DarioHealth (DRIO)

It was mentioned on another thread but thought DarioHealth (NASDAQ: DRIO) could be of interest to some members of this board, given LVGO has been widely discussed.
Like LVGO, DRIO makes a diabetes monitor and associated coaching app to provide nudges. Unlike LVGO, DRIO’s hardware plugs into an iPhone. Whereas LVGO is a standalone unit. The key difference is that LVGO has to pay the ongoing cost of cellular connectivity for their unit, whereas DRIO piggy-backs off the user’s mobile data-plan. LVGO COGS are 30% of sales, and probably one-third of that (10% of sales) relates to the cost of the finger strips they regularly send to members. The cellular connectivity is the second biggest cost. So DRIO claim they have a structural cost advantage vs LVGO – this could be up to 10% gross margin advantage at scale, enabling DRIO to charge only 2/3 of the cost of LVGO. Both offerings include unlimited finger strips.
2 other key differences. 1) currently, DRIO coaching is more automated with less call-centres. So it is a “cheaper, but less white-glove” option. Guess they could try to increase the call centres if that turns out to be the wrong strategy (although would need more capital). They do have some call centres currently (unclear, but given size these must be small?). They have a premium service which involves more coaching.
2) DRIO is committed to open platform. So users can share their account with doctors/others for remote monitoring between checkups. LVGO is a closed platform.
Last few years, DRIO has been selling their reader direct to consumers. They have 50k consumers, in US, Europe and Australia. Seems revenues are very US focused. $7.5m in 2019 revenues was via this channel. They sold the hardware via Amazon and you downloaded the app from the App store. So these consumers have gone out of their way to buy the product out of pocket. They have 4.9/5 reviews on the app store and people seem to like the product. Launched in 2016 and did $2.8m revs in that year.
As of late 2019, DRIO has seemingly had a strategic reset. They did a capital raise in December 2019. And another in July. In Jan 2020 they appointed a new management team from Catasys. Catasys has contracts with 7 of the 8 biggest US insurers. Note Catasys has a somewhat shady past as mentioned on another post. It seems that the mgmt. brought over to DRIO left Catasys and they are not the founder. So I wonder if they became unhappy/disenchanted with the dodgy Catasys CEO. Catasys is basically a glorified telesales company whereas DRIO have a real product and technical expertise.
The new DRIO President has relationships with all the big US insurers and healthcare companies. On 6 July DRIO appointed Dennis Matheis to the DRIO board. Matheis is president of Optima Health, a health plan with 850k members. He is former President of Anthem Blue Cross and Blue Shield, the largest health insurer in US. They also have Allen Kamer of United Health on the board. Notably VC fund Sequoia is invested in DRIO and the Chairman of the Board is a Sequoia guy.
As of December 2019, DRIO signed a distribution agreement with Walmart. Walmart is currently extremely focused on battling CVS for share in US pharmacy market. CVS is the key partner of LVGO.
They are also now distributing the product in the same was as LVGO ie marketing to the insurers and corporates direct. Last few months they have signed 3 important contracts. One with Vitality (health insurer) and 2 with self-insurer planners (these are the key customers which LVGO targets, so it is an apples-to-apples comparison with LVGO). As of Q1 they had 15k users through this segment, they say these contracts give them access to a pool of 240k user once they roll out. No revenue from the 3 big contracts has yet been recognized. They claim they are in discussions with other leads which could contribute a further 480k users. For context, as at Q1 2020 LVGO has 328k users.
The pitch vs LVGO is “better product, cheaper price, fairer billing”. LVGO charges companies for “active” members, everyone is set as “active” by default until they opt out. DRIO makes people inactive if they stop engaging with the platform.
Gross margin increased from 25% to 48% in Q1 2020 as they switched to subscription model. Used to be just one-off hardware sales. They say subscription margins are >70% (so higher than LVGO)
On Q1 call DRIO mentioned that H2 2020 they expect to see material revenue increases from the new contracts.
DRIO has job posting online for a US corporate sales force. They have 3 mgmt guys from Catsys and say they brought across some of the sales force. These guys have spent last few years taking the insurers out for steak dinners etc, so they should have good relationships.
Important to note that following the Jan and July capital raises, you should look at the fully diluted share count for DRIO (some data platforms only show the simple share count). At $15/share the fully diluted market cap is c$185m. They have c.$44m cash on the BS (pro forma for capital raise). So an enterprise value of $140m.
As mentioned the company has had a complete strategic reset, so historical numbers are not very helpful. But for completeness, they did $7.6m revenues in 2019 so currently at c19x historic revenues. That is a big discount to LVGO – rightly so, because DRIO is a small company, risky, and has yet to demonstrate their strategy works. Obviously if DRIO can sign up some of those 480k users they claim to be able to access via their new contracts, revenue can increase quickly.
Another way to think about it would be to look at the EV divided by total users. They have 65k total users, and 15k corporate users (ie sold through the same channel as LVGO). That gives an EV multiple of c2x total users, or 9x corporate users. LVGO is currently trading at an EV multiple of over 40x their last disclosed corporate users.
DRIO is very early stages and they are competing against a monster competitor. But given several industry veterans have recently joined the company, and several institutional investors have recently backed their strategy, it seems at least those guys think they could have a chance. Remote medicine is a huge space (as LVGO has proved), so if these guys can even take a bit of that pie, DRIO could be worth a lot more than the current $140m EV.
Interested to hear thoughts of those of you who have been following DRIO or LVGO. Thanks!
Link to announcement of most recent capital raise: https://dariohealth.investorroom.com/2020-07-31-DarioHealth-…

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Interested to hear thoughts of those of you who have been following DRIO or LVGO. Thanks!

Following Livongo, not DarioHealth.

Ask yourself why Teladoc bought Livongo with a market CAP of $12 billion when they could have bought DarioHealth with a market CAP of just $58 million (Yahoo data). What’s the difference in business models?

Last few years, DRIO has been selling their reader direct to consumers…

They sold the hardware via Amazon and you downloaded the app from the App store. So these consumers have gone out of their way to buy the product out of pocket.

Livongo sells to the institutions that are the healthcare payors, not to patients, a.k.a. members. This creates a multiplying factor that selling direct to patients does not have. DarioHealth uses a traditional retail approach while Livongo uses a wholesale approach. When it comes to AI, volume matters. While they are seemingly in the same business the two companies are not comparable.

Denny Schlesinger

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Thanks for your reply.
I tried to make it clear in my post that the business models in the past are indeed different, as you note in the quotes you included. This is why LVGO is a $14bn EV company and DRIO is only $140m!

But I also mentioned that DRIO has changed their approach since December 2019. Please reread the post to check and you will see this is the entire reason why DRIO is (potentially) interesting. They have hired a salesforce who have existing relationships with healthcare payors. They have added guys from the big health insurers to the Board. During H1 2020 they have 2 new contracts with self-insurer planners. Going forward, they are trying to sell their product in exactly the same way as LVGO. If they are successful they could benefit from the multiplying factor you mention. That is why they have 15k users under the “LVGO approach” but access to a pool of 460k more. Those 15k users were only added in H1 2020.

Post was not meant to criticise LVGO. Only to point out that DRIO have realised their “direct” sales strategy was wrong. They have now hired lots of legitimate people and have pivoted to the LVGO strategy. Of course they are now late to the party, and they are much smaller than LVGO (only 15k healthcare payor users vs 328k). So they may indeed fail, making this a risky investment. But given the pie is so large, if they manage to sign up a few extra clients, the company can be worth more that $140m.

Ask yourself why the guys from United Health and Anthem Blue Cross & Blue Shield have joined the DRIO board, if not help them sell to institutions directly.

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But I also mentioned that DRIO has changed their approach since December 2019. Please reread the post to check and you will see this is the entire reason why DRIO is (potentially) interesting.

The reason I didn’t get that far is that my attention span broke over so many details.

I had the good fortune to get some advice from the Sports Editor of the Caracas Journal to improve my sailing articles. He said that one should

1.- tell them what you are going to tell them
2.- tell them
3.- tell them what you told them
4.- include some human interest

If your intention was to highlight “their approach since December 2019” that’s the lead-in to your story.

Post was not meant to criticise LVGO. Only to point out that DRIO have realised their “direct” sales strategy was wrong.

That’s the body of your story!

You could have reinforced the story with a chart or two.

https://softwaretimes.com/pics/drio-08-11-2020.gif

What’s that big new spike?

https://softwaretimes.com/pics/drio-08-11-2020-1.gif

Ask yourself why the guys from United Health and Anthem Blue Cross & Blue Shield have joined the DRIO board, if not help them sell to institutions directly.

The new board members are the close of your story.


OK, you convinced me, I’ll have another look! LOL

Denny Schlesinger

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Guess I need to work on my prose style…

I guess to summarise. LVGO have nailed their distribution, capturing the multiplier effect which in turn provides network effects to the AI etc. To do that you need to build good relationships with the insurers/healthcare payors/self-insurer planners. LVGO pays c10% of sales as commission fees to channel partners, which they report in their SG&A line. That is money well spent because it makes those people recommend your product and you can build lots of users quickly.

My comparisons of DRIO to LVGO were not intended as criticism. DRIO so far has executed terribly. Just trying to suggest that DRIO has quite a similar product, and it might be slightly better in some areas (margin advantage because it plugs into phone, open network). Being slightly better is useless unless you nail distribution. DRIO has realised this and started copying LVGO, hiring all these distribution guys with industry experience and relationship.

IF (and its a big IF), DRIO can succeed in their new strategy, then it is possible they could acquire quite a few users and achieve a more LVGO-like growth trajectory. They seem to have all the pieces in the puzzle in place now. Only thing holding them bag is being a tiny player. That is of course a disadvantage, but given the market is growing so rapidly, they could still get a small piece of the pie and their valuation metrics are very undemanding relative to LVGO.

To answer your question on the spike: that is the reaction to capital raise I linked in original post, it was announced on 31 July.

Important text from that announcement is pasted below. You will see they state their are changing their distribution model and going direct to health-payors.

"Capital from this financing combined with existing balance sheet cash positions the company in its best financial state since its founding. It is expected that these resources will be used to fund Dario’s long term strategic operating plan, as it expands its focus from the direct-to-consumer channel to what it believes is the larger, more lucrative business-to-business-to-consumer channel, which is characterized by lower customer acquisition costs, higher margins and recurring revenues. In that regard, the primary use of proceeds will be to further fund the build out of the company’s commercial infrastructure to assist it in securing contracts with health plans, self-insured employers and providers and to penetrate their vast member, employee and patient populations.

The company’s largest existing shareholder, Nantahala Capital Management, LLC (on behalf of client funds and accounts), was joined by new investors including funds managed by Manchester Management Company LLC, Soleus Capital Management L.P. as well as leading Israeli institutional investors such as Phoenix insurance, Mor provident fund, Psagot investment house."

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Drio is a penny stock and it had negative growth last quarter. This is more of a story stock and anyone that is looking to invest in it should really look it over closely. Not anything I would invest in and is probably OT for this board.

Andy

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Drio is a penny stock and it had negative growth last quarter. This is more of a story stock and anyone that is looking to invest in it should really look it over closely. Not anything I would invest in and is probably OT for this board.

Andy

Penny stock? Today’s closing price was $14.70 and the 52 week low is $3.02.
Its 2020 Q2 revenue grew 8.2% from 2019 Q2, and 7.2% from 2020 Q1.

Am I missing something?

–SB
(no position in DarioHealth)

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Penny stock?..

Am I missing something?

From the SEC:

Penny Stock Rules

The term “penny stock” generally refers to a security issued by a very small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.); penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can include the securities of certain private companies with no active trading market.

Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Moreover, because it may be difficult to find quotations for certain penny stocks, they may be difficult, or even impossible, to accurately price. For these, and other reasons, penny stocks are generally considered speculative investments. Consequently, investors in penny stocks should be prepared for the possibility that they may lose their whole investment (or an amount in excess of their investment if they purchased penny stocks on margin).

Because of the speculative nature of penny stocks, Congress prohibited broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules thereunder. These SEC rules provide, among other things, that a broker-dealer must (1) approve the customer for the specific penny stock transaction and receive from the customer a written agreement to the transaction; (2) furnish the customer a disclosure document describing the risks of investing in penny stocks; (3) disclose to the customer the current market quotation, if any, for the penny stock; and (4) disclose to the customer the amount of compensation the firm and its broker will receive for the trade. In addition, after executing the sale, a broker-dealer must send to its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

For more information, read the penny stock rules section of our Broker-Dealer Registration Guide. You may also want to review the penny stock rules (Exchange Act Section 15(h) and Exchange Act Rules 3a51-1 and 15g-1 through 15g-100).

Before you consider investing in the stock of any small company, be sure to read our brochure, Microcap Stock: A Guide for Investors.

https://www.sec.gov/fast-answers/answerspennyhtm.html

Denny Schlesinger

It sounds like this stock might be OT given its small size, so this will be my last post on the subject.

But just to clear up some confusion from comments above. As I have tried to explain in my post, the business model is being completely changed, so it is important to read the filings closely.

GAAP revenues grew 7.2% yoy in the last quarter (Q2 2020).

If you include deferred revenues (when they receive cash up-front for a yearly subscription), revenues grew 83%. A company like AYX for example, would recognise this deferred revenue in their topline - DRIO is conservative.

Gross profit grew 95% yoy - as the business starts to transition to a subscription model.

These growth numbers are inline with some of the other stocks discussed on this board.

*** apologies, one last post with a correction to my last. GAAP revenues grew 7.2% qoq, the yoy is 8.2% as a poster correctly mentioned above.

And gross profit, including the deferred revenues, if we assume those deferred revenues achieved a 70% gross margin (inline with mgmt guidance), would have grown 368%.

But just to clear up some confusion from comments above. As I have tried to explain in my post, the business model is being completely changed, so it is important to read the filings closely.

Since they are effectively starting anew, revenue growth rates are currently meaningless – apples to aardvarks. :wink:

We need to wait and see how the new business pans out. Why would Fortune 500 type customers prefer a tiny startup to Livongo? I’ve put it on my watch list but that’s it for now.

Denny Schlesinger

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SBphil,

Penny stock? Today’s closing price was $14.70 and the 52 week low is $3.02.

Thanks for the correction. I am not sure what I was looking at to make me say it was negative growth.

I have it’s 52 week low at $.20. and its high at $18.83

A price of a stock really means nothing. You can have a marketcap of 10 dollars and only have one share. DRIO, like you said grew 8.2%. That still makes it OT for this board. The growth is way to slow. It has a market cap of 68.24 M, most of our companies make that or more in one quarter. It’s average volume is 229,000 shares. So, yes it’s a penny stock. Why? Would anyone invest in a company like this? Go invest in a company like Ulta if you want a company that is growing that slow, it would be a lot more surer bet. A lot of people want to find the next company that will make them millionaires but you are not going to get it from something growing that slow. I could understand bringing something like this to the board that is growing at 100 percent but not 8.2%. I really have no interest in checking into it because there are so many other stocks to look at.

That was a good catch SB, thanks.

Andy

And gross profit, including the deferred revenues, if we assume those deferred revenues achieved a 70% gross margin (inline with mgmt guidance), would have grown 368%.

Hi Exfortisd,
Instead of giving information out piece meal it is best to write up a stock and give out all the information you have on a stock. A single cognizant post would be much better. It is very helpful if you post information on the financial numbers so that people have something to judge and why you think they might accelerate if they are not growing that fast. Keep working at it and you will get better.

Andy

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Re DarioHealth: A company growing 8% yoy doesn’t belong on our board. Bring it back if it becomes a high growth stock. Thanks.
Saul

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Thank you, Andy.

I have it’s 52 week low at $.20. and its high at $18.83

A price of a stock really means nothing. You can have a marketcap of 10 dollars and only have one share. DRIO, like you said grew 8.2%. That still makes it OT for this board. The growth is way to slow. It has a market cap of 68.24 M, most of our companies make that or more in one quarter. It’s average volume is 229,000 shares. So, yes it’s a penny stock. Why? Would anyone invest in a company like this?

Definitely agree that one should be cognizant of the risks involved in owning shares of a small company that trades thinly. The information from SEC that Denny S. posted also makes that point. Even if a company has been trading above $5 for some time, there are other dangers as you’ve both indicated. In addition, I have seen three vastly disparate figures for its market cap. Could be because warrants, convertible preferred shares, whatever aren’t being properly accounted for; I don’t know. As you suggested, with plenty of other stocks to choose from, DRIO doesn’t seem worth investigating.

–SB

Thanks for the comments everyone. I encourage anyone interested to read the entire thread - you will see I did write a single, detailed post. I covered the point on market cap in that post - you are correct there are some convertibles in the cap structure, so need to be careful with some data providers showing incorrect numbers.
The piecemeal follow-up was to update on their Q2 results which were not released at time of original post.
In the Q2s, gross profit grew 95%. And revenues including deferred revenues grew 83%. When AYX makes a sale for a contract they recognise all the revenue up front. DRIO does not, it recognises them over the life of the contract and carries deferred revenues until that point. Deferred revenues represent cash already received so they are real revenues. So we should include them in growth calculation to enable apples-to-apples growth comparison with other enterprise SaaS stocks.
Either way, I totally agree the point on the risk around investing in small companies, so this will be my last post on DRIO. If they are successful we could revisit in a year or two, if market cap increases and with a longer track record on the growth side.

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When AYX makes a sale for a contract they recognise all the revenue up front. DRIO does not, it recognises them over the life of the contract and carries deferred revenues until that point.

There are a couple of errors in that statement, but suffice it to say that when a company recognizes revenue of a longer term contract is determined by the nature of that contract and accounting standards, not company whim.

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