DarioHealth Corp. — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2023. DarioHealth provides digital therapeutics and coaching for diabetes, hypertension, weight management, musculoskeletal and behavioral health. It is shifting from direct-to-consumer sales toward business-to-business-to-consumer (B2B2C) commercial contracts. Unless noted, financial amounts below are in U.S. dollars, millions.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3.5 | $6.6 | $16.7 | $20.8 |
| Gross profit / margin | $0.6 / 17.3% | $1.8 / 27.3% | $5.9 / 35.0% | $6.9 / 33.2% |
| Operating loss | $15.5 | $14.6 | $42.0 | $47.8 |
| Net loss | $15.7 | $15.6 | $45.1 | $49.6 |
| Net loss per common share, basic and diluted | $0.49 | $0.64 | $1.52 | $2.02 |
Q3 revenue fell 46.7% year over year, mainly because of lower strategic-partnership data access and development revenue. Nine-month revenue declined 19.7%, reflecting lower consumer hardware sales and lower strategic-partnership revenue. B2B2C revenue increased to $3.9 million for the nine months from $2.5 million; strategic-partnership revenue declined to $6.5 million from $9.1 million, and consumer revenue fell to $6.4 million from $9.3 million. The company reported $11.2 million in services revenue and $5.6 million in consumer hardware revenue for the nine months.
Q3 gross margin declined, while nine-month margin improved. Management attributed the quarterly decrease to lower services gross profit, partly offset by improved consumer-hardware gross profit; the nine-month improvement reflected the reverse mix. Excluding amortization of acquired technology, gross margin was 48.8% in Q3 and 54.6% for the nine months, versus 44.0% and 48.2%, respectively, in 2022.
Operating expenses were $16.2 million in Q3 and $47.8 million for the nine months. Nine-month R&D rose 8.0% to $16.1 million; sales and marketing fell 27.4% to $19.2 million; and general and administrative expenses fell 6.3% to $12.6 million. Nine-month net loss narrowed 8.9%, primarily with lower operating expenses, although Q3 net loss was slightly higher year over year. Net loss attributable to shareholders was $16.9 million in Q3 and $48.0 million for the nine months, including deemed dividends.
Cash flow and balance sheet. Cash and cash equivalents were $43.9 million at September 30, 2023, down from $49.4 million at December 31, 2022; cash, cash equivalents and restricted cash totaled $44.2 million. For the nine months, operating cash use was $23.0 million, compared with $39.9 million in 2022; investing cash use was $0.5 million; and financing provided $18.3 million, versus $61.7 million in 2022. Total assets were $106.5 million, stockholders’ equity $68.0 million, and accumulated deficit $333.9 million.
At quarter-end, long-term loan carrying value was $29.0 million, with no current loan balance reported. The May 2023 Avenue secured facility provides $30 million initially and up to a further $10 million at lender discretion; the interest rate is the greater of prime plus 4.5% or 12.5%. The prior OrbiMed facility was repaid in May. The balance sheet also included $0.5 million of warrant liability. Preferred-stock financing generated approximately $14.8 million net proceeds; ATM sales generated $1.6 million net proceeds during the nine months, with $48.0 million of ATM capacity remaining.
Material changes, outlook and risks
- Management said available resources should fund obligations for at least 12 months from issuance of the financial statements and removed the going-concern note. It also cautioned that the company continues to incur losses, has not established recurring revenue sufficient to cover operating costs, has a significant need for capital, and may need financing sooner than expected. No specific revenue, earnings or cash-flow guidance is provided.
- The Sanofi agreement was amended in July 2023 to adjust certain economic terms, including revenue sharing, and permit acceleration of certain development milestones. Sanofi accounted for 32.9% of nine-month revenue; a major customer represented 77.5% of accounts receivable at quarter-end. The filing identifies Sanofi and a national health plan as major customer concentrations.
- Series B preferred shares carry dividends payable in common shares, including quarterly share dividends and an additional dividend after five quarters; automatic conversion is scheduled for the 15-month anniversary, subject to ownership limits. These securities and other equity awards, warrants and stock compensation may dilute common shareholders. The company reported 27.2 million common shares outstanding at September 30 and 12.6 million potential shares excluded from diluted loss-per-share calculations as anti-dilutive.
- Management cited more than 100 signed contracts and continued enterprise-sales expansion. Announced developments included a regional health-plan launch anticipated in Q1 2024, a PlanSource agreement and, after quarter-end, a partnership with a national benefits consulting firm. The company announced a new iPhone 15-compatible glucose meter in November 2023. These are commercial developments, not quantified financial guidance.
- Risks include customer concentration, the ability to scale commercial launches and secure additional funding, and disruption from the Israel-Hamas war. The filing says Israeli employees or their family members may be called to service, potentially disrupting operations; commercial insurance does not cover war- and terrorism-related losses. It also flags volatile share trading and potential impairment of goodwill and intangible assets if the share price remains low.
- Disclosure controls and procedures were assessed as effective at a reasonable-assurance level as of September 30, 2023; no material change in internal control over financial reporting was reported during the quarter.
Investor verification priorities
- Track revenue by channel, especially B2B2C growth against declines in strategic-partnership and consumer revenue, and confirm the timing and economics of announced launches.
- Monitor cash burn, available financing, the Avenue facility’s discretionary tranche and high borrowing rate, and whether management’s stated 12-month liquidity expectation remains supportable.
- Assess Sanofi and national-health-plan concentration, receivable collection, contract performance, and any changes to the Sanofi agreement or partnership revenue.
- Review preferred-stock dividend and conversion terms, warrant and option overhang, and the resulting dilution to common shareholders.
- Check developments affecting Israeli operations and employees, and any evidence of impairment in goodwill or intangible assets.