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Second Quarter 2020 Operational and Financial Results
On August 12, 2020 DarioHealth Corp. (NASDAQ:DRIO) reported second quarter earnings and filed its companion 10-Q. The company also held an investor conference call providing detail on achievements during the reporting period and to date. Dario reported second quarter revenues of $1.8 million, beating our estimate of $1.7 million. Earnings exceeded our forecasts by an even greater degree with reported loss per share of ($1.16) as compared to our ($1.54) due to lower expenses across the board. Activity during the second quarter and period to date was focused on implementing remote patient monitoring agreements, communicating company strategy to stakeholders with a key opinion leader event, participating in scientific conferences and raising sufficient capital to implement the company’s commercialization strategy over the next few years. The most meaningful catalyst for stock performance since our initiation a month ago was the $18.5 billion bid for Livongo (LVGO) by Teladoc (TDOC).
Dario announced the imminent completion of a deal with what we believe to be a large health plan in the next few weeks. The company’s new commercialization team has been diligently generating new prospects and we anticipate that several new agreements will be executed in the second half of 2020. On the conference call, CEO Erez Raphael reiterated the three pillars of the company’s transformation to a profitable enterprise. Shifting to a software as a service (SaaS) model, expanding the platform into multiple chronic conditions and a moving towards a business to business to consumer (B2B2C) service model.
Revenues of $1.787 million represented $1.305 million in product sales and $482,000 in service sales. Examined from a different perspective, consumer products were $1.069 million and membership services were $718,000 in the second quarter. Sequential total revenue growth was 7% and year over year increase was 8%. Gross margin was 35.6%, up on a year over year basis, but down sequentially due to devices that were sold through the business to business channel. Management believes that the decline in gross margin is only temporary and can ultimately reach ~70%. Operational expenses were lower than expected across the board totaling $4.8 million compared to our estimate of $5.9 million. Lower costs related to research and development payroll, digital marketing expense and stock based compensation contributed to the trend. Net loss for the period was ($4.8) million or ($1.16) per share based on 4.1 million average shares outstanding.
Cash and marketable securities balance was $13.4 million as of June 30, 2020. Following the end of the reporting period, Dario raised additional funds, bringing the total to a pro forma ~$38 million. No debt is carried on the balance sheet. Cash burn for 2Q:20 was approximately ($2.7) million, only 55% of net loss; no cash from financing was recognized in the second quarter.
Since Our Initiation
Since our initiation, we have seen two material events take place for Dario and the industry. The first was the raise of $28.6 million in cash from a private placement and the second was the announcement of a merger between Teladoc and Livongo Health.
In its recent fundraising, Dario was able to tap resources from its largest existing shareholder, Nantahala Capital Management and new investors including Manchester Management Company and Soleus Capital Management. The deal also included leading Israeli institutional investors such as Phoenix insurance, Mor provident fund, Psagot investment house. The quality of the investors is high and Dario management anticipates that these will be long-term shareholders that will support the company as they advance through their growth trajectory.
On August 5th, Teladoc announced an $18.5 billion bid1 for Livongo which has only been public for about a year. Assuming the deal is completed, the combination will match two of the largest players in digital therapeutics and telemedicine. There is only a small degree of overlap between the two companies, so we do not anticipate an increase in the competitive environment. Penetration for the industry is very low which also suggests that this merger will not hinder Dario’s efforts. We discussed the deal in a note published on August 6th. With M&A in the air, Dario becomes a potential target for acquirers that could include health plans, managed care, hospital systems or even technology players desiring exposure to this rapidly expanding space.
DarioHealth announced an RPM deal where it will make a remote monitoring platform available to healthcare professionals in the UK and Ireland through an agreement with Williams Medical. Not only does this deal provide additional revenue from an emerging growth area but it also expands Dario’s reach into the British Isles.
Following the successful financing announced on July 20, investors’ risk perception of DarioHealth declined and a shortly after, an M&A comparison revalued the industry. Second quarter results were also ahead of expectations for revenues, earnings and cash burn and at least two large deals are imminent for Dario, increasing optimism over the company’s trajectory. Since our initiation, shares have more than doubled, reflecting the market’s revaluation of the company. While we are slow to change our views after conducting the comprehensive analysis presented in our initiation, we also recognize the multiple positive events that have taken place and update our valuation to reflect the improvements. We substantially raise our valuation to $14 per share.
We initiated on DarioHealth just a month ago recognizing the company’s exposure to one of the fastest growing areas of the economy. Dario’s recent shift to focus on large health plans and thereby raise its revenue per user and lower acquisition costs is a recipe for fast growing revenues and increasing margins. The company is on the cusp of closing several new agreements in the near term which suggest accelerating revenues and improving profitability in the latter part of the year and in 2021. We are optimistic that Dario can exceed our revenue projections if the pending deals are quickly closed and members enrolled at a reasonable pace. Expansion into other chronic diseases such as hypertension and obesity provide a longer and wider runway for future expansion. We raise our target price for DarioHealth to $14.00 based on the company’s better than expected quarter, accumulation of sufficient cash for several years, imminent large deal closures and industry revaluation based on M&A comparisons.
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1. Based on Teladoc’s accounting and closing price the night before the announcement.