Greetings and welcome to the DarioHealth Corp. Third Quarter 2021 Results Conference Call. All participants are in a listen-only mode during this time. A brief question-and-answer session will follow the formal presentation. This conference is being recorded. I would now like to turn the call over to your host, Mr. Glenn Garmont, from Investor Relations. Thank you, sir. You may begin.

Thank you, Laura. Good morning everybody and thank you for joining us today for a discussion of DarioHealth’s third quarter 2021 financial results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He will be joined by Zvi Ben-David, CFO; and Rick Anderson, President and General Manager of North America at DarioHealth. After prepared remarks, we will open the call for Q&A. An audio recording and webcast replay for today’s call 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 archived webcast, this call is being held and recorded on November 16, 2021. Last night, we issued a press release announcing our financial results for the third quarter 2021, 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 or the competitive nature of DarioHealth’s industry. Such forward-looking statements and their implications may 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 2020 Annual Report on Form 10-K, as well as the third quarter 2021 10-Q filed last evening. Additional information concerning factors that could cause results to differ materially from our forward-looking statements as described in greater detail in the company’s press release issued last night 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 operations and prospects for the future. A reconciliation of non-GAAP measures to the most comparable GAAP measures is included in today’s press release regarding quarterly and year-to-date results. And with that, I’d like to introduce Erez Raphael, Chief Executive Officer of DarioHealth. Erez?

Thank you, Glenn. Good morning everyone and thanks for joining our call this morning. This quarter was one of the most exciting quarters for us as we have seen all the strategic pieces that we put together in the last two years coming together in a remarkable way. Over the last couple of years, we have emphasized a few main pillars. Number one is the fact that the company is moving into a multi-condition platform. We always believed that the market would consolidate and that the digital therapeutics industry would come together into one platform. The second pillar is about the transition of the company from direct-to-consumer into the B2B2C model, which means targeting the peers market, employers market, and providers market. In the last four to five months, we have seen these two elements converge effectively within our multi-condition platform, particularly after building the metabolic components over the past few years, such as diabetes, hypertension, and weight loss. Additionally, we made two key acquisitions earlier this year, Upright and wayForward, focused on MSK and behavioral health. Furthermore, we have demonstrated strong institutional capabilities by successfully integrating the Upright Solution into the Dario platform and launching Dario Move—our MSK solution—just a few weeks ago. In integrating the behavioral health segment, we aim to achieve this within Q4. In terms of acquisition execution, we moved rapidly to create a comprehensive platform that is among the most complete in the industry today, and we've received a lot of positive feedback from clients. Especially impressive is that over the past four to five months, we've been able to sign accounts across all three major channels: providers, employers, and health plans. In Q1, we had around five signed accounts, and today, that number has expanded to 47. So, over the last four to five months, we've signed about 85% of the accounts we've ever had, and we are optimistic that this momentum will continue through year-end and into next year. It’s not just about the quantity of accounts; it's also about the quality. Notably, one of these accounts is a significant national health plan that has contracted with us, which we believe provides considerable durability and will significantly impact our financial profile. Additionally, many of the accounts we've signed are focused on multiple conditions, further validating our strategic direction. So broadly speaking, we are seeing a validation of our strategies across channels and offerings. Lastly, I want to emphasize that overall, we are operating in an increasingly favorable environment—a great demand is evident across the board compared to the inception of this company. We expect momentum to extend through year-end and into 2022, and we anticipate signing more accounts before the year concludes. A few words about the industry: we see the sector evolving beyond telemedicine, transitioning toward consumer-first models, and the adoption of digital therapeutics is becoming crucial. We are pioneering a digital Therapeutics-as-a-Service model and positioning ourselves as leaders in this category. Now, moving to the financial results for this quarter, we experienced robust growth of 176%. The pro forma gross margin was reported at 45%, compared to 26.9% previously. We're on track to achieve gross margins exceeding 70%, especially as we shift towards B2B operations. Our strategic initiatives around the multi-condition approach and entering the peers market are substantially enhancing our revenue potential, and we anticipate this will significantly reflect in our 2022 financials. Moreover, we have noted that on a multi-condition basis, there's a considerable improvement in eligible member percentages and average revenue per user. The collective revenue could grow remarkably, yielding a substantial impact on future revenues. Implementation rates are encouraging, with over 40% enrollment across our accounts and an 80% retention trajectory year-over-year. With that, I’ll hand the call over to Rick for deeper insights into accounts and implementations. Rick?

Thanks, Erez. I wanted to start with a few operational highlights. We continue to see enrollment for our standard accounts exceeding 40%, which is above the 35% benchmark used for our pipeline calculations and internal models. Current trends suggest that we are on track to achieve an 80% annual retention rate, consistent with our historical performance. Additionally, we have grown our platform users to approximately 210,000 people. We are in implementation mode for most of our recently announced agreements, with the majority set for launch in the first quarter of 2022, and a few expected for Q4 2021. This positions us well for significant revenue growth starting in Q1 2022 from our B2B pipeline. Our sales pipeline has now exceeded $1 billion, representing significant progress across all three channels in Q3; we expanded from five contracts at the beginning of the year to 47 currently, with 80% of those signed in the last six months. We anticipate closing approximately a dozen more contracts before year-end, which are either signed and not yet announced or in negotiation. Specifically, regarding health plans, we were pleased to announce our first health plan contract this quarter with one of the top five national health plans, which is expected to contribute millions in revenue starting Q1 2022. We are already discussing an expansion of our relationship with this plan, and we anticipate further health plans in 2021 and into 2022. On the employer side, we saw the largest growth in contracts during Q3, many won through competitive RFP processes against our largest competitors. We announced our first contract for our full product suite, with the expectation of more such announcements before year-end. These wins will significantly contribute to 2022 revenues and enhance our reference customers and opportunities for larger accounts during the upcoming employer selling season beginning in Q1 2022. We've also signed agreements with channel partners, including Virgin Pulse, which increases our visibility and is expected to accelerate revenue growth in 2022. We're seeing steady success with our behavioral health-only product in off-cycle sales, which is a trend we expect to continue into the next year. On the RPM provider side, we've recently announced additional provider contracts and are awaiting final agreements on several others, expected in Q4 or early next year. Importantly, we observe that the size of the deals we're closing is increasing, a favorable trend that signals strong demand for our multi-condition solution. Currently, 80% of our pipeline is multi-condition or full suite offerings, and feedback indicates that our fully integrated solution is resonating well in the market. As we look towards 2022, we are confident in strong growth, translating our efforts into contracts that will primarily generate revenue next year. We continue to grow our pipeline and have strong operational trends with our initial employer customers demonstrating our ability to convert contracts into revenue. Overall, we have multiple growth engines as we expand across various channels and partners, ensuring we aren't dependent on a single channel to meet our growth objectives through the end of 2021 and into 2022. Now, I’ll turn it over to Zvi.

Thank you, Rick. Revenues for the three months ended September 30, 2021 were $5.6 million, reflecting a 7% sequential increase compared to the quarter ended June 30, 2021, and a 176% year-over-year increase compared to $2 million for the quarter ended September 30, 2020. Gross profit for the three months ended September 30, 2021 was $826,000, an increase of $277,000 or 50.5%, compared to a gross profit of $549,000 for the same period in 2020. Gross profit margin was 14.7% for the three months ended September 30, 2021, down from 26.9% in the prior year. Pro forma gross profit, excluding $1.7 million of amortization expenses related to the acquisitions of Upright and wayForward, was $2.5 million, or 45% of revenues for the same period. Our operating loss for the three months ended September 30, 2021 was $22.5 million, an increase of $15.9 million, or 241%, compared to an operating loss of $6.6 million for the same period in 2020, primarily due to increased operating expenses and stock-based compensation. Our net loss for the three months ended September 30, 2021 was $22.4 million, which is an increase of $15.5 million, or 243%, compared to a net loss of $6.65 million for the same period in 2020. The non-GAAP adjusted net loss for the same period was $11.9 million, reflecting a $7.2 million increase, or 151%, compared to a non-GAAP adjusted net loss of $4.7 million for the same period in 2020. This increase resulted mainly from heightened operating activity. Cash and cash equivalents totaled $51.3 million as of September 30, 2021. I’ll now turn the call back to Erez.

Thank you, Zvi. I want to conclude with three main takeaways that are important for everyone to understand. First, I want to address the dramatic changes occurring in the healthcare industry. We used to view healthcare as doctor-first; now it's transitioning to consumer-first, digital-first, and more value-based. Digital therapeutics, distinct from telehealth or telemedicine, is leading this transformation, and we believe Dario is well-positioned to lead in this category, harnessing significant market potential. Second, regarding our strategy and execution capabilities—those who have followed our journey know we have been consistent regarding our focus on multi-condition offerings, shifting from B2C to B2B, and delivering the best solutions to peers. Our performance over the last four months speaks volumes about our execution. Finally, as the industry undergoes these digital transformations, we see increased interest from non-digital giants, such as pharmaceutical and medical device companies, that recognize the market shifts. Inbound requests have increased, suggesting potential strategic relationships with these larger players, which could help accelerate our platform's market reach. In summary, we are on a promising trajectory heading into 2022 with a solid momentum. I’ll pause here and hand it back to the operator for Q&A.

Our first question comes from Alex Nowak with Craig-Hallum. You may proceed with your question.

Great. Good morning. This is Trent McCarthy on for Alex. Can you provide more detail on the health plan, including the initial contract size and when that could start converting into sales? What additional investments, if any, are needed to prepare the platform?

In terms of launching it, we anticipate that it will launch by the first quarter of 2022. The ongoing activities for implementation are nearly complete, so there’s a small chance it may happen this year, but we are aiming for it to begin next year. As we indicated, the contract's value is in the millions of dollars, with more details to follow. Discussions regarding expansion with their ASO clients are ongoing. The lift required for this is minimal, indicating we expect a robust expansion without significant capital expenditure or time commitments.

Got it. That makes sense. And just from a broader perspective, can you expand on how you expect revenue to ramp throughout 2022? More specifically, do you still believe you can double sales next year as the street indicates?

Yes. Thank you for the question. We anticipate signing more accounts and believe there are more health plans in the pipeline in the contracting stage. We are confident in our capabilities for intense revenue growth. While it’s challenging to specify if the runrate will jump in Q1 or Q2 of next year, we have enough accounts lined up alongside an acceleration in signings to ensure substantial sales growth. Predicting the precise timing is not feasible, but we hope for significant accounts in Q4 of this year or early next year.

That’s helpful. Lastly, could you walk through the elevated spend? Is this current OpEx spending sustainable for the runrate, or do you expect it to increase? Any insight into your capital plans and how cash burn might trend in 2022 would be appreciated.

Currently, we are observing an increase in our burn rates because we are investing significantly to prepare for multiple account launches, combined with integrating various elements of our multi-condition services. Within nine months, we connected three companies into one platform, which has raised our expenses as many signed accounts, including the large health plan, are yet to generate revenue. This has contributed to a notable uptick in our burn. However, we expect this pattern to stabilize next year as significant revenues come in. Overall, we are comfortable with our cash reserves and aware of the upcoming opportunities in our pipeline.

Great. Thanks for the questions.

Thank you very much.

Our next question comes from the line of Charles Rhyee with Cowen. You may proceed with your question.

Yes. Hey, thanks guys and congrats on all the new business and the momentum that you are seeing. Perhaps you could elaborate a bit on the makeup of the new wins. I believe you mentioned that the majority are from employers. If we exclude the national health plan client, can you provide directional guidance on the average deal size and implementation length? How is revenue expected to be recognized? For instance, if we are seeing 40% enrollment, is that reached within the first month or over a longer period?

The revenue ramp and enrollment rate have so far typically reached 40% within about two months, meaning we generally see this level reached in a timeframe of approximately eight to twelve weeks. In terms of average deal size, it varies; these contracts indeed range from $100,000 to $250,000, with full suite products nearing a million dollars in annual run-rate revenue. Therefore, giving a precise average across the 47 contracts is challenging.

Okay, so if I’m understanding correctly, we can ballpark averages in the low to mid-six figures?

Yes, that's a reasonable estimate especially for metabolic or multi-condition deals, as we approach an average of about $1 million for a full suite with an average-sized customer.

When considering that the majority of contracts will start in January next year, how many of these contracts do you expect to kick-off in Q4? I’m also looking for consensus directionally.

Other than one contract for metabolic and multi-condition launching in Q1 2022, a few smaller behavioral health contracts are expected to begin implementation, usually around a 30-day launch. Most will require around 60 days unless they initiate a bit earlier. We anticipate some accounts, including the health plan, will have launch delays impacting scheduled revenue this year, with more substantial B2B growth expected in Q1 2022.

I’d like to add that while we have been discussing the big national health plan for a while, delays in this and its scale could influence revenue projections. The substantial national account is shifting our revenue trajectory, meaning some anticipated 2021 income will be deferred into early 2022. Therefore, we expect robust growth primarily in Q1 2022.

That clarifies things; one last question: are most of these accounts replacements, or are they clients without prior providers?

Approximately 70% to 80% of the new accounts either have existing solutions or are looking to replace them. Many clients seeking replacements reflect the end of older contracts while simultaneously exploring expansion options for a multi-condition approach. The rising demand for multi-condition solutions underscores our robust integrated offer.

Great, thank you.

Thanks, Charles.

Thank you, Chuck.

Our next question comes from the line of David Grossman with Stifel. You may proceed with your question.

Good morning, thank you. Erez, you mentioned new partnerships with pharma and med-tech firms. Can you elaborate on the potential relationships and what they might look like moving forward?

Yes, you understood correctly. I mentioned the healthcare market's digital transformation, encompassing both digital therapeutics and health technology—not telemedicine specifically. Pharmaceutical and medical device companies looking to enter the chronic condition market recognize this evolution and desire to be part of it. Increased venture capital investment validates the growing category. They aim for digital patient engagement options, primarily for improved management of daily patient routines, leading to interest in strategic partnerships. Potential collaborations could vary, such as licensing our platform for specific territories or provisions within the U.S. market to aid distribution. Licensing may play a role, and we are currently exploring various partnership structures.

Understood. You also mentioned that the national health plan deal could have multiple phases. Can you provide more specifics on the milestones required for Dario to transition between these phases?

The first two phases are tightly linked, with the health plan eager to advance faster than their infrastructure allows. They've divided Phase 1 into two parts to meet their commitments. There are no milestone dependencies; rather, once we complete key integration and branding tasks already in progress, we’ll begin Phase 2. We are currently discussing an expansion in the relationship, suggesting growth potential beyond the initial phases.

That aligns with my expectations. Excluding the large health plan, can you give context on revenue run rates once clients are fully implemented?

That is difficult to ascertain solely because of the health plan's scale and subsequent influence on revenue trajectory. Potentially, these health plans might bring in tens of millions once fully operational, while other accounts may yield six-figure revenues. The visibility into these contracts remains somewhat opaque, mainly due to implementation timelines, making it tricky to provide precise quarterly guidance.

Got it. Is the lack of visibility mainly tied to client activity, or do you feel confident in your team's capacity to handle this influx of new business?

Currently, we effectively manage approximately 208,000 platform users and are executing on both provider and employer accounts. We are well-prepared capacity-wise, with the right management, leadership, and R&D team numbers in place to handle a broader implementation scope. Our major unknown remains how quickly we can realize revenue potential across our 47 accounts; thus, precise quarterly predictions remain challenging.

Thank you very much, and best of luck.

Thank you.

Our next question comes from the line of Nathan Weinstein with Aegis Capital. You may proceed with your question.

Good morning, Erez, Rick, and Zvi. Thanks for taking my questions, and congrats on a successful quarter. To begin, regarding your pipeline, could you explain why some contracts are not multi-condition and what upsell potential exists?

Certainly! Customers often seek specific solutions aligned with their strategic goals or address costs derived from claims data. For example, if diabetes is a notable concern, they might initially invest in that specific solution. However, this sets the stage for future upselling, as they recognize the interconnectedness of conditions like behavioral health and weight management. While two-thirds of our pipeline constituents pursue holistic solutions, some seek targeted interventions.

Thank you for clarifying. One quick follow-up on mental health: what feedback are you receiving from covered labs on their familiarity and engagement with your solution?

Currently, around 20% of our patients that use the platforms are undergoing screenings. Our solution effectively fills the gap between EAP solutions and the provider networks by presenting participants with options. Importantly, we see a 10% referral rate to provider networks once screenings reveal additional needs. This model is advantageous for clients looking to expand services at a lower price point while offering tailored support based on individual needs. Greater mental health professional awareness of digital tools is evolving, particularly following the pandemic. However, challenges persist due to fragmentation within the industry.

Thanks for the detailed response. Great answers, and I appreciate your help today.

Thank you.

Our next question comes from the line of Ben Haynor with Alliance Global Partners. You may proceed with your questions.

Good day, gentlemen. I’m trying to get a better understanding of the mechanics of the backlog. It seems you added roughly $100 million, moving from $900 million to $1 billion during the quarter. Is it correct to think that if all that were closed, the revenue would need to be adjusted based on expected enrollment rates?

Yes, the pipeline isn’t about individual deals but likely represents a future revenue potential. Assuming around 10% of the pipeline will materialize into contracts, we consider the condition prevalence, estimated enrollment rates, and pricing to forecast expected revenue. So we do factor these elements into our net pipeline calculations.

Understood, so you're estimating about $100 million as potential revenue, acknowledging the need for enrollment adjustments?

Exactly. The pipeline number is a reflection of how we anticipate these potential contracts could yield revenue, while the specifics of enrollment rates and pricing considerations are accounted for upfront.

Just to clarify, when you announce B2B contracts, do you seek the firms’ permission for name usage, or is this typically prohibited for competitive reasons?

Typically, customers decline our requests to showcase their names in press releases due to legal stipulations and concerns regarding endorsements of specific solutions. We often include this in the contract, but many clients insist on keeping this confidential.

I see, thanks for clearing that up. Also, regarding sales for your blood glucose monitor on Amazon, are you seeing significant user traction, potentially in the range of 10,000 to 15,000 over a quarter?

Yes, indeed. The B2C segment continues to perform well; however, I currently can’t specify the exact break down between Amazon and other sales channels. Nonetheless, we are seeing substantial consumer interest and traction for our devices through this platform.

Lastly, can you provide insight into your digital marketing expenses on a monthly or quarterly basis?

Digital marketing expenditures are generally in the range of several hundred thousand dollars each quarter.

Thanks for answering my questions.

Thank you.

Ladies and gentlemen, we have reached the end of today’s Q&A session. I’d like to turn the call back to Mr. Erez Raphael for closing remarks.

Thank you everyone for joining us this morning. We look forward to building this business further in the digital therapeutic space and seeing you in the next quarter. Thanks everyone.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.