DarioHealth Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited; financial amounts below are in U.S. dollars, thousands, unless noted. DarioHealth provides digital therapeutics for chronic conditions, with a strategy focused on business-to-business-to-consumer (B2B2C) sales through employers and health plans alongside its consumer business.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / prior period |
|---|---|---|
| Revenue | $7,066 | $8,059; down 12.3% |
| Gross profit / margin | $3,168 / 44.8% | $3,985 / 49.4% |
| Operating expenses | $15,576 | $19,857 |
| Operating loss | $12,408 | $15,872 |
| Net loss | $12,825 | $15,916 |
| Basic and diluted loss per share | $0.45 | $0.74 |
| Net cash used in operating activities | $4,757 | $18,094 |
| Cash, cash equivalents and short-term investments at March 31 | $43,093 | Cash and equivalents were $49,357 at December 31, 2022; no comparable investment balance was reported then |
Services revenue was $5,257 versus $4,984; consumer hardware revenue was $1,809 versus $3,075. Commercial revenue was $4,950 versus $4,549, while consumer revenue fell to $2,116 from $3,510. The company reported $4,856 of stock-based compensation in Q1 2023. Its non-GAAP adjusted loss was $6,342, compared with $9,861 a year earlier; this measure is not a substitute for GAAP results.
At March 31, 2023, total assets were $108,009, current assets $55,476, current liabilities $17,617, and stockholders’ equity $72,030. Loan balances totaled $25,328, including $8,583 current and $16,745 long-term. The loan is secured, bears interest at the higher of applicable adjusted SOFR or 0.50%, plus 9.50%, and includes a $10 million minimum unrestricted-cash covenant. Principal repayments began in January 2023.
Changes from the prior comparable period
- Revenue declined mainly because of lower consumer-channel sales, although commercial revenue increased.
- Gross margin fell 4.6 percentage points, which management attributed primarily to higher service-related costs.
- Operating expenses decreased 21.6%, with lower sales and marketing spending the largest contributor. Net loss improved 19.4%.
- Operating cash use declined substantially year over year. Investing cash use increased to $4,362, mainly reflecting purchases of short-term investments; financing activities used $1,389, principally for loan principal payments. The prior-year quarter included $38,023 of equity financing proceeds.
Outlook, commentary and material items
- Management said existing resources were sufficient to meet obligations for at least twelve months from issuance of the statements. It also noted continuing losses, the lack of a stable recurring revenue base sufficient to cover operating costs, a significant present need for capital, and no assurance of adequate longer-term funding. The company stated it had removed the going-concern note based on its funding outlook. No specific revenue or earnings guidance was provided.
- After quarter-end, the company raised approximately $15.4 million gross through preferred stock offerings. The preferred shares have conversion features and stock-dividend provisions that may dilute common shareholders.
- Also after quarter-end, DarioHealth closed on a $30 million initial tranche under a new secured credit facility of up to $40 million, with a possible additional $10 million tranche subject to lender approval. The new facility refinanced and replaced the prior OrbiMed credit agreement. The stated rate is the higher of prime plus 4.50% or 12.50%, with additional fees and warrants.
- Management cited more than 100 signed contracts and reported new employer-channel and Amwell partnership developments. It said the Amwell offering was expected to become available in the second half of 2023. These are company expectations, not guarantees of revenue.
- Customer concentration is material: Sanofi represented 42.2% of Q1 revenue and 44.4% of receivables; a national health plan represented 10.0% of revenue and 13.1% of receivables. The filing warns that lost or reduced business from either customer could harm results.
- Other items include $1,081 of acquired-intangible amortization in cost of revenue, $1,072 of loan interest expense, and a $97 stock-compensation charge related to accelerated vesting under an employee separation agreement. Future royalties to the Israeli Innovation Authority depend on sales; no such royalties related to the Physimax technology were recorded in the quarter.
Investor verification priorities
- Track commercial revenue growth, consumer revenue trends, and whether the reported contract pipeline converts into recurring, diversified sales.
- Assess customer concentration and the continuation, scope, and revenue contribution of the Sanofi and national health plan arrangements.
- Review cash burn, the $10 million minimum-cash covenant, loan repayment and interest terms, and the availability and conditions of the discretionary credit tranche.
- Examine the preferred-stock conversion and dividend terms, new lender warrants, and other equity awards for potential dilution.
- Monitor gross margin and service delivery costs, including the effect of acquired-intangible amortization and stock-based compensation.