DarioHealth Corp. Q3 FY2020 Earnings Call

Good day, ladies and gentlemen, and welcome to DarioHealth's Third Quarter Conference Call. As a reminder, this call is being recorded. At this time, it is my pleasure to turn the floor over to Glenn Garmont, Investor Relations. Sir, the floor is yours.

Thank you, and good morning, everyone. Thank you for joining us today for a discussion of DarioHealth's third quarter 2020 financial results. Leading the call today will be Erez Raphael, President and Chief Executive Officer. He'll be joined by Zvi Ben-David, our Chief Financial Officer; and Rick Anderson, President and General Manager of North America. After the prepared remarks, we'll take your questions. An audio recording and webcast replay for today's conference will also be available online as detailed in the press release invite for this call. For the benefit of those who may be listening to the replay or the archives webcast, the call is being held and recorded on November 12, 2020. This morning, we issued a press release announcing our financial results for the third quarter 2020. A copy of the release can be found on the Investor Relations page of DarioHealth’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 and uncertainties including those discussed in the risk factors section and elsewhere in the company's annual report on Form 10-Q for the quarter ended September 30, 2020, filed this morning. Additional information concerning factors that could cause results to differ materially from our 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 an assessment of the company's ongoing core operation and prospects for the future. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is included in today's press release regarding our quarterly results. And with that, I'd like to introduce Erez Raphael, Chief Executive Officer. Erez?

Thank you, Glenn. And thanks everyone for joining our call this morning. Also joining me today is Zvi Ben-David, our Chief Financial Officer; and Rick Anderson, the President and General Manager for North America. During the third quarter, we continued to make progress on the three main pillars that we have discussed in our previous calls. The pillars that we believe will lead us into a leadership position in the digital therapeutic space. The first one is the transformation into a SaaS (software-as-a-service) model, where we are generating recurring high-margin revenues. The second pillar is the expansion into multi-chronic conditions. We started with diabetes, expanded into hypertension, and are continuing to grow into behavioral health with a comprehensive solution and a state-of-the-art user experience. The third pillar is a transformation from direct-to-consumer into business-to-business-to-consumer. It's this third pillar in particular where we feel that we have made significant progress this quarter. Rick will elaborate on that shortly, and Zvi Ben-David will cover the financial aspects. But before handing over to Zvi and Rick, I want to provide a few highlights. Number one on the revenue: during the third quarter of 2020, we exceeded $2 million in revenue, compared to $1.78 million that we generated in the second quarter, which is an overall 14.2% sequential increase. While we are pleased with our progress on revenue, the story here is not just about revenue impact; it’s more about the opportunity that is in front of us. Particularly in light of the transformation we are making from direct-to-consumer into business-to-business, we feel that we have gained significant traction with employers, insurers, and providers, which we believe will drive meaningful improvement in our revenue in 2021. This transformation will also create significant value for our shareholders. We generated an operating loss of $6.6 million during the third quarter, which represents a sequential increase from $4.1 million in the second quarter. The increase in operating loss is something we expected due to the expansion we are implementing in overall operations in the U.S., specifically building our sales team. We believe that as we move forward and start generating significant revenue from B2B2C, these expenses and losses will be reduced. Regarding margins, they declined to 26.9% in Q3, compared to 35.6% in Q2. This decline is a result of one-time sales we are conducting in the direct-to-consumer space where we are providing specific promotions on device sales. As stated in previous calls, we believe that once we successfully make the transition into B2B2C, margins will improve back to a positive trend. We anticipate reaching margins exceeding 70% for our SaaS model, where we will sell premium memberships to B2B2C. Overall, we are seeing growth activities in all three main channels: insurers, employers, and providers. Our pipeline has increased from $200 million in the second quarter to $350 million now. In each of these three channels—employers, providers, and insurers—we have deals that are either in negotiation or in the final stage of contracting. We are very confident about our path forward. Our best-in-class user experience resonates deeply with our 63,000 active paying users on the platform. This is reflected in our App Store rating of 4.9 stars from 13,500 reviews and a net promoter score of 77. This positive feedback not only resonates with our users but also with potential clients we are currently negotiating. Recently announced deals, such as with HMC and the expansion of our relationship with Vitality Group, are just two examples of the momentum we are creating. Additionally, the overall market is transforming toward digital solutions, and we notice that major companies traditionally operating in medical devices or pharmaceuticals are recognizing that clients are looking for comprehensive digital management solutions. It’s about managing the entire user lifecycle, which requires strong technology that integrates devices, applications, and coaching. These companies are interested in collaborating with established firms within the digital therapeutic space, which presents opportunities for DarioHealth. We are engaged in several discussions that may further enhance our penetration into the three key channels we are addressing. As for our financial position, we ended the quarter with $37 million in cash following our fundraising, which raised $28.6 million in an oversubscribed deal at the end of July. The proceeds will ensure we can support the accounts we are signing with a strong client success team in the U.S. We aim to grow our SaaS operations in each of these three channels as we focus our efforts on attracting key talents. Another crucial initiative is the establishment of our Scientific Advisory Board, chaired by Eric Milledge. With extensive experience in the healthcare industry across pharmaceutical and medical device companies, Eric will collaborate closely with our research and development team to strengthen our roadmap, particularly for integrations with continuous glucose monitors (CGMs). This will help enhance our platform’s potential over the medium and long term, creating recognition in the market and accelerating the adoption of our digital therapeutic solutions in the B2B2C channel. In summary, we are excited about our progress and I will now hand over the call to Rick to elaborate on the B2B2C.

Thanks, Erez. In addition to our legacy direct-to-consumer model, we are pursuing three channels as part of our ongoing transition to a B2B2C company: health plans, self-insured employers, and remote patient monitoring with providers and health systems. To bolster these efforts in the past quarter, we've expanded our commercial team by more than a dozen individuals. This means we now have a Dario sales team covering each channel, enhancing our ability to address the strong interest we’ve seen across these channels, positioning us for long-term success. For example, in the third quarter, we had to reallocate sales resources from the RPM channel to address the high demand from health plans. I'm pleased to say we have now added two senior sales executives with substantial experience in the provider space to lead our sales efforts in the RPM channel. We are also adding operational resources to ensure smooth onboarding processes for new clients and members, including implementations already underway. Let me begin with our efforts with self-insured employers. Earlier this year, we announced a strategic collaboration with Vitality Group, a leading health and wellness company primarily focused on the self-insured employer market. Through its many employer customers, Vitality's solutions touch more than 20 million people across 24 markets globally. This collaboration represents a significant step forward in our transition to a B2B2C company. Vitality’s customers now have access to a curated ecosystem of wellness and health solutions for their employees, with integrated incentives and rewards for healthy behavior. As a data-driven platform, we view Vitality as an ideal complement to what we're doing. As part of this collaboration, we recently announced that our digital therapeutics platform was selected by Vitality for integration into their new Gateway Flex offering. Gateway Flex is designed to meet the needs of a largely remote workforce. It simplifies things for employers by bundling many benefits into a single contract and is cost-effective since employers only pay for the programs in which their employees engage. In light of the challenges imposed by the COVID-19 pandemic, we believe Gateway Flex will be well-received, and we look forward to providing future updates. We also recently announced a partnership with HMC HealthWorks, a leading national provider of population healthcare management programs with over 1 million members under management. HMC is offering our digital therapeutics both as a standalone solution and as part of HMC's integrated offerings. We are already seeing strong customer interest through this partnership. We are finalizing contracts with employers that we anticipate announcing soon, specifically for those who are incorporating Dario into their new benefits cycle starting in January. We are very encouraged by our success in the employer channel throughout 2020, including RFP wins against some of our largest competitors. This success is even more noteworthy considering that we missed much of the 2020 sales cycle due to the timing of hiring our team and the pandemic's overall impact. We expect to build on this momentum as the 2021 sales cycle begins in the first quarter. Regarding health plans, as Erez indicated, we continue advancing discussions and contract negotiations with several large insurers. While the timeline for some contracts has shifted compared to our initial expectations, we have continued to make progress on additional deals within the pipeline. Sales cycles with health plans can be lengthy; however, we are optimistic about the substantial traction we've gained in this channel over the last four months. We expect to announce multiple healthcare planning contract wins between now and early 2021. Additionally, I’m pleased to report that the initial success we saw with our remote patient monitoring solution in the last quarter has continued into Q3. This solution is a key differentiator for our company. Since January 2020, providers have been able to bill Medicare under several new remote patient monitoring codes for up to $1800 per monitored patient per year. We anticipate that physicians will continue to rapidly adopt this new technology and revenue stream. Given the spike in interest for RPM, driven in part by the pandemic and the renewed rise in case counts across the country, we expect continued growth in this area. Lastly, we continue to cultivate our relationships with retailers as part of our direct-to-consumer sales channel. While we do not anticipate allocating substantial resources to that channel in the coming quarters, we are engaged in discussions with several large players for potential strategic opportunities. Overall, we expanded our sales pipeline by over $150 million in Q3 alone and moved deals into the contracting phase across all our channels, as prospects respond favorably to our product offerings. While the COVID-19 pandemic has diverted some focus for certain customers, we are in late-stage contracting with multiple entities and expect customer announcements in the current quarter. We believe we have positioned ourselves for a more significant growth trajectory in 2021. Demonstrating strong clinical outcomes, high member engagement, and satisfaction is essential for supporting customer adoption across all channels. I am pleased to report that we are continually enhancing our data in each of these areas. Additionally, in August, our poster titled 'Impact of Digital Management on Clinical Outcomes in Patients with Chronic Conditions: Diabetes and Hypertension' was accepted for presentation at the Association of Diabetes Care and Education Specialists 2020 Annual Conference. The results from this study show compelling reductions in blood pressure and glucose levels for those using our digital therapeutics platform for diabetes and hypertension management. This adds to our previously presented research at the American Diabetes Association's 80th Scientific Sessions in June 2020. Currently, we have 14 clinical studies supporting the benefits of our digital therapeutics platform, with outcomes spanning over two years and involving up to 38,000 users. These extensive studies with long-term outcome data provide strong support for payer adoption of the Dario solution. The clinical results clearly demonstrate that improved long-term outcomes can lead to substantial cost savings for the healthcare system. At this point, I'd like to turn the call over to Zvi for a review of our financials.

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 earlier today. Revenues for the third quarter exceeded $2 million, an increase from $1.78 million in the second quarter. Revenues were primarily derived from the sales of our product and from our membership plans offered to customers in the U.S. We anticipated moderate sequential revenue growth for the latter half of the year, reflecting our continued transition to a SaaS revenue model, which we expect to continue through Q4. Gross profit for the third quarter ended September 30, 2020, was $549,000, down $324,000 or 37% compared to a gross profit of $873,000 for the third quarter of 2019. The gross profit margin was 26.9%, down from 46.7% in the third quarter of 2019 and 35.6% in the second quarter of 2020. Our non-GAAP marketing expenses for the third quarter were $3.1 million compared to $1.7 million for the same quarter in 2019. We used $3.8 million to fund our operations in the third quarter of 2020, compared to $2.6 million in the second quarter. As of September 30, 2020, we had cash and cash equivalents totaling $37 million. This includes $28.6 million raised from the private placement that we completed in July. I will now return the call back to Erez.

Thank you, Zvi. In summary, we are very pleased with the progress that we made in Q3 of this year, as well as in the rest of the year. We are successfully executing our growth strategy and gaining momentum across all channels, including health plans, providers, and employers. We are also well-funded to execute our plans and have the right talent joining our team. We feel we are very well-positioned for success in the B2B2C space. Additionally, we are seeing momentum with client wins and believe that in the next few weeks and months, we will be able to announce further progress. With that, I would like to hand over the call to the operator for the Q&A session.

Our first question comes from Scott Schoenhaus. Please state your question.

Hi, Erez and team, congrats on the results and the new deal wins. My first question is for Rick actually. You mentioned in your prepared comments RFP wins against competitors and a strong pipeline. Are these strong pipeline deals also against competitors? What is helping you win these RFPs? Is it price, technology, a combination of both? I just want to understand the competitive landscape. Thanks.

Sure, thanks for that question. In terms of the pipeline on an overall basis, some of that is RFP-based, and some of it is direct sales where folks are assessing our solution. Competitors are always in the background, whether it's during an RFP process or not. We anticipate seeing even more RFPs as we move into the normal sales cycle for employers beginning in the first quarter. Currently, many organizations are implementing solutions they recently purchased. However, we have successfully pushed some deals forward. What we're finding in the marketplace is that our company is well-positioned from a product perspective due to the broadening offering we provide. We offer diabetes solutions for the traditional market, have added hypertension, and are in the process of incorporating weight management with pre-diabetes. People appreciate this comprehensive approach. Additionally, the compelling clinical data I've mentioned, such as the reductions in A1c levels seen in our studies, resonate positively in the marketplace. The scale of these studies, coupled with their longer-term impacts, demonstrates real-world outcomes, and the net promoter score we received in the App Store of 4.9 out of 5 stars continues to impress. Having tens of thousands of paying users reinforces our engagement levels, which captivates marketplace attention. Therefore, when comparing us to competitors, we find that our product, backed by proven data, stands out significantly.

Great, thanks for that color, Rick. My second question is for you, Erez. Can we talk about the M&A environment for chronic digital health companies like Dario? Since the merger of Livongo and Teladoc has been finalized, do you expect large telehealth platforms to look at acquiring digital therapeutic platforms in order to compete more effectively against Teladoc?

Thanks, Scott, for joining the call, and for the question. We're observing various developments in the market. The Livongo and Teladoc merger is one example. When it comes to chronic condition management, the goal is to engage users around the clock with a technology that empowers them to take ownership of their health in a scalable manner. This component is appealing to telemedicine companies. We believe these companies will pursue more acquisitions in the field of chronic condition management. That isn't limited to telemedicine; traditional medical device companies that previously dominated the space are also looking to go digital. Consequently, we anticipate a trend of acquisitions involving larger players targeting firms like ours, often smaller entities within the industry. We envision both consolidation of companies and acquisitions as markets begin integrating comprehensive chronic condition management solutions. We've structured our platform to be open, which means we can easily integrate additional chronic conditions. We believe that the future market will shift toward multi-condition management, and that's part of the vision we articulated previously.

Our next question comes from John Vandermosten. Please state your question.

Good day to everyone, and thank you for taking my question. First is on the number of active users, Erez. I believe I heard you say there were 63,000. Can you elaborate on that and provide a breakdown or any additional stats on subscribers that you can share?

Yes, we have the total number of users, and as you know, on the direct-to-consumer side, we are selling memberships and devices, which then attract users to buy memberships. Our ratio of membership to device users generating less revenue remains consistent at about 60-40. Moving forward, as we've mentioned before, our transformation to B2B2C will enable us to close the platform to membership-only options. On average, as we progress, you'll see our revenue generated per user per month will increase as the percentage of members out of the total user base rises. This is in line with our revenue goals, and as we gain traction on the B2B side, we expect to see higher revenue generation.

Okay. Hypertension has been available for a while; could you provide some early observations on how that's trending and picking up?

Absolutely. We are currently commercializing hypertension in the B2B2C channel. We launched this offering in the second half of last year and are actively marketing it. Approximately 5% to 7% of our revenue is already derived from hypertension. We believe this figure will increase in proportion as we establish relationships in B2B2C. During discussions with clients, employers, and partners, we often find that hypertension products are part of our discussions. We anticipate that in the coming two years, hypertension could grow to represent 20% of our business.

And is there any standalone hypertension offering, or is it usually paired with diabetes?

Yes, in the direct-to-consumer model, we sell hypertension as a standalone offering. It is not necessarily paired with diabetes. On the B2B2C side, we are also able to sell it alone. However, our philosophy emphasizes providing personalized solutions centered around chronic condition management. The integration of various conditions allows for more effective management, a feature that resonates well with clients we engage with. Additionally, we offer packages starting with diabetes and extending to other relevant conditions, which enhances our overall value proposition.

My last question is about the gross profit margin, which has been quite volatile. Zvi, I think this one is for you. Is this volatility related to timing issues, and can we expect it to stabilize in future periods?

As Erez mentioned earlier, the volatility is mainly due to our current positioning primarily on the B2C side coupled with promotional campaigns. This is a temporary effect, and we expect margins to stabilize as our B2B opportunities begin to translate more effectively into revenue.

It doesn't look like we have any further questions.

Okay, thanks, everyone, for joining the call. Goodbye.

Thank you. This concludes today's conference call. We appreciate your participation. You may disconnect your lines at this time, and have a great day.