DarioHealth Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Business context
DarioHealth develops digital therapeutics and connected health products for chronic conditions. During the period it expanded into musculoskeletal health by acquiring Upright Technologies, which closed February 1, 2021, and mental health through its June 7 acquisition of PsyInnovations (WayForward). Reported results include Upright from February and WayForward from June, so year-over-year comparisons reflect both business growth and acquisitions.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $5,261 | $1,787 | $8,856 | $3,454 |
| Gross profit | $1,508 | $636 | $2,589 | $1,415 |
| Gross margin | 28.7% | 35.6% | 29.2% | 41.0% |
| Operating expenses | $19,511 | $4,759 | $34,919 | $15,652 |
| Operating loss | $(18,003) | $(4,123) | $(32,330) | $(14,237) |
| Net loss | $(17,765) | $(4,006) | $(32,731) | $(13,898) |
Q2 revenue rose 194% and six-month revenue rose 156%. Gross margins were reduced by $1,092 of acquired inventory and intangible-asset amortization in Q2 and $1,618 for the six-month period. Excluding those amortization charges, management reported gross margins of 49.4% and 47.5%, respectively. Six-month net loss per share was $1.85, versus $2.33 in 2020; the weighted-average share count increased substantially.
For the six months, operating cash use was $22,838 (2020: $7,184), investing cash use was $7,593 (2020: $43), and financing provided $65,766 (2020: zero). Cash and cash equivalents at June 30 were $63,865, compared with $28,590 at year-end 2020; cash, cash equivalents and restricted deposits totaled $64,060. The company reported total assets of $130,983, stockholders’ equity of $118,113, and current liabilities of $12,745. Reported liabilities include operating lease obligations; the filing does not show material conventional borrowing debt.
In February, the company raised approximately $70 million gross, or $64,877 net, through a common-stock offering. Common shares outstanding increased from 8.12 million at year-end 2020 to 16.33 million at June 30, 2021; 16.51 million were outstanding August 11. The increase includes financing and acquisition-related share issuance.
Changes, outlook and risks
- Higher revenue reflected increased direct-to-consumer sales and consolidation of the acquired businesses. Six-month pro forma revenue, assuming both acquisitions had occurred at the start of the year, was $10,298; pro forma net loss attributable to common shareholders was $39,672.
- Operating expenses rose substantially, driven in part by acquisitions, payroll and marketing, and stock-based compensation. Six-month stock-based compensation was $9,900; acquisition costs were $880. Management’s non-GAAP adjusted loss was $19,788 for six months, a non-GAAP measure that should not be treated as a substitute for GAAP results.
- Management believes available cash and financing are sufficient for obligations for at least 12 months from issuance of the statements. It expects losses to continue and says resources may be consumed faster than anticipated; additional long-term funding may be required and may not be available on acceptable terms.
- No quantitative revenue or earnings guidance is provided. Management described plans to expand B2B2C offerings and develop a full-risk health-plan business, and announced the Upright GO S launch and customer/partner developments. Execution, commercialization and revenue conversion remain uncertain.
- COVID-19 had not disrupted product supply, but some prospective B2B partner discussions slowed while interest in telehealth increased. The company could not estimate the pandemic’s financial impact and said it could be material. Other stated risks include scaling sales, regulatory clearances, partner retention, product commercialization and capital needs.
- Acquisition purchase-price allocations were preliminary and subject to a measurement period. WayForward’s consideration included a revenue-based share earn-out; Upright consideration included escrowed and holdback shares. The filing reports no material off-balance-sheet arrangements. Management reported disclosure controls effective and no material quarterly change in internal control over financial reporting.
Investor verification points
- Track organic revenue, acquired-business contributions, recurring service revenue and customer growth separately.
- Reconcile gross profit and cost of revenue: the statements present $2,661 of Q2 cost of revenue plus $1,092 of acquired-asset amortization, while MD&A reports total cost of revenue of $3,753.
- Assess cash burn against management’s 12-month liquidity estimate, and the timing and terms of any further financing.
- Monitor dilution from acquisition consideration, employee awards, preferred-stock conversion and earn-out shares.
- Review final acquisition valuations, amortization, integration costs and whether the planned commercial expansion produces sustainable margins.