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DRIO: Several New Partnerships to Drive Growth

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By John Vandermosten, CFA



Third Quarter 2020 Operational and Financial Results

On November 12, 2020 DarioHealth Corp. (NASDAQ:DRIO) reported third quarter earnings and filed its companion 10-Q. The company also held an investor conference call summarizing achievements during the reporting period and to date. Dario reported third quarter revenues of $2.0 million, about 2% ahead of our estimate. Net loss lagged our forecasts with reported loss per share of ($1.02) as compared to our ($0.84) due to higher costs across the board. Activity during the third quarter and period to date was punctuated by multiple agreements including those with Williams Medical, HMC HealthWorks and multiple patient monitoring arrangements. Dario was also included on Vitality Group’s gateway, providing preferred access to 20 million members. The company also participated in poster presentation highlighting the impact of digital health on diabetes and hypertension control. Other items of note included 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. Another important event that positively impacted valuation metrics in the industry was the $18.5 billion merger of Livongo (LVGO) and Teladoc (TDOC) which was announced on August 5 and closed on October 30.

Dario announced the pursuit of several large opportunities in the third quarter that are anticipated to close and launch in the near term. On the conference call, management pointed to continued strength in the remote patient monitoring (RPM) effort, growth in the marketing team and continued demand from insurers, employers and providers.

Revenues of $2.042 million were divided between $1.556 million in products and $486,000 in services. Total revenues were up 9% over 3Q:19 and up 14% vs. 2Q:20. Using the alternative revenue breakdown, consumer products were $1.257 million and membership services were $785,000 in the third quarter. Gross margin was 26.9%, declining over prior year levels due to increased promotions. Management maintains its long term target of ~70% gross margins. Operational expenses were higher than expected across the board totaling $7.2 million compared to our estimate of $5.7 million. Higher costs were attributable to new hires for the sales and marketing team, increased digital marketing expenses, greater stock-based compensation, payroll, consulting and investor relations expense. Net loss for the period was ($6.6) million or ($1.02) per share based on 7.3 million average shares outstanding.

Cash and marketable securities balance was $36.9 million as of September 30, 2020. No debt is carried on the balance sheet. Cash burn for 3Q:20 was approximately ($3.8) million, only about half of net loss, predominantly due to the issuance of stock based compensation. Cash received from financing was $27.5 million related to the common stock, warrant and warrant exercises that took place in the third quarter. As of November 10, 2020, investors in the Class A preferred stock have redeemed 5,552 shares of the initial 21,375 shares sold in 4Q:19. This will reduce our future share count slightly as, once converted, the shares no longer pay a stock dividend.

Significant Events

Since July 2020, we have seen a material transformation in Dario and the digital therapeutics space. Dario was able to raise $28.6 million in cash from a private placement that will support the transition from B2C to B2B2C. Valuations and perceived value in the space have also increased as a result of the now consummated merger between Teladoc and Livongo Health.

In its July 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. Based on our estimates, the funds will be sufficient to advance the commercialization effort for the next two years. This capital removes a significant risk for the fledgling company and provides certainty that the sales team can continue to grow revenues and innovate as they pursue health plans. The near $38 million now on the balance sheet also reduces dilution risk, which is often an issue when a short of cash balance sheet mixes with share price volatility.

On August 5th, Teladoc (NYSE: TDOC) announced an $18.5 billion bid for Livongo, which has only been public for about a year. The now closed merger matched 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 low which also suggests that this merger will not hinder Dario’s efforts. We discussed deal details 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. During the 3Q:20 conference call, management noted continued interest in RPM and the company’s focus on making it a key differentiator in the company’s product offering.

Association of Diabetes Care Poster Presentation

DarioHealth presented a poster at the Association of Diabetes Care and Education Specialists 2020 virtual conference in mid-August. The poster, entitled "Impact of Digital Management on Clinical Outcome in Patients with Chronic Conditions: Diabetes and Hypertension," provides a summary of a 345-subject study that examined the impact of the Dario digital therapeutics platform on diabetic and hypertensive populations.

The analysis showed that of patients that started the program with hypertension stage 1, 2 or crisis levels, 70% improved their systolic and diastolic blood pressure by an average of 8.4 mmHg and 6.2 mmHg respectively. The group also reduced the number of high readings (down by 33%) and a reduction in severe events by 67% after six months of the program. A subset of the diabetic population of 114 subjects that had blood glucose above 160 mg/dL improved their blood glucose levels by 14% compared to baseline.

HMC HealthWorks Partnership

DarioHealth and HMC HealthWorks announced a sales and distribution partnership in September. HMC will incorporate DarioHealth’s digital therapeutics (DTx) platform into its comprehensive care management programs and offer DarioHealth’s platform as a stand-alone option.

HMC HealthWorks is a healthcare management company that provides administrative and care management to smaller plans such as Taft-Hartley union plans. They provide chronic care management, behavioral health and wellness services to client plans. The group covers approximately one million lives and is in a space that other competitors such as Livongo have not yet actively pursued. The arrangement between Dario and HMC will offer Dario’s full suite of services, including diabetes care, blood pressure management and coaching as well as other services as they become available.

The deal with HMC supports our thesis of rapidly growing expansion into the health plan market with is expected to offer higher PMPM and lower acquisition costs, providing both topline and margin leverage. While Dario’s sales are predominantly in the US, we see global opportunity as the platform proves itself and we expect other regions to be added when there is a reasonable assumption that they can be developed. Please see our initiation for additional details on our investment thesis, valuation approach and the DTx space.


DarioHealth has progressed as expected, growing revenues a sequential 14% and accumulating several new deals in the pipeline. Dario’s shift to focus on large health plans with higher per user revenues and lower acquisition costs is a recipe for fast growing topline and increasing margins. We anticipate additional deal closings similar to those with Vitality and HMC which suggest accelerating revenues and improving profitability in coming quarters. We are optimistic that Dario can exceed our revenue projections if the pending deals are quickly closed and members are enrolled at a reasonable pace. Expansion into other chronic diseases such as hypertension and obesity provide a longer and wider runway for future expansion.

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1. Based on Teladoc’s accounting and closing price the night before the announcement.