DarioHealth Corp. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated financial statements; dollar amounts below are in millions unless noted. DarioHealth develops digital therapeutics and connected health products, focused on diabetes and expanding into hypertension and other chronic conditions.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1.787 | $1.651 | $3.454 | $3.893 |
| Gross profit / margin | $0.636 / 35.6% | $0.326 / 19.7% | $1.415 / 41.0% | $0.884 / 22.7% |
| Operating expenses | $4.759 | $5.688 | $15.652 | $11.609 |
| Operating loss | $(4.123) | $(5.362) | $(14.237) | $(10.725) |
| Net loss | $(4.006) | $(5.382) | $(13.898) | $(10.758) |
| Net loss attributable to common stockholders, including deemed dividends | $(4.792) | $(5.382) | $(15.959) | $(10.758) |
Basic and diluted loss per common share was $0.68 for Q2 2020 versus $2.50 in Q2 2019, and $2.33 for the six months versus $5.43. Q2 revenue rose 8.2%, attributed mainly to higher direct-to-consumer revenue; six-month revenue fell 11.3%, mainly due to weaker first-quarter direct-to-consumer sales. Management attributed improved gross profit and margin primarily to increased membership revenue mix and lower product sales.
At June 30, cash and cash equivalents were $13.182, down from $20.395 at December 31, 2019. Operating cash use was $7.184 for the first half, versus $9.491 a year earlier; investing cash use was $0.043, and there was no financing cash inflow in the period. Total assets were $17.207 and stockholders’ equity was $12.226. Current liabilities were $4.662; operating lease liabilities totaled $0.606. The filing reports no off-balance-sheet arrangements and does not identify conventional borrowings.
Changes, financing, and unusual items
- First-half general and administrative expense rose to $6.897 from $2.677, principally because stock-based compensation increased to $4.963 from $1.047. Total first-half stock-based compensation was $7.178, compared with $1.310.
- Sales and marketing expense declined, reflecting reduced digital marketing. Research and development expense was slightly higher for the first half.
- Deemed dividends of $2.061 for the first half arose from preferred-stock dividend terms and a warrant exchange; these increased the loss attributable to common stockholders but not reported net loss.
- On July 28 and 30, 2020, the company agreed to sell common stock and pre-funded warrants for approximately $28.591 gross proceeds, or $26.470 net of issuance expenses. Management said cash on hand plus these proceeds should fund obligations for at least 12 months from issuance of the interim statements, but said long-term funding needs remain uncertain. The company removed its going-concern note following the financing.
- Common shares outstanding were 4,099,091 at June 30; the cover reports 7,353,037 outstanding as of August 7, 2020. Preferred-stock conversions and the subsequent offering add to potential dilution.
Outlook, commentary, and risks
The company provided no quantified revenue or earnings guidance. Management expects losses to continue and states that recurring revenue is not yet sufficient to cover operating costs. It identifies continuing needs for capital to develop and commercialize products, pursue regulatory clearances where needed, expand manufacturing, and fund sales, marketing, and working capital. Additional financing may not be available on acceptable terms.
COVID-19 had not disrupted product supply or sales, according to management, but it slowed negotiations with some prospective business-to-business partners; other prospective partners showed increased interest in telehealth. The company could not estimate the pandemic’s financial impact and said it could be material. It also noted potential workforce, manufacturing, and operating disruptions. Other key execution risks include commercial adoption, market penetration, partner relationships, regulatory approvals, and product development.
Important facts for investors to verify
- Confirm the terms, final net proceeds, and dilution from the July 2020 stock and pre-funded warrant offering, and reconcile the August 7 share count with subsequent conversions and warrant activity.
- Assess cash burn and financing runway against management’s 12-month liquidity statement, given ongoing losses and the absence of first-half financing cash flow.
- Verify the sustainability and composition of revenue growth and gross-margin improvement, including the relative contribution of products, membership services, and business-to-business contracts.
- Review the impact of preferred-stock dividend and conversion provisions, warrant exchanges, and stock-based compensation on future dilution and reported results.
- Reconcile restricted deposits: the balance sheet reports $0.177 of short-term restricted bank deposits at June 30, while the cash-flow note reports $0.126.