DarioHealth Corp. Q4 FY2020 Earnings Call

Greetings and welcome to the DarioHealth Fourth Quarter and Full Year 2020 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. It's now my pleasure to introduce Glenn Garmont of Life Sci Advisors. Thank you. Glenn, you may begin.

Thank you, Darrel and good morning everyone. Thank you for joining us today for the discussion of DarioHealth's fourth quarter and full year 2020 financial and operating results. Leading the call today, will be Erez Raphael, Chief Executive Officer of DarioHealth. He's joined by Rick Anderson, President and General Manager of North America; and Zvi Ben-David, Chief Financial Officer. After the prepared remarks, we'll open the call for Q&A. 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 archived webcast, this call is being recorded on March 9, 2021. This morning, we issued a press release announcing our financial results for the fourth quarter 2020. A copy of the release can be found on 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 and uncertainties including those discussed in the risk factors section and elsewhere in the company's annual report on Form 10-K for the year ended December 31, 2020. 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 and 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 and year-end results. And with that, I'd like to introduce Erez Raphael, Chief Executive Officer of DarioHealth. 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 the General Manager for North America. So 2020 was an exciting year for us. And I think it was an exciting time for all those that are part of the healthcare industry as the industry is transforming widely these days, and we are even more excited to be at the forefront of these amazing changes happening in the healthcare industry. Like we do in every earnings call, I would like to refer to our progress by referring to our three main pillars that we keep mentioning at every earnings call, I think for the last six or seven quarters. This is something that helps us communicate the progress that we are making with the transformation we are achieving. It also helps us focus on capturing the huge opportunity we are experiencing these days. The three main pillars: number one, the transformation into a SaaS (Software as a Service) where we are generating high-margin recurring revenues; number two is the transformation into B2B2C; and number three is the expansion into multi-chronic conditions. So 2020 was a very foundational year for us. I'll start with B2B2C. We put a lot of effort in 2020 to build the infrastructure to be not only a B2C company but also a B2B company. We started the year with only six employees operating in the US, in front of employers' health plans and providers, and now we are close to 30. We also signed eight different agreements over the year, with the last three months seeing us win two big Fortune 500 employers and even further than that, we managed to win overall size in main competition, which speaks to the overall offering and great products we have. When we started 2020, we knew we had a great product as all of you can see on the App Store and Amazon. We are operating and considered one of the best products in the market that we had during 2020 to package in a way that we can take it to the B2B market. And this is what we did, and with these recent wins, we are very confident that we can start generating meaningful revenue in 2021. As we started to implement these accounts in Q1, we are also getting very good first results and indications that we know how to enroll and turn these accounts into dollars, and Rick will speak to that very shortly. On the expansion into multi-chronic conditions, one of the things that we believe in is that operating as a digital therapeutics company - when providing a solution that is extremely user-centric and consumer-centric, we need to provide a very comprehensive solution for our users. It doesn't make sense to operate in silos, like the traditional healthcare industry. Companies in the traditional healthcare sector will focus on one single condition. We have seen companies that bid only on diabetes or hypertension. When moving into digital therapeutics and when dealing with a personalized solution, we need to provide multiple chronic conditions and that's what we aimed for. We are very happy and proud to complete the acquisition of Upright Technologies at the beginning of February. The more we are making progress with the post-merger integration, the more confident we are about making the right decision regarding this acquisition. Just as a reminder, Upright was acquired as a company that had 90,000 active paying users. This is a company that is scaled when we look into the musculoskeletal space, and there are not too many companies in this space that have over 50,000 active users. Hinge, which just raised money at a $3 billion valuation, is one of them. Next in line in terms of users is Upright, sharing the same philosophy we have, combining hardware, software, and services to drive behavioral change. They are doing a great job creating change in user behavior. In terms of the synergies we see in the B2B market, this is a perfect match for us. We're starting to hear very positive comments from our potential and existing clients. So this was a very good move from our perspective. The fact that we did this transaction or acquisition as an equity-only transaction speaks to the fact that we gained real partners who want to work together with us to build this company into a multibillion dollar enterprise. The post-merger integration activities are progressing excellently. In terms of the overall three pillars, each contributes to the main parameters that define our business in terms of recurring revenue related gross margins. We still see our overall objective as exceeding 70% in gross margins moving forward, and we anticipate an improvement in the gross margin already in Q1. In terms of eligible population when we started with diabetes, we accessed a potential employer for 8% to 10% of the population, high potential expenses expanding to 20% to 25% with MSK, making it over 40% for the conditions altogether. So in terms of account utilization, having a multi-condition approach makes our overall commercial efforts much more effective. Moreover, in terms of acquisition costs, the transformation into B2B2C drastically improves our views on the cost per acquisition per user. Selling more conditions further lowers the cost of acquisition per user condition. Each of these pillars has its own contribution to our financial profile and our growth capabilities. The combination of these three creates an exponential impact on our financial profile and overall growth abilities. While in 2020, we did not see significant growth in revenue between 2019 and 2020, we should consider 2020 as a foundational year. We should recognize the progress made in this foundation with the accounts we've won, leading me to be very confident that in 2021, we will observe significant impacts from all three pillars and parameters I just mentioned. I would now like to drill down into the B2B2C transformation and hand it over to Rick to elaborate more on that. Rick?

Thanks, Erez. Over the last few months, we've seen the creation of a lot of the efforts that we've been making for the last year and announced several wins in our B2B market. This includes two Fortune 500 companies won in a competitive RFP situation. We've also signed several RPM contracts, including a significant one with an integrated health system in New Mexico. We have now launched these customers in the first quarter and are pleased with our progress to date. We are seeing over 30% enrollment within the first month of commencing our outreach, and we're continuing to hone our approaches, anticipating that will go even higher. On the business development side, the pipeline is now more than $600 million across all market segments. As a reminder, we calculate our pipeline as the live opportunity times 10% for the prevalence of diabetes, which does not include other conditions, times a 35% enrollment rate times $59 per month for 12 months. We use actual numbers when available. This calculates our annual revenue opportunity, which reflects what we see as our pipeline. We continue to make progress in all three channels. For employers, we are now starting the sales cycle for self-insured employers on an annual cycle. A significant portion of employers are on this cycle, running from January 1 to December 31. This will see RFPs in the next few months, contracting in the third quarter, and the launch of these new opportunities in Q1 of 2022. We are seeing the benefits of the progress we made in increasing name recognition and relationships with benefit consultants, which are currently driving the RFP and RFI volumes we are witnessing. We anticipate this will enhance our pipeline and contracts later this year. Additionally, we still have opportunities closing in the middle of the year or outside the annual cycle that can close throughout the year. For health plans, we continue to rapidly grow the pipeline of opportunities and are working with a handful of plans at late-stage contracting or vendor management through the process. We anticipate closing many of these contracts over the next few months, which will add additional revenue in the second half of 2021. Regarding remote patient monitoring, we have a growing pipeline of near-term opportunities with providers. Recall that RPM enables providers to bill CMS for codes that came into effect at the beginning of 2020. We did face headwinds in completing contracts with providers, which were distracted by the COVID surge in vaccine rollout, but things have picked back up in the last month, and we see them moving towards closure. We have several agreements currently in contracting and believe RPM will contribute significant revenue in 2021. Additionally, we are working on a partnership enabling our direct-to-consumer Medicare members to take advantage of virtual care under an RPM model with significantly higher average revenue per user. We've made great progress in growing the team this year, adding management, product, and sales talent from entities such as Livongo, Omada, Mercer, OPTiM, and Hinge. These individuals are joining us because they see the differentiated opportunity at Dario and the ability to accomplish great things. These key hires also accelerate our business growth. As Erez discussed, we've expanded into MSK and are actively looking at other conditions to enhance our offering. Our overall strategy is to leverage the expertise of condition-specific point solutions for our customers with an integrated front-end and back-end and also integrate with third parties. We chose MSK because it's consistently among the top five priorities to reduce costs and improve outcomes for our clients. It expands our addressable population to approximately 40%. Moreover, MSK can boost our average revenue per user by an estimated additional $35 per month, with significant comorbidity with MSK existing conditions. This acquisition solidifies our platform as one of the most robust in the industry. We are already seeing customer interest in our MSK solutions even before going to market, and some of our current pipeline now includes an MSK opportunity. With that, I'll turn it over to Zvi.

Thank you, Rick. I will provide a brief overview of our results for the fourth quarter. Additional details on our quarterly results can be found in our press release published earlier today. Revenues for the first quarter ended December 31, 2020 were $2.1 million, a 1.9% sequential increase from the third quarter ended September 30, 2020 and a 15.7% increase from the $1.8 million in the fourth quarter ended December 31, 2019. Revenue generated during the first quarter ended December 31, 2020 was mainly from the sales of DarioHealth's medical device offerings and from our membership plans to our US customers. Gross profit for the fourth quarter of 2020 was $549,000, a decrease of $299,000 or 34.6% of total gross profit of $840,000 in the fourth quarter of 2019. Gross profit as a percentage of revenues decreased from 46.7% in the fourth quarter of 2019 to 26.4% in the fourth quarter of 2020. The decrease resulted from price reductions of our medical devices sold as part of our direct-to-consumer promotion campaigns. With that said, as we scale and implement our market transition, we believe we can drive gross margins to 70% and higher over the long term. Total operating expenses for the fourth quarter of 2020 were $9.6 million, compared to $5 million in the first quarter of 2020. Total operating expenses excluding stock-based compensation for the fourth quarter of 2020 were $7.5 million compared to $4.6 million in the fourth quarter of 2019. Net loss was $9 million for the fourth quarter of 2020, an increase of $4.8 million compared to a net loss of $4.2 million in the fourth quarter of 2019. As of December 31, cash and cash equivalents totaled $28.6 million. Our net proceeds from the private placement closed on February 1, 2021, amounted to $64.9 million. With that, I'll return the call back to Erez.

Thank you, Zvi. We are super excited to be at the forefront of these amazing changes happening in the healthcare industry. In some cases when we talk with investors, we get the question of whether this transformation or demand on healthcare is going to disappear post-COVID-19. From our perspective, COVID-19 accelerated a change that should have happened anyway in terms of digitalizing the space. No doubt, it created a huge acceleration in this transformation into the digital realm. All this information is here to stay, and we see that when we talk with clients, and we expect it to remain. When we look at the overall opportunity, considering the biggest competitors out there providing chronic condition management for diabetes and potential others, assessing all market penetration together, we're looking at around 2%. The opportunity is enormous. We're confident we will be a major player in this space. In 2020, we laid all the foundations from a B2B2C perspective as multi-condition. We believe these foundations will contribute to exponential improvement in our financial profile and growth, and we will start to see this impact significantly in 2021. When looking at our capital market and balance sheet situation, I want to emphasize that we completed two significant fundraisings, one in July and another by the end of January, raising a total of $100 million to fund all these activities. Overall, we are well-funded, and the company has no debt on the balance sheet. The run rate will extend into 2023. With such funding and the profile of our investors and shareholders are very different from two years ago. We have investors who understand the space and the strategy of the company moving forward. As we are in the late stages of Q1 and typically do not provide financial guidance nor do we plan to, in light of the transformative Upright acquisition, I want to highlight we expect consecutive quarter double-digit percentage growth in both our MSK and base business from Q4 2020 to Q1 2021. We believe this is just the beginning of a positive trend that we expect to see in 2021. With that, I would like to hand over the call to the operator for a Q&A session.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Alex Nowak with Craig-Hallum. Please proceed with your questions.

Good morning, everyone. Erez, I want to touch right on that point you mentioned about the sequential growth. So double-digit sequential growth into Q1 here. If I run through the rough math, assuming a 10% growth off of $2 million that annualizes to about $1 million. So is it fair to say that the deals you signed, the three big deals that included the two Fortune 500 companies and the RPM piece of the business, signed in Q4, is going to lead to a roughly annualized $1 million sort of net bump to the business? Is that the right way to think about it?

Yeah, I think that while your calculation may not be entirely accurate, you're definitely in the right direction. Those are approximately the numbers you're discussing. As we've stated before, employers generate for the company somewhere between a quarter of a million to $1.5 million annually. Your calculations are generally in the right direction, yes.

Okay, I was never very good at mental math. I totally understand that. Regarding the deals you've signed so far, what is the total contract value? If you go through the math that Rick mentioned on how to think about contract value, what is the total contract value of the deals that you've signed? And then of that $600 million pipeline number, how much of that is near-term contract value? Meaning, those are deals you expect to sign up sometime in 2021.

So we won't go into annual contract revenue yet until we have more traction and fully understand the percentages we anticipate getting. We'd rather discuss our enrollment rates and the number of members we have on the platform as we move forward. But in your requested context, if you're dividing the employers by the numbers you mentioned, you should be generally in that range we're anticipating once they're ramped up. As for the second part of your question, we expect somewhere between 10% and 20% of our pipeline to close each year. That doesn't mean that if those do not close this year that they won't close next year, as some are in longer sales cycles, especially on the health plan side.

Okay, that makes sense. On health plans, I know one or maybe two were getting close to being signed last time we spoke. Where does that stand? Are they pushed out a little due to the annual cycle restarting?

The health plans aren't necessarily on an annual cycle. They can lose time coordinating and getting through processes, etc. However, the late-stage guys remain in those final stages, and we're looking at potential launches by the end of this quarter or the beginning of the third quarter. We anticipate further contributing contracts in the second half of 2021.

Okay, that makes sense. Regarding the multi-condition segment, the final channel that doesn't touch behavioral health, would Dario consider entering this space and how would this occur? Would this be an organic development or more of an acquisition?

Behavioral health is indeed an area with significant demand from our customers. Addressing chronic conditions requires acknowledging behavioral health conditions. We are considering building a behavioral health solution from scratch through partnerships or acquisitions.

Alright, that sounds great. Thank you.

Thanks, Alex.

Thank you. Our next question comes from the line of Charles Rhyee with Cowen and Company. Please proceed with your questions.

Hi, thanks guys. I wanted to clarify the earlier comment about expectations for the first quarter. Did you say it was a double-digit sequential increase?

Yes, in percentages.

In percentage, so not 50%, just a double-digit increase okay.

This increase can be 10%, 15%, or 20%. That's double.

You mentioned diabetes and musculoskeletal opportunities, but did you provide any metrics regarding customer overlap? How much overlap exists between clients for Upright and the legacy Dario business?

In terms of the chronic condition itself, 36% of those that have diabetes on average will face MSK issues. Looking at the overall business, we anticipate that more than 20% or 25% of our clients will engage in more than one product. So we aim to have between 30% to 35% of our clients buy at least two conditions.

Thanks. Is it fair to say then that currently there is no overlap between clients for the two products?

At this point, we don't have overlap between clients. However, based on our pipeline, we anticipate interest in MSK given recent interest since the acquisition announcement. The pipeline mentioned includes MSK opportunities. Just to remind you, the MSK solution we have is being redefined. The product exists, but we are repackaging it to best approach the employer market. We plan to launch it only at the beginning of Q3.

That’s helpful. Lastly, thinking about remote patient monitoring, the health plan business, and the employer market; which of these will likely be the biggest contributor by the year's end? Is it still the employer market? A percentage mix would be great, but if not, ranking would work too.

That’s tough. Rick, you want to take it?

Sure. Based on opportunity size, I anticipate health plans making the majority of revenue by year's end or at least the largest portion. This will likely be followed by remote patient monitoring, leaving the balance to employers, with the possibility RPM could exceed employers in total revenue by year-end.

Okay, thank you. Just to confirm, your earlier statement regarding enrollment crossing 30% — does that include RPM? Is RPM enrolling in the same way, or differently?

Yes, regarding enrollment exceeding 30% within 30 days. RPM varies by contract; in the cases we operate now, the RPM customer identifies blocks of patients, and we have a very high percentage of those blocks enrolling.

And that's over 30%?

In terms of the blocks identified, yes, that’s more like 85% to 90%, but enrolling doesn't calculate eligibility the same way.

That's helpful. Thanks a lot.

Thank you. Our next question is coming from the line of Steve Halper with Cantor Fitzgerald. Please proceed with your questions.

Can you talk about some of the changes needed at Upright to sell to the employer market? And a follow-on: considering this is a big selling season for employers, is that part of the conversation now that you're selling traditional services?

We have two approaches for Upright's employer solution: the existing solution that holds relevance and, additionally, we're enhancing it by building out more robust video libraries of exercises that link to the sensors. We're also leveraging their current relationships with physical therapists to provide virtual physical therapy solutions. As Erez mentioned, we plan to launch those products by July this year. For employers currently in the sales cycle for 2022, we are including this in all RFPs.

Great, thank you.

Thanks, Steven.

Thank you. Our next questions are from the line of David Grossman with Stifel. Please proceed with your questions.

Can you shed more light on the transformation of the sales force? Perhaps integrate Upright's selling efforts and how they change the dynamic as we progress through 2021?

We have separate B2B sales forces, although there are overlaps in market segments we're pursuing such as health plans, self-insured employers, and RPM. We've essentially doubled our sales forces in RPM and the employer space and are actively filling additional sales positions. We've successfully persuaded great sales talent to join us, with experience selling to employers and the overall markets we compete in. In terms of MSK, this simply adds to our existing sales forces; apart from educating the team about the product and incorporating it into our RFP efforts, it is just another tool to our offering.

Are you at steady state with your sales force, or do you anticipate further additions throughout the year?

We're looking to fill a couple of open positions right now and will reassess our needs. I anticipate that we may add a few more towards the end of the year, responding to demand as it evolves.

In terms of selling, can you share any thoughts on Dario's strategy in the provider market?

We are primarily using the remote patient monitoring approach for the provider market, targeting large providers with Medicare members or integrated health systems. While there are some exceptions emerging in the non-Medicare space, our focus is to seek reimbursement from CMS for these services.

Understood. I realize you mentioned you're not providing guidance for the year, but can you share any insights on how you expect revenue and expenses to shift through the year? Any indicators that could help us visualize your end-of-year position compared to the start?

If we compare 2019 to 2020, we continued our B2C sales while laying the B2B foundation. In 2021, we're implementing B2B alongside our ongoing B2C efforts. B2C will remain part of our strategy, thus growing at a single-digit rate. In 2021, we expect significant revenue from employers, potential contributions from providers, and more from health plans as the year progresses. I anticipate noticeable revenue growth even this quarter. In comparing 2020 to 2021, while we’re not providing formal guidance, the growth is expected to be significant.

Good morning Erez, Rick, and Zvi. With the acquisition of Upright and willingness to integrate hardware into your SaaS model, will acquisitions remain a key avenue for ecosystem expansion? Have you seen similar companies for other chronic conditions?

Regarding our technology platform's development for digital therapeutics, we've established an open platform where integration of other products is feasible. We assess acquisitions for easier implementation and integration at the right price with suitable companies that mirror our philosophy and DNA. Acquisitions remain a possibility for expanding our offerings, with quick integration feasibility.

Thank you, Erez. One last question: with behavioral health being a huge issue in the US, can you envision collaborating with government payers to address this concern given the high unemployment?

Regarding government payers, both Medicare and Medicaid are significant considerations. We could provide low-cost treatment through digital platforms for those with behavioral health needs. This could involve partnerships or direct collaborations with government programs to enhance accessibility.

Thank you for the thoughtful response and for addressing my questions.

Thanks for the question.

Thank you. There are no further questions at this time. I would like to hand the call back over to management for any closing comments.

Thank you. Thank you all for joining us this morning, and see you on our next earnings call. Have a good day. Bye, bye.

Thank you.

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