Hello and welcome to the DarioHealth Corp. Second Quarter 2020 Results Conference Call. It is my pleasure to introduce your host, Mr. Glenn Garmont from Investor Relations. Thank you. Please proceed.

Thank you, Donna. Good morning, everybody, and thank you for joining us today for a discussion of DarioHealth's Second Quarter 2022 Financial Results. Leading the call today will be Erez Raphael, Chief Executive Officer of DarioHealth, and he'll be joined by Rick Anderson, President. After 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 August 15, 2022. This morning, we issued a press release announcing our financial results for the second quarter of 2022. 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 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, as well as the second quarter 2022 Form 10-Q, which was 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 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 our 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, and thanks, everyone, for joining our call this morning. Joining me today is Rick Anderson, the President of the company. As you all know, those who are following the story, Dario and the management of Dario have been very consistent over the last few years with our objective of changing health care to be much more consumer-centric and digital. We had a few big initiatives. One of them was to transform the business to be multi-condition. Another one was to shift our business from direct-to-consumer to B2B2C. I think that 2022 is transformational for us because we are seeing the fruits of everything that we have done in the last few years, and we are enjoying significant momentum in our B2B2C transformation. All the decisions we made a couple of years ago tend to be very smart and right decisions, as reflected in the business that is continuing to develop. On the B2B2C front, we see significant momentum. You probably saw the press release we issued last week announcing a national health plan that provides access for 10 million members on the behavioral health platform at DarioHealth. This represents tens of millions of dollars in contract value. Rick will elaborate shortly. Overall, we are showing contracts signed with a total value of $55 million and currently have 69 signed accounts. At the beginning of this year, we projected that we would have 100 accounts by year’s end, and we are on track to achieve that. Moreover, we believe that many of the relationships we are cultivating with strategic partners, including Sanofi, are contributing to our growth. We feel very satisfied with the transformation to B2B, and we are equally pleased with the fact that we have built this multi-condition platform, evident by the over 40% of signed contracts representing more than a single condition. This direct-to-consumer strategy was essential for building our platform, as it allowed us to gather user data. This data is critical in developing a consumer-centric solution. Comparing our business today to a year ago, we have significantly more accounts, established strategic partnerships, and agreements with three health plans. Our confidence in the business is extraordinarily high. In order to support the national health plan and to work closely with partners like Sanofi, we have allocated more resources towards making our B2B model successful. Consequently, we made the strategic decision to significantly slow down our B2C business and redirect resources into B2B. This decision's effects are starting to show in Q2 and will continue to do so in the upcoming quarters. More specifically, we anticipate improved financial profiles through more efficient operations, reduced operational expenses, lower losses, and an expanded run rate that will lead us toward profitability. Many digital health companies struggle to achieve profitability despite scaling sales effectively. Our multi-condition strategy and capability to extract 5 to 8 times more revenue per account, combined with gross margins beyond 70%, indicate that we should achieve profitability much sooner than other companies. Despite witnessing reductions in our non-GAAP gross margins due to a delay in revenue recognition from our National Health Plan, we are still confident that our B2B2C transformation will carry us to where we need to be. In Q2, we reduced our operational expenses by 18% compared to Q4 of last year. The decline in losses was 26%, and our cash burn rate decreased by 38%. Consequently, we believe the efficiencies gained from the B2C slowdown will stabilize our cash position. We should anticipate margins improving to above 50% for the full year and above 60% next year as we transition to B2B models. We expect revenues to reflect these changes, as the impact of the B2C reduction will be minimal in 2023 and 2024. Our balance sheet stands strong with $68 million, providing us solid stability for 2024. Additionally, we have a $25 million credit line available if needed. Our connections with strong strategic partners enhance our financial position. With that, I would like to hand the floor to Rick.

Thanks, Erez. We continue to see strong traction across our employer health plan channels, with wins in the employer side, both off-cycle and our recent announcement of the National Health Plan. We are very pleased with our traction and have not yet moved into the point in the year where we anticipate the majority of our employer cycle contracts to finalize, which typically happens late in the third quarter and fourth quarter. Therefore, we are optimistic about the traction we’re gaining with both our behavioral health stand-alone product and our full suite product off cycle. The health plans we announced previously have launched this quarter and are contributing small revenue, with expectations that they will generate more revenue in the future. As Erez mentioned, the National Health Plan is expected to yield revenue starting in the third quarter. Our strategic partners are now becoming a recurring revenue stream for us, which is a significant positive. With the national health plan, we estimate that it will represent approximately $25 million to $35 million in recurring revenue. Currently, we have signed 69 accounts, positioning us on track for our goal of 100 accounts. Partnerships with companies such as Virgin Pulse and Solera are also starting to yield business and reveal a growing pipeline. The multi-condition solution is experiencing positive traction in the market; buyers appreciate the lowered vendor count and the integrated solution we offer, leading to a unified member journey. We aim to bring in at least one additional health plan this year, with sustained traction in our partnership with Sanofi, particularly on the commercial side, where we are co-selling with their market access team. Presently, our client base is expected to grow by 100%, and we’re currently achieving about 35% growth, which puts us in a favorable position to hit our target. We predicted the addition of 3 to 5 health plans; we have added 2 and anticipate one more by year-end. As for our multi-condition offerings, around 35% of our signed deals currently feature multiple conditions. As deals advance in Q3 and Q4, we expect that number to approach 40%. Regarding strategic partnerships, we projected 1 to 3 strategic partners in 2022; we have one, with additional prospects in the pipeline. We also believe that our growth in signed contracts from 51 in 2021 to over 100 in 2022 is on schedule. Our metrics indicate a retention rate of 70% to 80% for members on the platform annually. Our enrollment rates average above 30% among eligible users. The B2B2C cost of acquiring customers is now below $20, which is significantly lower compared to our direct-to-consumer approach. This drastically improves our financial profile. We expect to see steady margins above 70%. Additionally, our partnership with Sanofi is a multiyear, $30 million agreement with three main collaboration aspects, which include market access and data utilization. This collaboration increases our sales resources and thus supports a higher chance of penetration into health plans. I'll hand it back to Erez.

Thank you, Rick. Overall, we are very satisfied with our position today. Q2 marked an important milestone as we transition from B2C to B2B. We have established enough accounts and implementations, seeing all key performance indicators move in the right direction, especially concerning gross margins and recurring revenue. Our confidence is extremely high due to the strategic decisions we've made regarding our focus and the path toward profitability. The reduction in operational expenditures is a positive development, and we are on track to achieve our goal of 100 accounts by year-end. While we note the temporary revenue miss this quarter, we attribute this primarily to the delayed recognition from the National Health Plan. However, our alignment as a multi-condition provider, coupled with growing interest in our platform, positions us favorably for the future. As we continue executing our strategy effectively, I'm optimistic about our prospects for significant growth in the coming years. With that, I want to open the floor to questions.

The first question today is coming from Charles Rhyee of Cowen.

Erez, I just want to talk a little bit about the B2B2C revenue in the quarter, about $2.8 million. In relation to the slippage of the national health plan client, last quarter B2B was more like $4.6 million. Can you give us a sense of the dynamics there? What happened last quarter, and were you recognizing revenue from the National Health Plan client, and some project slipped? Just trying to understand the sequential change while considering some things slipped. What gives you confidence we’ll see that in the third quarter?

Yes, absolutely. So aside from B2C, we categorize our revenues into three main buckets: strategic partnerships, including Sanofi, B2B2C employers, and health plans. The fluctuations you witnessed between Q1 and Q2 could be attributed to the strategic revenues being recognized fluctuating as they are not recorded uniformly throughout the quarters. For B2B2C, our business related to employers and health plans continues to grow each quarter.

Got it. So, is the difference here largely related to revenue from Sanofi? Because I think you had previously discussed an $8 million contribution from Sanofi. Is it that we recognized some in the first quarter, but not as much in the second quarter?

Yes, the way we recognize strategic revenue and interactions with Sanofi are not split evenly throughout the quarters. Therefore, it’s possible to have elevated revenue in one quarter and lower in the next. For instance, the Sanofi contract sees us acquiring revenue for three distinct areas: market access, development services for integrating Sanofi medical devices, and data. Each segment has its revenue recognition cycle. While we spoke about projected revenues of $8 million, the actual number may vary. Overall, quarterly revenues will not grow uniformly due to the nature of our projects.

The next question is coming from Alex Nowak of Craig-Hallum.

Hoping we could discuss the DTC transition. This quarter, it looks like DTC represents about 60% of sales. How quickly is that percentage likely to decline to zero as spending is cut back? What is the current annual operational expense associated with DTC, and how much more are you planning to eliminate and shift to the B2B channel?

Yes. Overall, our DTC will continue to slow down. From Q3 and Q4 last year, we are down 25% on DTC. We expect a further reduction between Q3 and Q4. While I can't provide exact figures, it will decline further. We retain the DTC aspect that generates recurring revenues but won’t invest significantly in digital advertising, which has contributed to DTC expenses. In terms of operational expense reduction, we’ve already reduced OpEx by 18% between Q4 last year and Q2 this year. We expect an additional reduction of at least 10% between Q2 and Q4 this year, primarily due to the direct-to-consumer slowdown.

Just to clarify, while we expect DTC spending to diminish, we do not anticipate it reaching zero. Our approach is to rationalize the spending to ensure we still achieve beneficial outcomes from DTC, capturing necessary data while maintaining some operational presence.

Understood. Now, looking at everything you’ve shared, from the $55 million in contracted deals to the 100 account aim by year-end, it sounds like there’s a robust sales pipeline behind this. With B2C declining due to focus reduction, what does that imply for revenue in 2023? How are you guiding for next year?

Rick, would you like to tackle that?

Yes, certainly. Our perspective for 2023 is that B2C, as noted, won't go to zero; it will maintain a run rate that allows us to keep users engaged on the platform. The minimal budget allocated to DTC is essential to keep generating data and testing our product before introducing it to the B2B2C market. Thus, we expect that while B2C revenue might recycle into double digits, the primary revenue driver will stem from B2B appointments. We anticipate significant growth thanks to our signed accounts, which will offset potential short-term impacts from B2C reductions.

Would you aim to double your number of B2B accounts to 200 in 2023?

Yes, we anticipate that could be a real possibility. Think of the contract value building as transitioning into recurring revenue streams over the next few quarters, supplemented by additional progressions in our pipeline.

The next question is coming from Rahul Rakhit of Life Science Capital.

Can you provide clarity on your progress with the first national health plan? You mentioned there are phases left—how many are there and what does each phase add to your ARR?

So what we have announced includes the second phase, which, along with the first phase, demonstrates traction that is embedding our technology into their behavioral health platform. It's composed of several components, one being per member per month fees, with two tiers for customer upselling, relevant to revenue options forecasting from ARR. We expect revenue associated with this to be recognized in 2022 and then to increase in 2023. Additionally, there are opportunities to extend further into planned memberships, significantly enhancing revenue for future phases.

Thank you. About the additional national health plan announced, can you clarify on how revenue will ramp up? Is its ramp similar to the first plan? Are there specific phases with distinct revenue values?

This plan will market its platform to their self-insured business, so ramp up relies on their conversion speed. I foresee it as front-loaded, gradually expanding from 2023. While we will see some revenue in 2022, we will grow it through 2023 and 2024.

The next question is coming from Nathan Weinstein of Aegis Capital.

Regarding the multi-condition platform, how do you assess its competitiveness in current market conditions?

Our multi-condition approach is a key differentiator. Employers and health plans increasingly seek to limit vendor engagements, preferring fewer vendors covering multiple conditions, which reduces costs and simplifies management. People appreciate our completely integrated solutions, enhancing user engagement. A person utilizing our digital services for one condition can easily transition to another without leaving our platform, leading to a more valuable experience overall. This positions us favorably when competing in RFPs as we’re often the sole provider during these decisions.

For my follow-up, regarding anything related to data, can you elaborate on its value, and are there further monetization opportunities?

We're focused on generating evidence that our solutions work, which is gaining significance among employers and plans demanding validation. We possess over 20 studies validating our outcomes, and we anticipate that demand will escalate over 3 to 5 years. Our collaboration with Sanofi provides extensive capabilities at no additional cost to help us gather the valid evidence to support our commercial pathways. We believe harnessing our platform’s data can establish value, though broader monetization isn’t our current priority.

The next question is coming from Benjamin Haynor of Alliance Global Partners.

Impressive to see customer acquisition costs drop below $20 for B2B2C. Can you clarify what is included in that $20 CAC?

Certainly. When evaluating our account acquisition costs, we encompass all expenses involved in enrolling users onto our platform through multiple channels—digital campaigns, phone calls, and webinars. Everything from the launch phase leading to user signup is considered in that number. It's pertinent to note that our sales team's fixed costs do not factor into this customer acquisition cost.

Got it. For further inquiry, can you characterize non-strategic B2B2C growth sequentially? Please exclude Sanofi from the equation.

Overall, we are observing around 30% quarter-over-quarter sequential growth. It may not be perfectly linear, especially when factoring in larger contracts like the National Health Plan.

The next question is coming from David Grossman of Stifel.

Can you summarize the various dynamics influencing your commercial business flow for the latter half of the year?

Absolutely. In terms of B2B2C, we will keep onboarding users across our 69 signed accounts, generating more revenue as a result. The National Health Plan we have recently signed should also add to our revenues starting in Q3. While we anticipate overall revenue recognition growth from B2B2C efforts, strategic partnerships might show a decline relative to the first half of the year due to milestone-based project deliveries.

To clarify, will revenue from strategic partnerships be sequentially reduced compared to the first half?

Yes, the nature of how we deliver on these projects dictates that revenue recognition will decrease in the latter half of the year compared to the first half due to project delivery timelines. This doesn't imply any slowdown in business; it’s just project-specific revenue recognition metrics.

The next question is coming from Charles Rhyee of Cowen.

Erez, considering the pushback on the B2C business and market dynamics, to what extent do you see a reversal in customer acquisition costs? Is there any potential for a future reacceleration?

That’s an excellent point. We recognize that the COVID impact flooded digital channels with competition leading to soaring costs. While we see a small decline in costs, we want to emphasize resource deployment towards B2B opportunities that show the highest potential for value and growth. We're focused on optimizing our efforts strategically; however, if a notable pivot occurs in the digital space, we may reassess our stance on B2C significantly.

Lastly, regarding your new national health plan, could you clarify if it focuses on commercial or Medicare members?

This arrangement targets their ASO commercial segment, with opportunities for expansion into their fully insured book in line with our objectives.

Are any plans being discussed to venture into Medicare in your discussions?

Currently, that’s not on the agenda; however, it represents a potential future avenue. Our existing partnerships, notably our two health plans, have positioned us in the Medicaid space and stimulated demand.

The next question is coming from John Vandermosten of Zacks.

I've noticed that out of the last several contracts you've signed, many included behavioral health components. Is this primarily due to demand generated pre-acquisition, or is there heightened demand for these services?

There is ongoing demand for behavioral health solutions. However, the observed uptick results from increased off-cycle demand. We have also seen strong interest in full suite products, predicting most of that will occur in the on-cycle phase of Q1 next year. Post-pandemic, there has been definitively heightened demand for behavioral health services, which we expect will benefit our standing moving forward.

Could you rank interest from key areas including diabetes, behavioral health, blood pressure, and weight by perspective?

That’s not easy to gauge as the integration aspect is vital. We find that these conditions often coexist; for instance, hypertension and diabetes frequently appear together. Thus, the strongest demand comes from offering a comprehensive suite rather than isolated treatment.

Thank you. I would like to thank everyone for joining our call this morning. We look forward to seeing you at our next earnings call, as the business continues to progress. Thank you, and have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and enjoy the rest of your day.