DarioHealth Corp. Q4 FY2021 Earnings Call

Greetings, and welcome to the DarioHealth Corporation Fourth Quarter 2021 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 conference is being recorded. I would now like to turn the call over to Glenn Garmont of Investor Relations. Thank you. You may begin.

Thank you, Darryl, and good morning, everyone. Thank you for joining us today for a discussion of DarioHealth’s fourth quarter and full year 2021 financial results. Leading the call today will be Erez Raphael, Chief Executive Officer of DarioHealth. He’ll be joined by Zvi Ben-David, Chief Financial Officer; and Rick Anderson, President and General Manager of North America at DarioHealth. After the prepared remarks, we’ll 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 March 22, 2022. This morning, we issued a press release announcing financial results for the fourth quarter and full year 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 2021 annual report on Form 10-K filed this morning. Additional information concerning factors that could cause results to differ materially from the company’s forward-looking statements are described in greater detail in the company’s press release issued this morning and in the company’s other 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 these non-GAAP measures to the most comparable GAAP measures is included in today’s press release regarding quarterly and full year 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. We’re very excited about the results of 2021. In fact, this is a fundamental year for executing our long-term strategy. As we do at every earnings call, I’d like to report on the progress by referring to the main three pillars that we discussed in the last few years because we like to be very consistent and show all the execution that we accomplished in the past few years. The three pillars, as most of you are aware, are: one, the transformation from direct-to-consumer into the B2B, mainly health plans and employer channels; number two, the transformation from single condition into multi-condition; and number three, continuous improvement in the financial profile of the company and building what we are calling digital therapeutics as a service company in the healthcare environment, which is a pure SaaS company with a high-margin recurring revenue profile. I’ll start with the expansion into multi-condition. We started with diabetes and from 2018 to 2020, we expanded into other metabolic areas, including diabetes, hypertension, and weight loss. In 2021, we completed three acquisitions in 12 months, two in the musculoskeletal space and another in the behavioral health space. It’s not just about the execution of the acquisitions; it’s also about integrating these acquisitions into a full suite. We anticipated the consolidation of the digital health and digital therapeutics market and expected demand mainly from self-insured employers that want to adopt integrated solutions. This demand is reflected in our pipeline where 80% of the inquiries are asking for more than one condition. Today, we are one of the most comprehensive platforms in the space. Pillar number 2, which is super important, is moving the business from direct-to-consumer, which has a very tough financial profile with relatively low gross margins and high customer acquisition costs, into high gross margins and lower cost per acquisition channels that are scaling up between employers, health plans, and providers. In 2021, we grew from five accounts to 54 accounts, and the total ARR value behind these accounts is $35 million in full implementation. This includes additional revenue from the strategic deal we announced two weeks ago with Sanofi, which is expected to contribute an additional $8 million this year. We demonstrated strong execution capabilities in terms of enrollment rates of the accounts we are implementing. We are securing wins over the competition based on the portfolio of solutions that we built into one integrated suite. Today, we have at least one account with the full suite implemented and operational. This speaks to our strong execution capabilities in integrating all the acquisitions together quickly. Looking at the first two pillars—expansion into multi-conditions and the transformation from B2C into B2B—combined with our financial profile, creates a compounding impact. The average revenue we can extract per user is higher. Furthermore, the revenue per account can reach as high as 4.5 times more when they sign up for more than one condition, which is improving our financial profile. We are very confident in the significant growth we are anticipating for 2022, particularly as we project gross margins to increase to between 50% and 60% for the year. Our overall goal is to reach gross margins of between 70% and 75%, and we plan to show an improvement from 2021 to 2022. We believe the transformation from 2021 to 2022 will reduce the company's losses and burn rate, primarily because of the higher gross margins from the B2B segment. The additional revenue from B2B will further contribute to this improvement as the B2C segment slows down, enhancing our overall financial profile with reduced losses and a lower burn rate. A significant deal we announced two weeks ago was with one of the largest pharmaceutical companies in the world, Sanofi. This deal is expected to generate $30 million in revenue over the next few years, with $8 million recognized in the first year. After discussions with investors following this deal, it felt like people were focused primarily on the $30 million; however, we believe this is only a small part of the potential of the Sanofi deal, as the core commercial activities, with Sanofi leveraging their name and sales capacity behind Dario, are expected to significantly assist in our revenue growth. This is a major deal for us and we are exploring other strategic initiatives that are currently under discussion. Regarding Q4, we had previously anticipated a top-line revenue of between $5.8 million and $6 million for the quarter. In this report, we have highlighted that gross margins on a non-GAAP basis have decreased, reflecting a drop from approximately 37% in 2020 to about 37% in 2021. In Q4 specifically, we have observed a reduction to around 20.1%. This is due to an expensive shipment we had to make, which was a one-time event, influenced by shipping costs and discounts we provided in the B2C segment. Looking ahead to Q1, we are optimistic that gross margins will improve significantly, with our full-year expectations for 2022 leaning toward the 50% to 60% range. I now want to pass the call to Rick. Please go ahead, Rick.

Thanks, Erez. In 2021, we added more than 50 customer contracts across all three channels, including a national health plan. Of the accounts announced prior to December 31, all but one provider account are implemented and contributing to 2022 revenue starting in the first quarter. The last provider agreement will launch shortly. Most of the employer contracts we announced prior to year-end are on a January to December benefit cycle, so they started in the first quarter, and we will see a repeat of that trend in 2022 as well. We’ve continued this momentum into the first quarter, announcing nine additional agreements to date, including one regional health plan, as we move towards our goal of 100 total accounts by the end of the year. Many of the agreements we are currently announcing are off-cycle employer, health plan, and provider agreements, and as such, are expected to generate revenue in 2022. Typically, it takes about 60 to 90 days to implement these types of customers. With the addition of these new agreements, our contract value now exceeds $36 million, up from what we announced during the recent investor call in January. This figure excludes Sanofi, which represents an additional $30 million in contract value. As Erez mentioned, we continue to see solid operational metrics in the launched accounts, with an enrollment rate of approximately 40% and retention on the platform at around 80%. Our integrated multi-chronic condition platform strategy continues to attract interest in the employer and health plan market, with customers recognizing the value of having fewer vendors while addressing more conditions per vendor and ensuring a singular user journey for their employees or members. Our competitor’s systems, on the other hand, still rely on modular approaches despite offering similar or nearly as many conditions. Currently, roughly three-quarters of our pipeline is multi-condition-based. As we’ve discussed in the past, this multi-condition offering delivers more value to both our customers and Dario, contributing approximately four to five times the revenue compared to single condition solutions. We are extremely pleased to have entered into a strategic relationship with Sanofi in the first quarter. This agreement is, to our knowledge, unique in having a major pharmaceutical company partner with a digital health company to enter the digital health space in a holistic manner, rather than merely providing a software companion to their drugs or devices. Sanofi conducted a comprehensive evaluation process, and we are honored to be selected as their partner on this journey. This is a $30 million multi-year commercial deal, of which we anticipate recognizing $8 million in revenue in the current year. There are three main parts to this agreement: co-promotion, under which Sanofi will promote the entire Dario suite to health plans and select employers, effectively increasing our health plan sales resources by over 10 times and enhancing data and targeting for our sales efforts; developing new or enhanced solutions on the Dario platform distributed by Dario and through the co-promotion agreement; and leveraging Sanofi’s internal data and real-world evidence teams to create studies and additional data around Dario solutions. We believe these efforts will only grow in value as the market seeks more evidence from digital health providers in the next few years. All these streams have already launched under Sanofi, and we expect the co-promotion to begin later this month or early next month, leading to increased activity across the year. While we are still actively selling to health plans, we anticipate the usual sales cycles will be in play. However, we are enthusiastic about the additional traction this partnership will provide. We are making strides on the sales front across all three channels. In the employer sector, we are currently in the early sales cycle for self-insured employers on a January 1 to December 31 cycle, about 70% of employers are on this schedule. Consequently, we expect to see RFPs in the coming months, with contracts being finalized in late Q3 and early Q4, launching in the first quarter of 2023. Additionally, we continue to see robust demand for our standalone behavioral health offering and anticipate announcing several additional contracts this year. On the health plan front, in addition to the two plans we’ve already announced, we are nearing the final stages with several other plans, hoping to close one to two contract agreements in the upcoming quarters. Previously, we mentioned additional phases for a national plan we'd already signed and stated that we anticipated closure later this year or in 2023. We are pleased to report that these phases have been expedited, with major terms agreed upon, and we look forward to finalizing that expanded agreement in Q2, which has the potential to onboard over 10 million members onto our platform in the next couple of years. In 2022, we expect to see multiple millions in revenue derived from this agreement. Furthermore, we continue to sign contracts with providers and expect to discover more in Q2. With that, I’d like to pass it over to Zvi.

Thank you, Rick. Revenues for the fourth quarter ended December 31, 2021, were $6.03 million, a 7.1% sequential increase from the third quarter ended September 30, 2021, and a 190% increase from the $2.08 million in the fourth quarter ended December 31, 2020. The increase in revenues resulted from the new product line acquired during 2021 and the expansion into the B2B market. Gross profit in Q4 of 2021 was $548,000, a decrease of $1,000 compared to a gross profit of $549,000 in Q4 of 2020. Gross profit as a percentage of revenues decreased from 26.4% in Q1 of 2020 to 9.1% in Q4 of 2021. The decrease in the gross profit and gross profit as a percentage resulted from amortization of expenses related to the acquisition of Upright and wayForward, along with higher shipping expenses and price reductions as part of direct-to-consumer promotion campaigns in Q4. Pro forma gross profit, excluding $782,000 of amortization from Upright and wayForward acquisitions, was $1.33 million or 22.1% of revenues for the three months ending December 31, 2021. Total operating expenses for Q4 of 2021 were $22.2 million compared to $9.6 million in Q4 of 2020, an increase of $12.6 million or 131%. This increase resulted from heightened activities in research and development, sales and marketing, administrative expenses, and stock-based compensation. Total operating expenses, excluding stock-based compensation, acquisition expenses, and depreciation for Q4 of 2021, were $16.4 million compared to $7.5 million in Q4 of 2020. The net loss for Q4 was $21.6 million, an increase of $12.6 million or 140% compared to the $9 million net loss in Q4 of 2020. Cash and cash equivalents stood at $35.8 million on December 31, 2021, and our net proceeds from the offering that closed at the beginning of this month amounted to $38 million. Back to you, Erez.

Thank you, Zvi. To summarize our call, I want to emphasize to all the investors that the business is in a better position than ever. The healthcare industry is increasingly oriented toward adopting effective digital therapeutic solutions, and we take pride in building one of the leading companies in this space. We see our fundamentals improving every day, which is somewhat contrary to how the broader sector is faring in the stock market. Digital therapeutics adoption has intensified, and we believe 2022 is set to drive accelerated growth. We are very confident with analyst estimates, having secured signed accounts, strategic deals, and a comprehensive suite of products. Our trend is improving into Q1, and for the full year of 2022, we are targeting gross margins of between 50% and 60%, signifying another improvement from 2021. We also believe there will be a reduction in our losses and burn rate, and we are already witnessing this in Q1, where our financial profile is markedly better than Q4 of 2021. Overall, we concluded the year with $35.8 million, alongside an additional $40 million we raised, which provides us with sufficient runway through 2023. We are also exploring a few strategic opportunities to secure additional capital equity later this year if necessary. Importantly, our company is very well-funded in this market environment. With that, I will now turn the call over to the Q&A session.

Thank you. Our first questions come from the line of Alex Nowak with Craig Hallam. Please proceed with your questions.

Good morning, everyone. Thinking about the growth you’re expecting this year, Rick, if we take your comments about all the new contracts that were signed last year that are now currently online and generating revenue, is it fair to assume that by the time we get to the end of this year, end of 2022, you’ll essentially have $35 million of new run rate revenue that you then add on top of the $24 million of revenue exiting 2021, and then even potentially add on Sanofi’s $8 million on top of that? Maybe just help us take those comments and apply them to the revenue ramp or how you’re thinking about it for this year?

So I don’t think you can look at it on a run rate basis yet. You can see it that way as we exit the year, but just to be clear, I don’t expect that you can take the $35 million plus the $24 million and say that’s revenue for 2022. But on a run rate basis, it should approximate that by the end of the year, yes.

Okay. Now that’s really good to hear. Maybe expand a bit more on the Sanofi deal. Just what is Sanofi booking to build out internally on the digital therapy side? Can you speak to what other therapeutic options they want to add to the channel and maybe discuss that competitive tender process and ultimately why they picked Dario?

Well, starting in reverse, I obviously can’t speak for them exactly regarding their final decision components. However, what they have communicated to us is that when they evaluated the market solutions, the clinical results we achieved and the comprehensive integrated user experience we provide were compelling in the marketplace, making us a viable partner for them moving forward. As for the digital therapy aspect and what they wish to pursue, it will build upon the Dario platform. They are considering enhancing the member experience they’re already seeing and exploring where they want to go in the future with Dario, and that was also an important factor. We are currently defining our 2022 development roadmap in terms of specifics, considering areas around expanding specific patient populations and opportunities to increase the number of conditions on our platform.

Got it. And regarding the $8 million of sales from Sanofi this year, what is the trigger for that? Is it viewed as a service contract, and what are the triggers to recognize the remaining $22 million?

The economic structure of the agreement centers primarily around co-promotion elements and a preferred partnership. The components related to the preferred partnership are generally more time-based. As for the development pieces, it revolves around fulfilling the first development plan, which we expect to complete in the next few months, alongside ongoing developments on the platform.

Okay, got it. Lastly, we’ve previously discussed the new digital therapeutic reimbursement codes. It feels like there’s growing traction in the marketplace. Can you elaborate on what this means for the provider channel? We didn’t touch upon this much today, so are more providers engaging in remote patient monitoring now that reimbursement codes are actively being discussed?

We’ve been two years into the initial RPM codes that were introduced, with additional codes announced at the start of this year, primarily linked to MSK. Over these last two years, we’ve noticed a growing acceptance of the RPM codes despite some skepticism remaining in the marketplace. The prospect of reimbursement for the RPM codes is encouraging, and providers are starting to navigate the operational aspects. We see increasing enthusiasm surrounding RPM codes from the provider side, and we’re monitoring how reimbursement trends evolve, particularly since the government has indicated they are willing to reimburse for digital prescription therapeutics, despite the doubts expressed by major health plans around the data supporting these digital therapies. Overall, we anticipate that more reimbursement pathways will emerge over time, with a trend towards greater acceptance and integration of RPM solutions.

That’s great to hear. Appreciate the update. Thank you.

Yep.

Thank you. Our next question comes from the line of Craig Jones with Stifel. Please proceed with your questions.

Hi, thanks guys. Going back to the $8 million on Sanofi, when does year one start, and how does that get recognized? Is it relatively even throughout each quarter, or is there variability? Additionally, how does this relate to revenue and cash flow?

It is a calendar year. When we mention year one, we refer to 2022. Therefore, we currently expect to recognize the $8 million of that revenue in this year. Although it’s somewhat front-loaded, as the cash flow from preferred partnership payments comes in upfront, alongside the launch of the development components, we anticipate the last payments will be recognized by the end of the year. From a revenue angle, while it won’t be perfectly even throughout the year, it should generally be spread out.

Does that include Q1? So would it be like two, two, and two, or should it start in Q2?

No, it will start in Q1. We anticipate that the revenues will begin in Q1.

Got it. And looking at the breakout you provided previously regarding hardware consumables versus services, it seems to have been around 87% and 13% in revenue percentage and remained flat over the year. How should we expect that to trend and exit in 2022? How big should the services be as a percentage of revenue by year-end?

Moving into 2022, we expect to see more software and less hardware or products, due to our transformation from B2C to B2B. We believe Q4 was the last quarter where hardware had a significant portion. This shift should already start in Q1, and overall, it will help us achieve our targets for gross margins for 2022 of between 50% to 60% on a non-GAAP measure.

Got it. Since we’re starting from low gross margins and aiming for 50% to 60% for 2022, will the exit rate presumably be even higher than that if we expect to continue improving throughout the year?

That’s correct.

Okay. Got it. That’s all I had. Thank you.

Thank you.

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

Thank you, Operator. Thanks everyone for joining our call. We look forward to meeting on the next call. Have a great day. Goodbye.

This concludes today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.