DarioHealth Corp. — Q2 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2017; financial amounts are in U.S. dollars, thousands, unless noted. DarioHealth develops and commercializes a mobile diabetes-management solution combining an app, cloud-based services and a blood-glucose meter. Sales were mainly direct-to-consumer in the United States and Australia, as well as through distributors. The interim statements are unaudited.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,210 | $669 | $2,217 | $1,237 |
| Gross profit (loss) | $360 | $(157) | $466 | $(259) |
| Gross margin | 29.8% | (23.5%) | 21.0% | (20.9%) |
| Operating loss | $(4,118) | $(2,623) | $(8,323) | $(4,546) |
| Net loss | $(4,092) | $(4,057) | $(850) | $(6,415) |
- Q2 revenue increased 81% year over year; six-month revenue increased 79%, primarily from higher product sales. Cost of revenue was $850 for Q2 and $1,751 for the first half.
- Operating expenses for the first half were $8,789, up from $4,287: research and development $1,653, sales and marketing $4,030, and general and administrative $3,106. Management attributed increases to product development and clinical-trial costs, expanded U.S. and Australian marketing, and stock-based compensation.
- The first-half net loss included $7,485 of net financial income from warrant revaluation, including a $7,460 gain after a price-protection feature expired. The resulting net loss therefore substantially understates the $8,323 operating loss; Q2 net loss was broadly unchanged year over year.
- Cash used in operations was $5,826 in the first half, versus $3,798 a year earlier; investing used $38, and financing provided $8,669. Cash and cash equivalents rose to $3,898 from $1,093 at December 31, 2016. The filing reports no off-balance-sheet arrangements.
- At June 30, current assets were $5,862 and current liabilities $2,779. Total liabilities also included a $3 warrant liability. No conventional debt balance is reported in the presented balance sheet. Stockholders’ equity was $3,953, compared with a $6,541 deficiency at year-end 2016.
Changes, outlook and risks
- The company raised $8,669 net in 2017 through private placements and an April public offering. Common shares outstanding increased to 9,599,234 at June 30 from 5,713,383 at year-end; 9,754,887 were outstanding as of August 11. Further equity issuance and dilution are possible.
- Management estimated available resources would fund planned activity only into January 2018, including anticipated sales inflows. The filing states that substantial doubt exists about the company’s ability to continue as a going concern and that additional financing is needed. Funding may not be available on acceptable terms or at all; slower sales or faster-than-expected cash use could shorten the runway.
- Commercialization depends on scaling sales and production, maintaining partner relationships, completing required clinical trials and obtaining FDA or other regulatory clearances. The filing provides no quantified sales guidance or formal earnings outlook.
- Inventory was $717 at June 30; inventory write-offs were $47 in the first half. Stock-based compensation was $2,441, including management share awards described in the filing. A July 2017 subsequent event involved 71,908 shares issued in exchange for salary, fees and bonuses waived or reduced.
- Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. The filing describes legal claims in general but gives no clear quantified contingency value.
Important facts for investors to verify
- Whether sales growth and gross margins can continue, and whether commercial revenue can support operating costs.
- The assumptions behind the January 2018 cash runway and the timing, amount and terms of any required financing.
- The effect of warrant revaluation and other non-cash compensation on reported results, cash needs and dilution.
- The status and timing of clinical trials, FDA clearance and other regulatory requirements for U.S. commercialization.
- Share issuance, equity-plan awards and potential dilution, including warrants and subsequent-event share grants.