DarioHealth Corp. Q1 FY2020 Earnings Call

Good morning, ladies and gentlemen. And welcome to DarioHealth First Quarter 2020 Financial Results Conference Call. As a reminder, today’s conference call is being recorded. At this time, I would now like to turn the conference over to David Holmes of LifeSci Advisors. You may begin.

Thank you, operator, good morning everyone. Thank you for joining us today for a discussion of DarioHealth’s first quarter 2020 financial results. Leading the call today will be Erez Raphael, President and Chief Executive Officer of DarioHealth. He will be joined by Zvi Ben-David, Chief Financial Officer and Rick Anderson, General Manager of North America of DarioHealth. After prepared remarks, we will open the call for Q&A. An audio recording and webcast replay for today's conference call will also be available online in the investor section of the Company's website. For the benefit of those who may be listening to the replay or archived webcasts, this call is being held and recorded on May 12, 2020. This morning, we issued a press release announcing our financial results for the first quarter 2020. A copy of the release can be found in the investor relations page of the Company's website. Actual events or results may differ materially from those projected as a result of changing market trends, reduced demand, and the competitive nature of DarioHealth’s industry. Such forward-looking statements and their implications involve known and unknown risks, uncertainties, and other factors that may cause actual results or performance to differ materially from those projected. The forward-looking statements discussed on this call are subject to other risks, uncertainties, including those discussed in the risk factors section and elsewhere in the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2020 to be filed with the Securities and Exchange Commission. Additional information concerning factors that could cause results to differ materially from the forward-looking statements are described in greater detail in the Company's press release issued today and in the Company's filings with the SEC. In addition, certain non-GAAP financial measures may be discussed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results, and evaluate the Company's current performance. Management believes the presentation of these non-GAAP financial measures is useful for investors understanding and assessing the Company's ongoing core operations and prospects for the future. A reconciliation of these non-GAAP measures to the most recent comparable GAAP measures is included in today's press release. And with that, I'd like to introduce Erez Raphael, CEO of DarioHealth. Mr. Raphael?

Thank you, David. Good morning everyone and thanks for joining our call today. Also joining me today, Zvi Ben-David, our Chief Financial Officer and Rick Anderson, the President and General Manager of North America. The four pillars that guided Dario's ongoing transformation which we emphasized in previous calls and I’d like to reiterate them today, is this the way that we are measuring the progress that is related to our multi-year Strategic Plan. Pillar number one is the company’s ongoing transformation to a software as a service model that generates higher margins and recurring revenue for the company. Pillar number two is the evolution from direct-to-consumer into business-to-business-to-consumer which is something that lowers our cost of acquisition as well as creating scale and accelerating our goals. Pillar number three is the expansion of our offering from a single chronic condition that was originally diabetes into multi-chronic conditions and everything is under product excellence where we strive to create the best performing product in the market. The last pillar, the fourth pillar, is the positioning of DarioHealth as the market leader in the digital therapeutic space that according to Business Insider is projected to be a $9 billion market by 2025. I’d like to start with the first pillar. So, as you’ve heard in previous calls, we started the confirmation on selling a standalone medical device into a full membership program that integrates software, hardware, and service already towards the end of 2019. The membership program includes the ability to help users not just have the medical device but also get digital intervention driven by our analytics AI that helps them improve outcomes. The overall objective was to increase user engagement to improve the outcomes of the users and for the company to improve the gross margins and also increase average revenue that is generated per member per month. We have already seen an indication that success in the software as a service model is improving and is reflected in the financial portfolio of the company especially on the gross margin part. While the revenues for the first quarter of 2020 were $1.67 million, a slight decrease from the previous quarter, both gross margins and overall gross profit were significantly higher relative to the previous year. Gross profit increased from 24.9% in the first quarter of 2019 to 46.7% in the first quarter of 2020. This reflects an overall 87% improvement in our gross margins. The gross profit in the first quarter of 2020 was $779,000, an increase of $221,000 or 39.6% compared to a gross profit of $558,000 reported in Q1, 2019. This trend of improving margins is expected to continue in the next few years, with the overall goal to be above 70% margins as we move forward. The total operating expenses for the first quarter of 2020 were $11.2 million compared to $5.9 million in the first quarter of 2019. The increase in operating expenses is mainly due to the rise in one-time stock-based compensation to Directors, employees, and service providers. Operating expenses excluding the equity-based compensation for the first quarter of 2020 were $4.6 million, compared to $5.7 million in the first quarter of 2019. This represents a reduction of $1.1 million, or an overall reduction of 19% compared to Q1, 2019. The reduction in total operating expenses reflects the reduced spending in direct-to-consumer and the transformation budget into B2B2C, so some of the reduction was offset by this increased investment into building the B2B team in the U.S. So overall, we already see evidence that the transformation into the software as a service model is impacting our financial profile especially the gross margins and the reduction in user acquisition. I would like to move from here to the second pillar, which is the transformation of the business from the direct-to-consumer into B2B2C channels. Here, despite the fact that B2B2C might have a long sales cycle, we see a few significant benefits for this overall strategy. Number one is that through this kind of business-to-business-to-consumer model, we have the ability to access a broader patient population which is something that can accelerate the growth intensively. The cost per acquisition for users is reducing now, once we are approaching this strategy. Also, by selling our premium membership product, we generate higher revenue per member per month compared to what we are currently doing in the direct-to-consumer model. I’d like to deep dive into the unit economics of the few membership programs that we have, so you can understand the revenue potential that we can generate in the next few quarters. If we are looking at how the company was operating towards the end of 2019, we were selling a device on a disposal basis and on average we were generating between $5 to $7 per member per month. As we move into the membership program still under the direct-to-consumer model, we are generating $25 on average per member per month on our standard membership program. Once we evolve into the business-to-business-to-consumer and sell our membership program, the price point here is between $60 to $70 per member per month depending on the number of conditions that the specific user is getting on the platform. If we simulate a new 10,000 users that will join the platform under premium membership on the business-to-business-to-consumer channel, we are generating revenue of approximately $8 million for every 10,000 users on a yearly basis. This is a significant improvement for our top line as we continue our transformation and execute on our B2B2C strategy. I’d like to move from here to a few updates on some of the initiatives that we are doing on the B2B2C side. The overall goal is to have access to broader pools of users and to reduce the cost per acquisition. As a reminder, this is not something that we started today; we began this effort in mid-last year, and today we can update that we’ve made progress here on the different channels under which we are operating. To remind you, we are operating on the employers’ channel, the retailers’ channel, the healthcare providers’ channel, as well as the insurers’ channel. Since we started in mid-2019, we have signed a few significant agreements with partners, and some of them have already been announced. I'm going to talk about one of them shortly. We also have a few significant contracts that are under negotiation and we feel that in some cases, COVID-19 is pushing them forward. We are also seeing a significant increase in our pipeline. Therefore, we think that already this year, we can expect results of this transformation into B2B2C translating into concrete increased sales. I want to talk about one of the agreements that we signed and announced earlier this year in March. This is a substantial example of the progress that we're making in the self-insured employer market. I'm referring to the agreement that we signed with Vitality Group. This is a partnership with a company that is selling wellness programs. Vitality is part of a large insurer called Discovery Health that has over 16 million insurers. Through Vitality, we have access to hundreds of employers in the States. Together we are marketing our overall offering on the disease management side. So we have Vitality as a strategic partner that also has an equity interest in our company, and we have them as a motivated organization to provide us immediate access to their network of employers that we would otherwise have to approach one-by-one. This is an example of a deal that provides concrete evidence that our strategy of transforming our go-to-market strategy from direct-to-consumer into B2B2C is bearing fruit for us. We are confident that we will see it translate into increased revenue later this year. Other than that, I would like to discuss the health plans channel, as we believe this is one of the major channels for the company. We strongly believe that this will be our largest growth engine in the next five years. We are focused on making our solution appealing to health plans so that we can help them with their most expensive patients and assist them in reducing overall costs. We know we have the right solution. We also proved with over 50,000 users and more than 10 different clinical papers submitted to various entities that users operating on our platform are improving outcomes in ways that we can demonstrate with concrete savings. We understand how to do this effectively which we believe insurers require. A key success factor in our strategy is having a best-in-class management team that understands these channels very well and has the experience and relationships to execute effectively. We have made significant progress on executing our strategic objectives. In January, we appointed Rick Anderson as the President of the company as well as the General Manager for North America. Rick brings with him extensive experience, including over 10 years at Catasys, where he cultivated and scaled the business generating tens of millions of dollars in recurring revenue. Most recently, we announced that B Stark joined the company as the SVP and Head of Managed Markets. He also has extensive experience with the health plans market, our major channel. In addition, we announced that Dr. Omar Manejwala joined as Chief Medical Officer. Dr. Omar will lead our clinical delivery, as well as support our product offering and sales team. Dr. Omar has extensive experience working with health plans and payers, specializing in delivering value-added clinical programs and understanding the intersection between chronic conditions and behavioral health. We are thrilled to have Rick and Omar on our team. As we start to translate the progress in the two pillars I just mentioned into specific economics, we anticipate ongoing improvements in our margins, and we are confident that we will see the results of signing all these agreements translate into better top-line performance as we move forward into the second half of this year. You will also see a positive impact on our P&L. With that, I would like to hand over the call to Rick to discuss more about the marketing initiatives and our evolving product offerings. Rick?

Thank you, Erez. I am excited to report today on the continued progress we have made on our commercial front. However, before I go through each of the channels, or as we sometimes refer to them, the markets, I would like to review Dario’s competitive advantages that we believe will facilitate meaningful penetration in several of our target markets. To be a successful digital health company, you must have four strong factors: one strong clinical data, two good technology that is quickly adaptable and configurable, three a deep understanding of how the healthcare system works and who the players are, and lastly, the ability to engage people in the solution. Many digital health companies do not achieve their goals because they lack one or more of these key ingredients. Dario has strong clinical data across multiple studies and a large number of users. Dario is a software company at its core, with a best-in-class application built on a flexible open platform allowing us to pivot quickly to new opportunities. Dario has a team that understands the healthcare market, and most importantly, Dario has strong consumer engagement demonstrated by high user satisfaction scores of 4.9 out of 5 on the Apple App Store, a net promoter score of 77, and over 50,000 active users on the platform. Nothing signifies consumer engagement like people paying out of their pocket for a solution each month. Dario checks all the boxes, and our solution is very cost-effective to deliver. This enables us to compete in markets where others cannot and allows us to provide a significantly better product at a lower cost in the employer and health plan markets. We are very pleased with the progress that we have made over the last quarter despite the fact that some of these channels have long sales cycles, and we are still in the first phase of the transition to the B2B model. I will expand on our four market segments and highlight how Dario has made significant headway in the first quarter to position ourselves for growth in the second half of the year. First, I want to briefly discuss the impact that recent events have had on the digital therapeutic space. Overall, we have seen an impact of COVID-19 on our opportunity pipeline. In some cases, we've seen delays in decisions and projects; however, in others, including some employers and the remote patient monitoring market, we have noted an acceleration of interest. On the whole, we have significantly grown our pipeline across all channels in the first quarter. On a more macro level, the recent pandemic has highlighted several inadequacies in antiquated features of our current healthcare system, which has been slow to modernize with the rest of our now digital society. The challenges created by the pandemic are dramatically speeding up the adoption curve for digital health solutions, such as telehealth, remote patient monitoring, and digital therapeutics, as providers and patients seek to provide care remotely and reduce risks for both the patient and the payer. We believe that the trend towards more acceptance and utilization of digital health will continue even after the pandemic, as people have experienced its advantages. Now for the market segments: First on retail, we have continued to expand through our relationships established in 2019 with Best Buy and Wal-Mart. We believe we have built a foundation to see an increase in our business through these partners in 2020. Additionally, we are on the verge of entering a significant opportunity that leverages our membership model in the retail space and could yield substantial growth moving forward. One of the most significant changes made this quarter was in our approach to providers, health systems, and provider groups. We pivoted away from trying to convince providers to distribute our solution or have their patients acquire Dario through retail channels. Given the flexibility of our open platform, efficient cost structure, and high engagement, we evolved our product into a remote patient monitoring offering, allowing providers to monitor their patients remotely between visits. With the new remote patient monitoring codes available starting in January for Medicare, we can offer providers improved clinical care while increasing their revenue from their existing patient population. As a result, we began pursuing larger provider practices and consolidators like chronic management companies or CCMs, who offer services to numerous providers. We believe our solution is a natural fit for these existing businesses. Our RPM solution has grown even more relevant during the pandemic and we have seen increasing interest as a result. We are pleased to report that we have signed our first two RPM contracts with others currently under negotiation. One of the channels we are most excited about is the self-insured employers. We have significantly increased our activity and traction with employers directly and through benefit brokers in the first quarter. We are currently in the traditional benefits sales window for self-insured employers. While many of those opportunities we are in competition for will be implemented in 2021, we are also pursuing several that may provide revenue in the second half of 2020, including one that is currently in late-stage discussions. As previously mentioned by Erez, we recently entered into an agreement with the Vitality Group, which is a health and wellness platform providing integrated solutions for employers. We are now co-marketing the Dario Solution to employers on their platform, representing a significant opportunity for us in the second half of 2020. Health Plans represent one of our largest and most complex opportunities. With the recent additions to our team, we now have a group of seasoned healthcare executives with a proven track record in this market. We have spent the first quarter diligently positioning Dario to aggressively pursue health plans, and we are now launching those efforts. Although the health plan market involves a lengthy sales cycle, we are already witnessing interest and late-stage discussions with a plan potentially closing as early as the second quarter. An essential highlight is Dario’s open platform, which allows for data sharing and integration with health plan resources. The capacity to integrate seamlessly into existing systems and workflows with minimal disruption is often crucial, especially in increasingly complex healthcare environments. We anticipate that health plans will grow to be one of our most significant channels in the medium and long term. Interestingly, beyond the four identified market segments we typically discuss, we have also seen interest from several parties regarding partnerships that would utilize our platform for solution integration. We believe this creates the potential for high-margin revenue opportunities, and we look forward to discussing these more with you in the future. Our continued success across all market segments greatly relies on our ability to engage and help members manage multiple chronic conditions. Initially, our focus was diabetes, as it presented the most significant opportunity to impact healthcare outcomes and costs. Since then, we have broadened our offering; with the addition of hypertension and integrating a blood pressure monitor already late last year. Recently, we announced expansions into telehealth and behavioral health coaching addressing issues like stress, anxiety, and loneliness. The behavioral health coaching is particularly relevant at present, as many of our members are experiencing stress and loneliness due to the COVID-19 pandemic, exacerbated by factors such as unemployment, financial strain, bereavement, and general fear surrounding the crisis. Considering the established connection between mental health and chronic disease outcomes, we are convinced that these changes will lead to better, more comprehensive care for Dario members, improving their overall experience. The implementation of full-service telemedicine on our platform has been achieved through our recent partnership with MediOrbis. This partnership supports our SaaS-based business model and provides our members access to physicians across various medical specialties, including primary care and chronic disease management. With these recent product additions, we are now equipped to offer an almost entirely remote solution to our members, creating a compelling value proposition under the current stay-at-home orders. Even as restrictions lift, at-risk populations like those we serve will continue to require careful management. We expect this comprehensive remote solution will hold significant value across all our markets. I will now turn it over to Zvi to discuss our financial results.

Thank you, Rick. I will now provide a brief overview of our financials. Additional details on our results can be found in our Form 10-Q filed yesterday evening. Revenues for the first quarter ended March 31, 2020, were $1.67 million, a 7.3% sequential decrease from the fourth quarter ended December 31, 2019, and a 25.6% decrease from $2.24 million in the first quarter ended March 31, 2019. Revenues generated during the first quarter ended March 31, 2020, primarily came from the sales of DarioHealth's components and the offering of our membership plans to customers in the U.S. Revenue declines are attributed to lower spending in the direct-to-consumer channel while we are shifting efforts towards the larger B2B2C channels, which we anticipate will drive growth later this year. At the end of the first quarter, we had accumulated deferred revenues of $1.27 million, the majority of which we expect to recognize during the remainder of this year. Revenues from membership services were $778,000, or 46.7% of revenues for the first quarter ended March 31, 2020, compared to $608,000, or 27.1% of revenues for the first quarter ended March 31, 2019. This increase in revenues from membership services contributed to the increase in our margins. Gross profit in the first quarter ended March 31, 2020, was $779,000, an increase of $221,000, or 39.6% compared to gross profit of $558,000 in the first quarter ended March 31, 2019. Our gross profit increased from 24.9% in the first quarter ended March 31, 2019, to 46.7% in the first quarter ended March 31, 2020. This increase is mainly due to the rise in revenues generated from our membership plans. Total operating expenses for the first quarter ended March 31, 2020, were $10.9 million, an increase of $5 million, or 84% compared to $5.9 million for the first quarter ended March 31, 2019. The increase in operating expenses is primarily due to the increase in equity-based compensation to directors, employees, and service providers to $6.3 million in the first quarter ended March 31, 2020, compared to $243,000 in the first quarter ended March 31, 2019. Non-GAAP operating expenses, excluding equity-based compensation for the first quarter ended March 31, 2020, were $5.6 million, compared with non-GAAP operating expenses, excluding equity-based compensation of $5.7 million in the first quarter ended March 31, 2019, reflecting a reduction of $1.1 million. This reduction was mainly due to decreased digital marketing activity in the direct-to-consumer channel. The operating loss for the first quarter ended March 31, 2020, was $10.1 million, an increase of $4.7 million, or 89% compared to the $5.4 million operating loss in the first quarter ended March 31, 2019. This rise was mainly driven by an increase in stock-based compensation, partially offset by the enhancements in our gross margin. The net loss attributable to common shareholders was $11.1 million, or $1.57 per share in the first quarter ended March 31, 2020 compared to a net loss of $5.4 million, or $2.92 per share, in the first quarter ended March 31, 2019. We had cash and cash equivalents totaling $15.8 million at March 31, 2020. Now, back to you, Erez.

Thank you, Zvi. In summary, it's a very exciting time for DarioHealth as we keep executing on our multi-year Strategic Plan. We believe we are creating substantial value for our shareholders. A few key takeaways from today's earnings call: First, in the space of digital therapeutics, we see it growing. We believe DarioHealth has the right technology to disrupt the healthcare market as part of this field. Business Insider anticipates that this market will expand to a $9 billion market by 2025. We are well-positioned to be one of the leaders in this market. Furthermore, we note that COVID-19 is catalyzing the transformation into digital solutions in both the medium and long-term. Our product excellence is supported by over 50,000 users on the platform. We possess clinical data demonstrating improved health outcomes. As we evolve through our transformation, we project improved margins that will exceed 70%. Lastly, we believe the ongoing transformation to B2B2C is crucial for scaling our business. We have a best-in-class management team that has successfully executed similar models in the past, which increases our likelihood of success. From a capital raise perspective, we completed a raise in December, so our financial position is solid to continue our transformation. With that, I would like to open the call for questions. Operator?

Thank you. The floor is now open for questions. Our first question comes from Alex Nowak with Craig-Hallum. Please go ahead.

Great. Good morning, everyone. Rick, you joined about four months ago. And in that time, we've seen some nice B2B wins and also the addition of behavioral health. If you step back, what have you uncovered in the last four months? And with the Dario platform, what do you believe still needs to be modified to position the business for B2B success?

Thanks for that question. I think that from what I'm seeing, I was actually more pleased than I thought walking through the door regarding the platform's flexibility. The pivot to remote patient monitoring was a good example of that technology's capability. We need to continue evolving the B2B product, which is already underway and will be completed in time for some of the upcoming deals. We must keep doing the marketing and promoting our name. Dario is only started gaining traction right before I joined, and it takes time to get the name out there and let people understand what Dario is capable of.

That's great. Can you point to anything that worked well at Catasys that you are trying to implement at Dario?

I think there are many things that could translate well. They all really boil down to understanding the health plan market. One of the key elements is that a company like Dario, or any company, finding how hard it is to get a health plan or employer to change their practices. Therefore, being flexible and fitting within the health plan's operations is crucial. Understanding the complexities of the system is essential for successfully positioning the product. We also have competition in the marketplace that aids us; being a fast follower can allow us to position ourselves against weaknesses in existing products.

The pivot to behavioral health fits with the Catasys background, but it represents a substantial shift from Dario’s diabetes platform. Why do you think this pivot makes sense, and what additional investments does Dario need to make in this market?

To clarify our approach, we understand that behavioral health and chronic condition management are intertwined. Addressing behavioral health is necessary for chronic condition success. We're integrating behavioral health into all modules of our service. Rather than building a standalone behavioral health module, we will focus on coaching for stress, anxiety, and loneliness in a repurposed manner, especially given the current environment. Behavioral health will be a core part of our overall product offering.

A major concern among investors is the names Dario is partnering with or those in the pipeline. Can we expect press releases featuring actual organizations you're working with for transparency regarding the quantity and quality of these partners? Will you also provide some sort of standardized 'lives under contract' metric for future earnings calls?

Rick, can you please address that?

Certainly. We will endeavor to announce our partners as we can. I understand that many partners wish to maintain control over their announcements. However, we believe we will be able to disclose notable partnerships as they develop. In terms of metrics, we are actively evaluating what metrics will provide clarity on our business progress as we transition from a standing start to growth over the rest of the year.

You've mentioned ongoing direct-to-consumer business. What have been the dynamics around diabetes equipment purchases via Amazon or retail channels recently?

You're right; we still maintain a strong direct-to-consumer business and have a robust membership side. We've observed users encountering challenges paying out of pocket during the crisis; however, we also saw a growing demand as a result of a reduction in user acquisition costs, spotlighting the importance of our solutions for those at higher risk for COVID-19, such as individuals with diabetes and hypertension. Overall, it's a balanced scenario for us.

I have a clean-up question regarding the large increase in stock-based compensation in the G&A line. Can you provide context on what led to this rise?

Certainly. This increase largely stems from expanding our team and advisory team members, enhancing our efforts to elevate the company to the next stage. We made strategic hires to ensure our team, Board of Directors, and service providers are incentivized for success. This adjustment is expected to be a one-time cost.

Approximately how long do you expect the current cash balance to last?

As updated in our financial reports, we believe our cash should last through September 2021. We raised significant capital in December with a solid group of supportive investors, which promotes a sense of community among our stakeholders as we move towards the next growth stage.

Thank you.

Thanks, Alex.

And our next question comes from Ben Haynor with Alliance Global Partners. Please go ahead.

Good morning, gentlemen. Thanks for taking my questions. When employers are working with Vitality to design benefits plans, how many other options do they have that could be deemed digital health or potentially competitive to Dario?

Vitality certainly has a couple of options that could be perceived as competitive. We see it as advantageous to be evaluated side-by-side with those options. We consider that a win if we are being assessed directly against competitors, as it underscores the market's recognition of our offering.

So, are you gaining insight into how often you win versus competition through the Vitality program or do you lack that kind of visibility?

It's a bit early to provide those statistics. We are currently in the sales window for these opportunities, so it’s too soon to comment on our win rates or metrics.

Essentially, employers are evaluating their options now with the intent to enroll later this year, resulting in revenue becoming apparent, likely starting in 2021?

Yes, we expect to see revenue in the latter half of 2020. However, implementation for many of the contracts we are pursuing will occur in January 2021. Additionally, we will see some revenue this year from contracts we are currently negotiating.

Finally, where will your efforts be concentrated moving forward? Could you break down your focus between health plans, employers, and RPM providers?

Approximately 80% of our efforts have been directed at the RPM and employer space in recent months. The remainder has been on preparing to pursue health plans. I expect health plan efforts to ramp up going forward, but in the near term, we will continue prioritizing our work with employers. We've seen positive traction within the RPM market.

Great, thanks for all the insight. That will do it for me.

Thank you.

Thanks for that.

That does conclude our Q&A session for today. I'll turn it back over to Erez Raphael for any closing remarks.

Thank you for joining our call today. We look forward to seeing you at our next call. Have a good day.

That does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.