DarioHealth Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited financial amounts below are in U.S. dollars, thousands, unless noted.
Business context and reporting period
DarioHealth develops digital therapeutics for chronic conditions, including diabetes, hypertension, weight management, musculoskeletal health and behavioral health. The company is shifting from direct-to-consumer sales toward enterprise and business-to-business-to-consumer arrangements. Its platform expansion includes the Upright and WayForward acquisitions and the March 2022 Physimax technology acquisition.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $6,183 | $5,261 | $14,242 | $8,856 |
| Gross profit / margin | $1,138 / 18.4% | $1,508 / 28.7% | $5,123 / 36.0% | $2,589 / 29.2% |
| Operating loss | $17,355 | $18,003 | $33,227 | $32,330 |
| Net loss | $18,028 | $17,765 | $33,944 | $32,731 |
| Basic and diluted loss per share | $0.74 | $0.99 | $1.43 | $1.85 |
- Commercial revenue grew to $2,847 in Q2 from $129 and to $7,396 for the first half from $182. Consumer revenue declined to $3,336 in Q2 from $5,132 and to $6,846 for the first half from $8,674.
- Q2 total cost of revenue, including acquired-intangible amortization, was $5,045; first-half total cost was $9,119. Management cited shipping costs and acquired-technology amortization. Excluding acquired-intangible amortization, reported gross margins were 36.1% for Q2 and 50.2% for the first half.
- First-half operating cash use was $29,209, versus $22,838 in 2021. Investing cash use was $340, versus $7,593; financing provided $61,675, versus $65,766.
- Cash and cash equivalents were $67,949 at June 30, 2022, compared with $35,808 at December 31, 2021. Current assets were $82,444 and current liabilities $12,986.
- In February, the company raised approximately $40 million gross ($38,023 net) through common stock and pre-funded warrants. In June, it closed the first $25 million tranche of an up-to-$50 million, five-year secured credit facility; cash borrowing proceeds were reported as $23,786. The balance sheet reports the loan at fair value of $23,061. The facility bears interest at the higher of adjusted SOFR or 0.50%, plus 9.50%, and requires at least $10 million of unrestricted cash.
Material changes versus the prior comparable period
- Revenue increased 18% in Q2 and 61% in the first half, driven by commercial-channel growth. However, Q2 gross margin declined year over year, while first-half gross margin improved.
- First-half research and development expense rose 57% to $10,064, attributed mainly to expanding product development. Sales and marketing expense rose 12% to $18,832; general and administrative expense fell 20% to $9,454, mainly reflecting lower share-based compensation.
- First-half net loss widened 3.7% to $33,944. Operating cash use increased 27.9% year over year.
- Common shares outstanding increased from 16.57 million at year-end 2021 to 22.86 million at June 30, 2022, reflecting financing and other share issuances.
Outlook, commentary, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management stated that cash resources were expected to meet obligations for at least 12 months from issuance of the financial statements; its MD&A also said resources were expected to support activities through 2023, assuming commercial sales begin on anticipated timelines. Management cautioned that additional funding may be needed for longer-term development and commercialization.
- The OrbiMed facility is secured by substantially all company and guarantor assets, includes restrictive covenants and fees, and may require monthly principal repayment if revenue thresholds are not met. A further $25 million draw is conditional on revenue requirements.
- Customer concentration is material: Sanofi accounted for 32% of Q2 revenue and 42% of first-half revenue; the major customer represented 63.7% of receivables at June 30. The five-year Sanofi agreement provides for up to $30 million in aggregate consideration, including contingent milestones. The company recognized $1,975 under its first-year development plan in Q2 and expected a further $2,025 by year-end 2022.
- After quarter-end, the company amended the WayForward earn-out threshold from $5 million to $3 million of product revenue. The earn-out liability was $1,764 at June 30; the filing reports a $939 first-half remeasurement expense.
- Management cited risks including dependence on commercial launches and customer relationships, ongoing losses and cash burn, potential dilution or difficulty raising capital, regulatory approvals, manufacturing and market acceptance. It reported disclosure controls effective at quarter-end and no material change in internal control over financial reporting.
- Contingencies include potential Israeli Innovation Authority royalties of 3% of applicable product sales and related revenue, capped at 100% of grants received; payments depend on sales. The filing does not quantify a material litigation contingency.
Key facts investors should verify
- Whether commercial enrollment and launch timing for new employer, provider and health-plan contracts translate into recurring revenue and improve margins.
- Sanofi contract performance, customer concentration and collection of the concentrated receivables balance.
- Cash runway under actual operating cash burn, the $10 million minimum-cash covenant, and the revenue conditions and costs attached to any additional credit-facility draw.
- Potential dilution from further equity financing, outstanding pre-funded warrants and other potentially dilutive securities; the filing excluded 7.2 million potential shares from diluted loss per share as anti-dilutive.
- The effects of the WayForward earn-out amendment and the valuation of Level 3 debt, warrant and earn-out liabilities, which rely on significant unobservable inputs.