DarioHealth Corp. — Q3 2016 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2016; amounts are in U.S. dollars in thousands except per-share data. The company develops and commercializes the Dario mobile diabetes-management solution, including a glucose meter, test strips, lancets, and app. It began U.S. commercialization in March 2016 and changed its name from LabStyle Innovations Corp. in July 2016.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $728 | $273 | $1,965 | $515 |
| Gross profit (loss) | $76 | $(131) | $(183) | $(596) |
| Operating expenses | $2,797 | $2,416 | $7,084 | $5,240 |
| Operating loss | $(2,721) | $(2,547) | $(7,267) | $(5,836) |
| Net loss | $(1,741) | $(1,829) | $(5,649) | $(5,470) |
| Basic and diluted loss per share | $(0.31) | $(0.90) | $(1.13) | $(3.42) |
Q3 gross margin was approximately 10%; the nine-month gross margin remained negative at approximately 9%. Revenue increased about 167% in Q3 and 281% year to date, attributed to market expansion. Sales and marketing costs rose to $1,533 in Q3 and $3,194 year to date, reflecting U.S. launch and marketing activity. R&D was $1,577 year to date, down from $1,991; general and administrative expense was $2,313, broadly unchanged year over year.
Liquidity, cash flow, and capital
- At September 30, cash and cash equivalents were $3,339, short-term bank deposits $229, current assets $5,555, and current liabilities $2,041. Total assets were $6,696; stockholders’ equity was $4,360.
- For the first nine months, operating cash use was $6,520, investing cash use $560, and financing cash inflow $7,748. Cash increased $668 from year-end 2015.
- The company reported no conventional debt balance in the presented balance sheet. It had a $295 warrant liability, down from $2,610 at December 31, 2015. Current liabilities included $1,027 of trade payables and $1,014 of other payables and accrued expenses.
- March 2016 public and private offerings generated net proceeds of approximately $7,538. The company reported 5,713,383 common shares outstanding at September 30 and 5,197,994 outstanding warrants, with exercise prices ranging from $3.24 to $135.
Material changes, outlook, and risks
- Q3 moved to gross profit, compared with a gross loss in Q3 2015, while year-to-date gross losses narrowed. Operating loss widened year to date as operating expenses increased, chiefly from sales and marketing.
- Net loss improved in Q3 but increased year to date. The results include substantial warrant revaluation gains: $1,658 in Q3 and $2,315 for the first nine months, which are fair-value items and not operating revenue. Other unusual items included a $650 expense for a registration-right waiver in exchange for a warrant and a $265 deemed dividend related to extending warrants. The filing also reports inventory write-downs and other inventory/manufacturing-related charges.
- Management estimated available resources would support planned activity only into March 2017, revising its prior estimate of June 2017 because of increased marketing costs. Management sought additional public or private funding and expected sales growth, but gave no quantified revenue or earnings guidance. The filing states that operating losses and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern.
- Commercialization risks include the ability to expand sales, meet targets, control marketing and production costs, obtain additional financing, and establish distribution channels. The company had signed GEMCO Medical as its first authorized U.S. distributor; further channels were anticipated but not assured. Distributor product revenue recognition changed to recognition upon delivery beginning July 1, 2016, which may affect revenue timing.
- The Dario system received FDA 510(k) clearance in December 2015 for the specified system and Apple iOS app platform. The filing notes that further regulatory clearances or approvals may be needed for future commercialization plans. Management reported disclosure controls effective at reasonable assurance and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether cash runway and the March 2017 estimate remain realistic, including the sales inflows assumed and any need for near-term financing.
- Revenue quality, customer and distributor sell-through, and the effect of the July 2016 distributor revenue-recognition policy.
- Gross-margin improvement and whether production costs, inventory write-offs, and marketing spending are sustainable.
- Potential dilution from outstanding warrants, options, and any future equity financing; also monitor warrant expirations and remeasurement effects.
- Progress in U.S. and international distribution, regulatory requirements, and the company’s ability to commercialize at sufficient scale.