and $4,546. Net loss was $2,719 for Q2 and $3,908 for the first half, compared with $2,004 and $3,642 in 2015. Basic and diluted loss per share was $0.49 for Q2 and $0.84 for the first half, versus $1.26 and $2.70 in 2015.
- Expense trends: First-half sales and marketing expense rose to $1,661 from $514, mainly reflecting U.S. marketing and commercialization. General and administrative expense rose to $1,708 from $986. Research and development expense fell to $918 from $1,324, mainly because 2015 included U.S. clinical-trial and development costs.
- Cash flow: First-half operating cash use was $3,798, compared with $2,832 in 2015; investing cash use was $245 versus $49; financing provided $7,748 versus $2,409. Cash and cash equivalents increased by $3,705 during the half to $6,376.
Financial position and material changes
- At June 30, 2016, current assets were $8,060, including $6,376 cash and $1,011 inventory; current liabilities were $1,974. Total assets were $9,132.
- The balance sheet reports no conventional borrowings. It includes a $1,953 liability for warrants, down from $2,610 at year-end 2015. The six-month $657 warrant revaluation gain reduced reported financial expense; warrant revaluations can make earnings volatile.
- Stockholders’ equity was $5,205, compared with a $1,580 deficiency at December 31, 2015. The company raised net proceeds of approximately $7,538 in March 2016 through public and private offerings and received $210 from warrant exercises. Common shares outstanding increased from 2,911,788 at year-end to 5,688,358 at June 30; 5,713,383 were outstanding August 9.
- Series A preferred shares were converted into common stock in March. The conversion included a $455 deemed dividend attributable to common shareholders; first-half net loss attributable to common shareholders was $4,363.
Outlook, risks, contingencies and unusual items
- Liquidity and going concern: The filing states that recurring revenue is not yet sufficient to cover operating costs and that losses and operating cash outflows raise substantial doubt about the company’s ability to continue as a going concern. Management estimated available resources would fund planned activity into June 2017, relying in part on anticipated sales. Additional funding may be needed sooner and may not be available on acceptable terms or at all.
- Commercial outlook: The company planned to expand production, sales and marketing, product development, regulatory work and distribution. It expected additional U.S. distribution channels in the second half of 2016, but gave no quantified revenue or earnings guidance. In July it signed GEMCO Medical as its first authorized U.S. distributor.
- Costs and inventory: First-half cost of revenue included a $118 inventory write-down to net realizable value. The filing also identifies a $32 deferred-inventory write-off related to a former-distributor legal settlement, a $48 inventory write-off and $14 of machinery-equipment write-offs related to a manufacturer change. Total inventory write-offs for the first half were $195.
- Other subsequent events: In July 2016, the company extended certain 2015 warrants by one year and amended their exercise price to $6.66; it expected to record an approximately $265 deemed dividend in Q3. On August 10, it agreed to issue an existing stockholder a warrant for 300,000 shares at $4.50, exercisable for 4.5 years, in exchange for a waiver of certain registration rights.
- Key risks include the need for further financing, the ability to scale sales and distribution, product and regulatory execution in additional markets, reliance on partners, and protection of intellectual property. The company reported no off-balance-sheet arrangements and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether post-quarter sales and distributor activity support management’s liquidity estimate through June 2017, and whether further financing is required.
- Revenue quality and sustainability, including distributor collections and the company’s stated cash-basis recognition approach where distributor payment ability cannot yet be determined.
- Gross-margin improvement, inventory levels and additional write-downs as production and sales scale.
- The potential dilution and accounting effects of outstanding warrants, options and subsequent warrant agreements.
- Progress in U.S. and international commercialization, regulatory requirements, and the timing and viability of planned distribution channels.