DarioHealth Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparative periods are the corresponding 2021 periods. Unless noted otherwise, financial figures are U.S. dollars in thousands. The filing describes DarioHealth as a digital therapeutics company expanding from direct-to-consumer offerings into enterprise and multi-condition solutions.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $6,605 | $5,629 | $20,847 | $14,485 |
| Gross profit (margin) | $1,800 (27.3%) | $826 (14.7%) | $6,923 (33.2%) | $3,415 (23.6%) |
| Operating loss | $14,573 | $22,499 | $47,800 | $54,829 |
| Net loss | $15,632 | $22,444 | $49,576 | $55,175 |
| Net loss attributable to shareholders | $16,126 | $22,932 | $50,954 | $56,695 |
| Basic and diluted loss per share | $0.64 | $1.18 | $2.03 | $2.98 |
- Q3 revenue increased 17%; nine-month revenue increased 44%. Management attributed growth mainly to the B2B channel. Commercial revenue was $4,195 in Q3 and $11,591 for nine months, compared with $309 and $491, respectively, in 2021. Consumer revenue declined to $2,410 and $9,256 from $5,320 and $13,994.
- Q3 gross margin improved to 27.3% from 14.7%; nine-month margin improved to 33.2% from 23.6%. Excluding acquired-technology amortization and inventory step-up, management reported gross margins of 44% and 48.2% for Q3 and nine months, respectively; these are non-GAAP-style supplemental figures.
- Operating expenses totaled $16,373 in Q3, down from $23,325, and $54,723 for nine months, down from $58,244. Nine-month R&D increased 24.9% to $14,867; sales and marketing declined 3.9% to $26,403; G&A declined 28.7% to $13,453. Management cited lower marketing spend and lower stock-based compensation as factors in expense reductions.
- Non-GAAP adjusted loss was $8,416 in Q3 versus $11,908, and $29,490 for nine months versus $31,696. The measure excludes specified items, including stock-based compensation; it is not a substitute for GAAP results.
Cash flow, liquidity and debt
- At September 30, 2022, cash and cash equivalents were $57,081, current assets $71,582, current liabilities $11,524, and stockholders’ equity $88,946. Cash was $35,808 at December 31, 2021. The company reported an accumulated deficit of $272,968.
- For the first nine months, operating cash use was $39,904, versus $35,273 in 2021; investing cash use was $514, versus $7,690; financing provided $61,675, versus $65,766. Cash, cash equivalents and restricted cash increased by $21,257 to $57,205.
- In June 2022, DarioHealth entered a five-year senior secured credit facility of up to $50 million. It drew the initial $25 million tranche; the balance sheet reported a $24,046 long-term loan fair value, and cash proceeds from borrowings were $23,786. A further tranche of up to $25 million may be available by June 30, 2023, subject to revenue requirements. Interest is at the higher of adjusted SOFR or 0.50%, plus 9.50%.
- The loan is secured by substantially all company and guarantor assets, includes a $10 million minimum unrestricted-cash requirement and restrictive covenants, and may require repayment with premiums and fees if revenue thresholds are not met. Management said available resources were expected to meet obligations for at least 12 months, while also warning that additional capital may be needed for longer-term development and commercialization.
Material developments, outlook and risks
- DarioHealth is building a multi-condition platform spanning diabetes, hypertension, pre-diabetes/weight management, musculoskeletal and behavioral health. It cited acquisitions of Upright and WayForward and the 2022 Physimax technology acquisition as part of this expansion.
- A February 2022 five-year exclusive preferred-partner agreement provides for up to $30 million in aggregate consideration, including upfront, development and contingent milestone payments. The filing says $1,370 of Q3 revenue was recognized under the first-year development plan, with another $655 expected by year-end; variable milestone amounts were excluded from transaction price because recognition was not considered sufficiently certain.
- An August 2022 health-plan statement of work provides $2,650 of fixed consideration; $1,778 had been recognized by September 30, with $872 expected by June 2023. The separate October 2021 health-plan arrangement had generated no revenue by September 30 because usage had not occurred.
- Management reported two employer contracts announced in September and additional employer selections announced in October 2022, with launches expected in late 2022 and the first quarter of 2023. These are forward-looking plans, not reported revenue.
- The company continued to incur operating losses and negative operating cash flows and expects losses for the foreseeable future. Its liquidity outlook depends on commercial launches, sales targets and cash use; management cautioned that funding may be needed sooner than expected and could be unavailable on acceptable terms. Equity financing could dilute existing holders.
- Customer concentration is material: the filing identifies Sanofi and a national health plan as major customers and warns revenue could fall if either relationship or project activity diminishes. It also reports $945 of nine-month earn-out remeasurement expense and $13,898 of stock-based compensation.
- The filing reports effective disclosure controls as of September 30, 2022 and no material changes to internal control over financial reporting during the quarter. It reports no material changes to previously disclosed risk factors except the customer-concentration discussion.
Important facts for investors to verify
- Customer concentration figures: different parts of the filing give inconsistent accounts-receivable and revenue percentages for major customers. Reconcile the detailed financial-statement note with the risk-factor disclosure.
- Whether the anticipated employer launches and health-plan project work commenced on schedule, and how much revenue was actually realized from these arrangements.
- Cash consumption, the timing and conditions for any delayed-draw loan tranche, compliance with the $10 million minimum-cash covenant, and the facility’s revenue-based repayment provisions.
- Progress toward recurring B2B revenue and whether gross-margin improvements persist as the business scales; reported results remain loss-making and operating cash use increased.
- Potential dilution from outstanding pre-funded warrants, options, restricted stock and lender warrants. The company had 23,291,008 common shares outstanding at September 30, 2022 and 23,296,754 as of November 11, 2022.