DarioHealth Corp. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated financial statements; amounts below are U.S. dollars in thousands unless stated otherwise. DarioHealth develops and sells its Dario mobile diabetes-management solution, including its app, Smart Meter and related components.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,375 | $728 | $3,592 | $1,965 |
| Gross profit (loss) | $276 | $76 | $742 | $(183) |
| Gross margin | 20.1% | 10.4% | 20.7% | (9.3%) |
| Operating expenses | $3,260 | $2,797 | $12,044 | $7,084 |
| Operating loss | $(2,984) | $(2,721) | $(11,302) | $(7,267) |
| Net loss | $(2,978) | $(611) | $(3,823) | $(7,026) |
Revenue increased 89% in Q3 and 83% for the nine-month period, mainly from higher product sales, principally direct-to-consumer sales in the U.S. and Australia and sales through distributors. Operating costs rose substantially year over year, led by sales and marketing and general and administrative expenses. Q3 net loss was larger despite improved gross profit; nine-month net loss was lower largely because of a noncash warrant revaluation gain, not improved operating results. The company reported no interest-bearing debt in the presented balance sheet; current liabilities were $3,340, and the warrant liability was $2.
Cash, liquidity and capital
- At September 30, cash and cash equivalents were $6,262, versus $1,093 at December 31, 2016; total current assets were $8,614 and total assets $9,457.
- Nine-month operating cash use was $8,223, compared with $6,520 in 2016. Investing cash use was $77; financing provided $13,469, primarily from equity offerings and private placements. Cash increased by $5,169 during the period.
- Stockholders’ equity was $6,115, compared with a deficiency of $6,541 at year-end 2016. The balance-sheet improvement included the reduction of the warrant liability from $7,488 to $2 following warrant revaluation.
- Management estimated available resources would fund planned operations into Q3 2018, assuming anticipated sales and current spending plans. The filing states that additional funding is needed and that substantial doubt exists about the company’s ability to continue as a going concern.
Material changes and notable items
- Nine-month research and development expense increased to $2,450 from $1,577, attributed mainly to salaries, stock compensation and clinical-trial costs. Sales and marketing rose to $5,707 from $3,194 as U.S. and Australian marketing activity expanded. General and administrative expense rose to $3,887 from $2,313, mainly reflecting stock compensation, including management share grants.
- The company recorded $7,486 of nine-month financial income from the change in fair value of warrants. Management said expiration of price-protection features led to cancellation of the related liability and recognized financing income. This accounting gain materially affects the comparison of net losses.
- Cost of revenue included a $102 Q3 write-off of old production fixtures and related inventory. Inventory write-offs for the nine months totaled $120.
- Financing included an August private placement generating $4,799 net proceeds from common stock and Series B convertible preferred stock. The preferred stock carries a 6% stock dividend and a liquidation preference; conversion into common shares is subject to stockholder approval.
- Subsequent to quarter-end, the company reported issuing 1,039,676 common shares in November in exchange for cancellation of warrants to purchase 1,871,436 shares. It also issued 114,204 shares in October in lieu of cash salary, fees and bonuses.
Outlook, risks and controls
Management planned to use funds for product development, regulatory work, production, sales and marketing, and working capital. It warned that slower market penetration, missed sales targets, faster-than-expected cash use or inability to raise capital could require earlier financing, changes to business plans or threaten continued operations. The company also identified risks involving product commercialization, regulatory clearances, clinical trials, manufacturing, key partners, intellectual property and retaining key personnel. No specific revenue or earnings guidance was provided. Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commercial sales growth can continue and translate into improved gross margins and lower operating cash use.
- Whether additional financing will be available before the estimated Q3 2018 runway ends, and the terms and dilution of any financing.
- The status of FDA and other regulatory requirements, clinical trials, and the planned commercialization and production scale-up.
- The dilution and economic terms of the Series B preferred stock, including its 6% stock dividend, liquidation preference and conversion approval.
- The warrant-related accounting effects and the impact of the November 2017 warrant exchange on outstanding and potential shares. Common shares outstanding were 10,238,220 at September 30 and 10,352,424 as of November 10, 2017.