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DRIO: Upright Acquisition Expands Offering

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By John Vandermosten, CFA

NASDAQ:DRIO

Upright Technologies Acquisition Funded with $70 Million Financing

DarioHealth Corp. (NASDAQ:DRIO) announced its acquisition of Upright Technologies in a January 27th press release, which was followed by an analyst call discussing the transaction in further detail. In conjunction with the largely share based acquisition, Dario is raising $70 million in a private placement to support continued growth initiatives.

With the addition of Upright Technologies’ Upright Go posture corrector device, both existing and prospective end users may benefit. The offering will allow Dario to target a broader set of providers, employers and health plans that desire a musculoskeletal (MSK) solution for their beneficiaries and augment the existing portfolio of chronic disease digital therapeutics. It complements the existing set of offerings as back pain, diabetes and hypertension which are all chronic disorders that mostly affect the same age group of patients and commonly co-exist.

Exhibit I – Association of MSK With Other Chronic Conditions (1)

Upright Technologies is a leader in the MSK space with over 90,000 users on its platform and almost $13 million in revenues in 2020. The company has been historically focused on the consumer market with almost all of its current members falling into this category. Upright’s device is a small, approximately 2” long by 1” wide sensor that adheres to the patient’s back. When the user slouches, the device sends a signal that can modify behavior to improve posture. Users can also purchase accessories such as a lanyard and adhesive patches to hold the unit in place. An application is available to download on the user’s phone and a coaching service and membership are available.

Exhibit II – Upright Go 2 Attached to Patient (2)

Deal Details

Dario is paying $31 million in consideration to acquire Upright Technologies. $1.5 million is denominated in cash and was prepaid to guarantee the deal and $29.5 million will be tendered in ~1.7 million equity shares when the deal is finalized. The transaction is expected to close on February 1, 2021.

Upright is complementary to Dario’s current offerings in diabetes, hypertension and obesity. The acquisition adds to the products that Dario can offer employers and health plans, who have indicated a desire for MSK solutions. It expands Dario’s offering into the MSK market that is estimated at $213 billion (3) annually. Upright has conducted many studies at San Francisco University, Texas Tech University and Oregon Health and Science University demonstrating the benefits of postural intervention and related positive health outcomes. We see a number of synergies from this combination that can leverage existing sales infrastructure, coaching, management and other operational shared services. Dario reported high margins in excess of 60% for Upright and see a path to exceeding 70% in a few years.

Looking Forward

Upright is largely focused on the US consumer market, but is a solution recommended by physicians at more than 500 clinics around the globe for use pre- and post-surgery. Dario plans to expand the offering into the business to business to consumer (B2B2C) market using its existing sales force infrastructure which should reduce acquisition cost and increase overall per member per month (PMPM) revenues. The acquisition helps Dario achieve several of its key objectives by expanding into multiple chronic conditions and achieve its goal to realize holistic and integrated AI-driven personalized medicine.

Fourth Quarter Update

Along with the announcement, Dario also provided details on fourth quarter 2020 revenues and average subscribers. Revenues of $2.12 million are up 18% over the prior year and slightly behind our estimates. Backing out of the rough numbers given as pro forma subscribers of the combined company suggests a slight increase in both average subscribers for Dario and a small rise in PMPM amounts. Following third quarter results, Dario announced two Fortune 500 employee plan wins and new remote patient monitoring (RPM) contracts which are expected to produce revenues in the near term. Dario was able to win these contracts in head to head competition with Livongo and Omada Health. The company also announced a pipeline in excess of $500 million, increasing across all segments of business.

Capital Raise

Along with the merger, Dario announced a $70 million capital raise with proceeds to be used for general corporate purposes. 3,278,688 shares of common stock were sold at $21.35 per share. Investors in the deal include Nantahala Capital Management, LLC Perceptive Advisors, Driehaus Capital Management, Farallon Capital Management, Pura Vida Investments, Phoenix Insurance Ltd., More Provident Funds, and others. Cowen served as financial and capital markets advisor to Dario for the acquisition transaction and private placement. Cowen, Stifel and SternAegis Ventures served as placement agents for the financing. Combined with amounts on the balance sheet, cash is expected to be over $90 million following the anticipated deal close on February 1.

Noteworthy MSK Players

Exhibit III - Upright Technology Peers (4)

Summary

DarioHealth is making bold moves to execute on its priorities to transform into a software as a service (SaaS) business, expand the platform into multiple chronic conditions and evolve from a direct to consumer (D2C) to a B2B2C model. The acquisition of Upright makes progress on the latter two objectives by providing a broader product set for companies and health plans and by leveraging the existing B2B2C sales force. We see the acquisition price as very favorable at $31 million compared to the near $300 million valuation of Dario (5) especially in light of Upright’s higher level of revenues in 2020. Given the very low penetration into the MSK market and the reach of Dario’s sales force, we anticipate greater growth opportunities from the MSK offering as compared to existing products. The MSK contribution is expected to increase the attractiveness of Dario relative to other competitors in the field when responding to requests for proposals (RFPs), including Livongo and Omada. Dario’s updated fourth quarter data indicates that the growth trajectory continued into the end of 2020 and a full pipeline suggests this trend will accelerate in 2021. With the capital raise, Dario’s balance sheet is strong with an estimated 2+ years of cash available to grow the company and layer on this new exciting offering.

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1. Source: Dario Corporate Presentation sourcing underlying data derived from Duffield, S. et al. The contribution of musculoskeletal disorders in multimorbidity: Implications for practice and policy. November 2017Bailliè re s Best Practice and Research in Clinical Rheumatology 31(2) DOI: 10.1016/j.berh.2017.09.004

2. Source: Upright Technologies Webpage. UPRIGHT GO 2™ Posture Corrector | Results in 2 weeks | Upright Pose – Upright Tech

3. According to a 2016 report by the United States Bone and Joint Initiative (USBJI). This amount represents treatment, care and lost wages

4. Compiled by Zacks Analyst Research

5. We assume 12.5 million shares outstanding recognizing as converted shares of the preferred stock in addition to equity shares outstanding.