DarioHealth Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unless otherwise noted, financial amounts are in U.S. dollars in thousands. The filing describes DarioHealth as a digital therapeutics company offering programs for diabetes, hypertension, weight management, musculoskeletal conditions and behavioral health, with a strategic focus on business-to-business-to-consumer sales.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $6,152 | $6,183 | $13,218 | $14,242 |
| Gross profit / margin | $2,074 / 33.7% | $1,138 / 18.4% | $5,242 / 39.7% | $5,123 / 36.0% |
| Operating expenses | $16,094 | $18,493 | $31,670 | $38,350 |
| Operating loss | $14,020 | $17,355 | $26,428 | $33,227 |
| Net loss | $16,585 | $18,028 | $29,410 | $33,944 |
| Basic and diluted loss per share | $0.58 | $0.74 | $1.03 | $1.43 |
| Net cash used in operating activities | Not separately stated | Not separately stated | $14,393 | $29,209 |
- Revenue mix: Q2 services revenue was $4,149, up from $3,265; consumer hardware revenue was $2,003, down from $2,918. Commercial revenue was $3,915 versus $2,847, while consumer revenue was $2,237 versus $3,336. For the first half, commercial revenue rose to $8,865 from $7,396, while consumer revenue fell to $4,353 from $6,846.
- Margins and costs: Management attributed improved gross margin primarily to commercial-channel revenue. Gross profit excluding acquired-intangible amortization was $3,168 (51.5% margin) in Q2 and $7,417 (56.1%) for the first half. Sales and marketing expense declined 30.5% in Q2 and 32.0% in the first half; R&D expense increased 26.2% in Q2 and 3.2% in the first half.
- Cash and balance sheet: June 30 cash and cash equivalents were $52,602, compared with $49,357 at December 31, 2022. Current assets were $65,777 and current liabilities $8,076. Stockholders’ equity was $78,404; accumulated deficit was $316,951.
- Cash flows: First-half investing cash use was $183 and financing cash provided was $18,049, resulting in a $3,473 increase in cash, cash equivalents and restricted cash. Operating cash use decreased from the prior-year period, which the company attributed mainly to lower operating expenses.
- Debt and financing: In May, the company refinanced its prior facility with a four-year secured Avenue facility: $30,000 funded initially and up to $10,000 potentially available at lender discretion. The June 30 loan carrying/fair value was $29,094. Interest is the greater of 12.5% or prime plus 4.5%, with additional fees and a prepayment premium. The company also raised approximately $15,400 gross (about $14,807 net) through preferred-stock sales. It received $1,410 net from ATM common-stock sales during the first half.
- Non-GAAP measures: Management reported EBITDA loss of $12,801 for Q2 and $23,999 for the first half; non-GAAP adjusted loss was $7,509 and $13,851, respectively. These are company-defined non-GAAP measures and are not substitutes for GAAP results.
Changes versus comparable periods
- Revenue declined 0.5% in Q2 and 7.2% in the first half, reflecting the planned reduction in the consumer channel; commercial revenue growth partly offset the decline.
- Gross margin improved in both periods, while operating expenses and GAAP net losses declined year over year.
- Financial expenses increased to $2,565 in Q2 and $2,982 for the first half, from $672 and $716, respectively. The increase reflected refinancing-related costs, interest and debt and warrant remeasurement. First-half loan remeasurement expense was $3,456; warrant remeasurement reduced expense by $246.
- First-half financing cash provided was lower than in 2022, when the company raised substantial proceeds from common stock and pre-funded warrants.
Outlook, risks and notable items
- Outlook and liquidity: Management said available resources should cover obligations for at least 12 months from issuance of the statements. The company also reported continuing operating losses, no stable recurring revenue source sufficient to cover costs, and a significant need for capital for longer-term development and commercialization. It cautioned that cash could be consumed faster than anticipated and that additional funding may not be available on acceptable terms. No quantified revenue or earnings guidance is provided.
- Customer concentration: Sanofi accounted for 37.8% of Q2 revenue and 40.2% of first-half revenue; the largest customer represented 68.8% of receivables at June 30. A national health plan represented 4.1% of Q2 and 7.3% of first-half revenue. The filing identifies dependence on major customers and the risk that agreements or assigned projects may not continue.
- Sanofi agreement: A July 2023 amended agreement adjusted certain revenue-share economics and allowed acceleration of development milestones. The multi-year agreement is described as potentially providing up to $30 million, subject to contingencies. The terms were amended after the reporting date.
- Potential dilution: Preferred shares are convertible into common stock, with automatic conversion on the 15-month anniversary subject to ownership limits. Holders are entitled to share-based dividends, including quarterly amounts and a higher fifth-quarter amount. The company recorded deemed dividends of $1,691 in Q2 and $1,691 for the first half; these increased loss attributable to shareholders beyond GAAP net loss.
- Other risks and contingencies: Management cites risks involving commercial execution, capital availability, customer retention, regulatory clearances, product launches, intellectual property and key partners. The company has conditional royalty obligations to the Israeli Innovation Authority—generally 3% of applicable product sales and related revenue, up to 100% of grants received. Management reported no material changes to previously disclosed risk factors other than customer concentration.
- Unusual items: The company issued preferred stock, refinanced debt, and recorded significant stock-based compensation of $10,148 for the first half. It reported that disclosure controls were effective at a reasonable-assurance level and that no material changes in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether commercial revenue growth can offset continued contraction in consumer revenue and support improving operating performance.
- Sanofi’s continuing contribution to revenue and receivables, and the economics and milestone terms of the amended agreement.
- Cash burn relative to the $52,602 cash balance, the conditions for any additional $10,000 Avenue tranche, and future capital needs.
- The effective cost and covenants of the secured debt, including fees, prepayment terms and the potential impact of lender warrants.
- The conversion, dividend and ownership-limit terms of the preferred stock and their potential dilution to common shareholders.