DarioHealth Corp. Q1 FY2023 Earnings Call

Good morning, and welcome to the DarioHealth First Quarter 2023 Results Call. All participants are in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chuck Padala. Please go ahead.

Thank you, operator, and good morning everyone. Thank you for joining us today for a discussion of DarioHealth's First Quarter 2023 Financial results. Leading the call today will be Erez Raphael, CEO of DarioHealth, and he'll be joined by Rick Anderson, President. After the prepared remarks, we will open the call to 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 on May 11, 2023. This morning, we issued a press release announcing our financial results for the first quarter of 2023. 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 first-quarter 2023 quarterly report Form 10-Q 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 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 this morning's press release. With that, I'd like to introduce Erez Raphael, CEO of DarioHealth. Erez?

Thank you, Chuck, and thanks to all of you for joining this morning call. Q1 financial results continue to demonstrate the success of the multiyear strategy we implemented in the last few years. We continue to see the trend of financial profile improvement that we saw in Q3 and Q4 of 2022. We moved our business from direct-to-consumer to B2B and from a single-point solution to an integrated multi-chronic condition platform. Let's reexamine the strategy, the market trends against the strategy, and the indications for success in the financial results we are reporting today. First, our transformation from direct-to-consumer to B2B. We have succeeded and continue to succeed in making significant advances in the financial profile of the company. This is because of the significant reduction in the cost per member acquisition, the ability to scale, and a more efficient economic model for members on the platform. Key indicators for financial results for the success of this strategy is evident in that 70% of revenues came from B2B. Also, the continuation of the sequential improvement in our gross margins and a significant reduction in the company burn rate. Second is the multi-condition strategy in our B2B business, where we manage five different conditions on one integrated platform. This strategy is not only aligned with the market but also ahead of the macro digital health market trends of consolidation and consumer centricity. In fact, our current model is better suited to the global financial macro environment we are all facing today. The market trends of customers looking for an innovative digital solution with more conditions and from a smaller number of vendors and adopting solutions for partners continues. The majority of our new contracts continue to be multi-conditions. We generate more revenue per customer than a single chronic condition point solution. We believe our platform has a strategic advantage because it not only covers a large number of conditions, but does so through an integrated user experience with high member engagement. We're also seeing real-world evidence in our voice of customer data, which focuses on ROI, a trend that will certainly position us as a value differentiator to benefit from, as recently demonstrated in the clinical data published by Sanofi earlier this week. Another strategy is accelerating penetration through partnership, which is an approach we have been executing on for the last few quarters to accelerate both the sales cycle and the accounts implementation. We have collected a meaningful list of partners, including Solera, Virgin Pulse, Alliant, Sanofi, and Aetna that are looking to accelerate our footprint further. This quarter, we added significant new partners and secured new customers through these partners. We announced a very significant new partnership with Amwell, one of the largest telehealth companies in the country, with 90 million people having access to their platform. Rick will elaborate on this significant deal for us. In addition to that, we announced our first customer through the co-promotion efforts under our strategic partnership with Sanofi. This is a multi-condition agreement, with a pharmacy benefit manager. Third, we demonstrated tight collaboration on real-world data and clinical evidence with Sanofi through the presentation of the first Sanofi conducted study earlier this week. We are very excited about this study and what this represents not only for Dario but for the digital health industry as a whole. We believe our partnership strategy, including the traction we saw in the first quarter, will drive accelerating revenue in the second half of 2023 and even more in 2024. Let's take a deep dive into the financial results. Q1 shows continued improvement of the company financial profile, a trend we demonstrated in Q3 and Q4 of 2022. We are presenting real evidence that shows the model is working and creating long-term shareholder value. Let's start by looking into the revenues and its components. First-quarter 2023 revenue was $7.07 million, a sequential increase of 3.8% compared to Q4 of 2022. This is a 12.3% decrease compared to the revenues of $8.06 million in the first quarter of 2022. This decrease resulted mainly from lower B2C revenues in Q1 2023, which is part of our previously discussed strategy to manage the B2C business to a breakeven to a decreased investment in B2C customer acquisition cost. We believe we will see revenue acceleration as we continue to get signed accounts launched. Another important metric is the gross margins. This is where results are even more exciting as we are showing a true software-driven business, with SaaS Software-as-a-Service oriented characteristics. Pro forma gross margins were above 60% for the first quarter of 2023, up from 58% of revenues in the fourth quarter of 2022. As I mentioned in the last few calls, we are targeting an average gross margin of above 60% for 2023 and above 70% for 2024. Looking at the operating loss, we are seeing true operating leverage on the infrastructure that we have built and real economic advantage for a multi-condition approach. We continue to reduce the cash used in operating activities in the first quarter, with only $4.76 million used further reduced net loss excluding stock-based compensation acquisition-related expenses and depreciation, for the first quarter of 2023 to $6.8 million compared to $10 million for the first quarter of 2022 and $9.6 million in the fourth quarter of 2022. Looking into the balance sheet, we also have a strong cash position. Pro forma cash balance as of the end of Q1, inclusive of the private placement funds and the loan refinancing, was $61 million, which leaves us with a significant runway to execute on our strategies. With that, I want to hand over the call to Rick to elaborate on the commercial aspect.

Thanks, Erez. In the first quarter, we continued our revenue growth trend, with increasing year-over-year and sequential quarterly growth. As expected, we are maintaining our B2C revenues at levels consistent with the fourth quarter of last year and it remains a self-funding strategic innovation platform. We expect to maintain the B2C business at these levels throughout 2023. On the other hand, we continue to see growth in our B2B revenue in the first quarter, with the B2B revenue now accounting for approximately 70% of total revenue. While we continue to release the number — increase the number of B2B contracts in the first quarter consistent with the normal self-insured employer benefit cycle, the number of contracts signed was less than the fourth quarter of 2022. More than 70% of self-insured employers are on a January to December benefit cycle, with the majority of employer contracts signed in the late third and fourth quarters, though we are currently in the early stages of the annual employer buying cycle. Our overall contract value is approximately $67 million, a modest increase over the end of last year. However, this does not include any value for distribution partnerships unless we have visibility to the distributors in customer contract value. For example, we have not reflected any value related to the Amwell contract despite the fact that Amwell is already in discussions with some of their downstream customers about adding Dario to their offering. The market trends of customers looking for more conditions from a smaller number of vendors and accessing care management solutions through partners continues. The majority of our new contracts continue to be multi-condition, which generates more revenue per customer than single condition contracts. We believe our platform has a strategic advantage because it not only covers a large number of conditions that are high priorities for customers but does so through an integrated user experience with high member engagement. We are also seeing increasing focus from customers on ROI, a trend that we believe we are well positioned to benefit from. Our solution delivers significant clinical and cost improvements for our customers on some of the most costly chronic conditions. This was validated in the first Sanofi conducted study that was released earlier this week. We are very excited about the results of this study and what it represents not only to Dario but to the digital health industry as a whole. The study was conducted by Sanofi and their third-party data partner, which makes it one of the only independent digital health studies, and it was conducted with a much higher level of rigor than most of our competitor studies, including the use of a propensity match comparison group. The results demonstrate that Dario does impact healthcare costs. The study showed with a high level of statistical significance that Dario members had a 9.3% reduction in healthcare utilization and a 23.5% decrease in hospital admissions. In this environment of increasing focus on cost and ROI and with increasing demand for evidence from customers and prospective customers, we believe this study will accelerate the adoption of our solutions. Distribution and strategic partners are an important part of our strategy to accelerate sales and make implementation and management as easy as possible for our customers. We had two significant partnership developments in the first quarter. We announced our first customer through our Sanofi co-promotion efforts. This multi-condition agreement with the Pharmacy Benefit Manager is one of the two health plan type customers that we discussed last quarter. We anticipate that it has the potential to generate multiple millions of revenue once fully implemented. Implementation is underway, and we expect to launch this customer in the second quarter of this year. We are very excited to see our first customers through our collaboration with Sanofi and look forward to more developments from the growing pipeline with them. Second, we announced the partnership with Amwell, one of the largest telehealth companies in the country with an installed base of approximately 2,000 health plans and health systems that reach over 90 million people. Amwell is integrating our cardiometabolic solution into their platform and will distribute it to their current and prospective customers. Given Amwell's past success distributing another digital health solution through their platform, we have high expectations of this partnership and believe that it could represent high tens of millions or perhaps more in revenue, as the relationship ramps up over the next several quarters. While we know that Amwell is actively selling the Dario solution, we have not yet included any contract value in our 2023 forecast or reported contract value. We will adjust the contract value as we gain more visibility to the initial customer size and timing. We have one additional health plan that we continue to anticipate launching through a partner in the near term. We have seen several delays with this customer that are occurring between our partner and the health plan but we continue to anticipate the launch in the second or early third quarter. Encouragingly, this partner has asked us to expand the number of conditions that they can distribute to their customers, which are all health plans and we are currently contracting on that expansion. As previously reported, we also expect Aetna will launch their new digital platform, which they are selling to their employer customers on July 1. We earn revenue for members that are contracted to have access to the platform which we expect to grow over several quarters post-initial launch. Throughout 2023, we will continue to invest resources in our existing partnerships to assist with customer pull-through and we will seek to expand our partner roster to a select number of additional partners that we believe can accelerate our revenue and service specific subsets of customers. We have demonstrated that we can convert contracts into revenue by expanding the number of contracts that are multi-condition, achieving an average enrollment rate of 30% or better and significant levels of engagement. Over the last year, we have more than doubled the number of records account, which based on experience is the basis to accelerate growth of customers on the platform, especially as we continue the 2023 selling season for 2024 employer launches, and we believe our partnership strategy, including the traction we saw in the first quarter, will drive accelerating revenue in the second half of 2023 and 2024. With that, I would like to turn it back over to Erez.

Thank you, Rick. So to summarize, we believe that further into 2023 and 2024, we'll continue to strengthen our financial profile. The losses will continue to decline. Gross margins will improve with a target of about 60% for 2023 and above 70% for 2024. Despite macroeconomic factors and the possibility of recession, we don't see a slowdown in the digital health market. In fact, we continue to see tailwinds as sales and employers seek to better manage their patients and reduce healthcare costs. The market trends of customers looking for digital health solutions with more conditions from a smaller number of vendors and adopting partners continue. Further, our commercial capabilities matured considerably in the past few years with a larger sales team and more strategic partnerships, which we expect to accelerate not just more contract wins but more meaningful contract wins, such as Aetna and other large accounts. We are seeing a trend of big traditional healthcare players in large pharma such as Sanofi and other big medical devices companies looking to tap into the digital health space by partnering with companies like Dario so they too can extend their footprint in healthcare transformation. We expect to make more large and strategic partnerships like those. We have made and continue to make substantial progress in building our relationships with Sanofi, which we believe can take us to the next level in terms of our relationship with Sanofi as a big pharma. Our relationship with Aetna is forming, and we recognized revenue this quarter in the last few quarters, and we are anticipating that revenues will accelerate throughout 2023 and beyond. We believe that we are positioned to accelerate growth in 2023 and 2024 as the overall foundation for client wins is improving with a larger sales team and meaningful partnerships that should give us significant larger access to clients. With that, I want to hand over the call to the operator for a Q&A session.

We will now begin the question-and-answer session. Our first question comes from Alex Nowak with Craig-Hallum Capital Group. Please go ahead.

Hi, great. Good morning, everyone. Maybe just talking on that last point, thinking about the enterprise revenue. Just how much of the B2B enterprise revenue, how much of that B2B revenue in Q1 is now, call it, purely recurring versus what I would say would be more milestone-like payments?

Thanks, Alex, for the question. So the way that we are looking into the revenues that are coming from Sanofi and Aetna, some of it is also recurring revenue. So I would say that on a high level, around half of the revenues that we have today are kind of recurring. Some of it is coming from employers, and some of it is coming from data that we are getting paid for. I wouldn't say that everything that we are getting from Sanofi services; so the way to think about it is that around 50% of the revenue is recurring.

Okay. That is helpful. When we talked a lot about the strategic deals, but also you signed over 100 contracts now with $67 million in contract value. Where are we in ramping through those contracts? Are we halfway through that contracted value, or my math would probably say we're probably 25% of the way to that contracted value impact, the revenue is recurring. Just help us think about that. And when can we ultimately reach a full $67 million of revenue coming from those contracts at 100% penetration?

For the $67 million in contracts, it's important to note that Aetna accounts for approximately $30 million to $35 million of that total. We recognized revenue from Aetna between Q2 and Q3 of last year, but this revenue consisted solely of services, not recurring revenue, which is why we view Aetna as a zero ramp-up. If Aetna is excluded from the $67 million, we're left with about $32 million, of which approximately 70% is ramped up. There are a few accounts still not launched, so overall, only about 35% to 40% of the $67 million is currently active. As for Aetna's implementation, a lot will depend on how quickly that progresses. I estimate it will take us three to four quarters to realize the full recognition and deployment of these signed contracts into revenue. To emphasize Rick's point, Amwell represents a significant opportunity, and we have other sizeable deals in the pipeline that are not included in the $67 million. With Amwell, we have access to 90 million users, and as we continue to secure more accounts from partners like Amwell and Solera, we will be able to increase the overall figure from the $67 million. Currently, about 40% is recognized, with the remainder set to be realized over the next four quarters. This is the best visibility we have at this time.

If I remember correctly, I think the pipe or the funnel of deals out there was about $900 million worth. This is going back several quarters now. I guess, as you think about new deals that will be signed up on the platform here, it seems like you're targeting these larger names like Amwell, for example, where they're going to bring a large group of customers to Dario platform versus targeting more on an employer-by-employer basis. Is that the right way to think about the ramp of new deals going forward?

Yeah. I think that the way we are looking into the future ramp-up is that, number one, we're going to have bigger employers on the platform when we started B2B. We had to gain recognition and we had to gain reference customers. We started with relatively small employer accounts, and we are now moving to bigger employer accounts. The second trend is that we're going to probably get more bulk accounts that are larger through our partners. So eventually through Amwell, we're going to get to plans that will lead us to employers. Aetna is getting us into employers that will lead us to users. Eventually, we believe that more than 50% of the employers that we're going to have on the platform will come through partners and not directly from us. That's the trend that we're expecting to see two to three years from now. We believe that more than 50% of the revenues are going to come from these partners like Aetna, Sanofi, and Amwell, Solera, etc. We have our own direct sales team, with 12 or more sales representatives that are working directly and are also working inside these partnerships. So we dedicate our own sales team into relationships with Amwell and others to leverage these connections. We think that this will eventually lead to a reduction in the cost of acquisition for a single account. That's how we view it.

Okay. That is helpful. And then last question. We talked about this in the past, but we've been seeing this big uptake in digital health around weight loss. Just what are the company's thoughts on adding drug prescriptions to this platform? It could be weight loss drugs like Ozempic or Wegovy. What are you thinking about that? And how does that play into the Sanofi relationship?

So, obviously, those medications are having a significant impact in the market and we anticipate they will actually have a significant impact on wellness vendors managing only weight management solutions. The market perspective on those medications, in other words, our customer perspective on that depends a little bit on who the customer is. Our approach to that at the moment is targeting a digital approach and experience for our members that tie into what their doctors are doing and provide information and tools into that process. Now, that said, we are having discussions with one of our partners about potentially integrating more closely on looking at that for members. Unlike, for example, some diabetes medications where companies are looking to take members off of those medications, we don't think that's realistic in the long term. What we're looking to do is provide members with tools to help manage their overall health and weight around that, including the utilization of those medications. But we're not planning on being in the business of having providers and prescribing that; however, we are looking to partner closely with some of our existing partners around those drugs.

Okay. Understood. Appreciate the update. Thank you.

Thanks, Alex.

Our next question comes from Charles Rhyee with Cowen. Please go ahead.

Hey guys. Thanks for taking the question. I wanted to revisit something I missed earlier. Rick, can you quickly go over again what customer base you're gaining through Sanofi? Could you fill me in again briefly? Apologies.

Sure. It's the PBM or Pharmacy Benefit Manager. It's a national PBM. It's actually a several million dollar revenue opportunity to have a current diabetes solution, which we're replacing and then bringing the rest of our suite into that. They have recently seen some very high growth and are fairly aggressively growing as well. We think that's a good opportunity. That was the first one. And if you think about it on a sales cycle basis, it came a little bit faster than I would have otherwise anticipated. I think that we will see more customers coming out of that relationship a little bit faster than we have in the past as we're further along in the sales cycle and our understanding of how to make it work a little bit better than we did back in February when we started.

And is that in the $67 million contracted value, is there some estimate for that in that number?

There is.

Okay. And just to be clear, what's your part in selling in this case? Are you brought in as a technical consultant towards the end of a sale, or are they handling all the selling on your behalf? Can you just talk a little bit more about how that works? And is there any population where it's automatically rolled out to?

Yes. The existing population will be transferred over to Dario as we launch the solution over the first month or two months. So there is an immediate revenue opportunity once that customer is turned on, which, as I said, we anticipate here fairly shortly. For the rest of the customer base and as they go forward, yes, we are investing resources in that partnership as well as others to help them sell it through. In that particular case, it is more of a technical consultant role where we're assisting with the switchover of the existing members and providing marketing materials as well as consultation on sales and working as they ask it. In other cases in our partnerships, we're more involved in the sales, attending sales meetings, etc. It sort of depends partner to partner. That one is a little bit more on the lighter lift side.

Okay. So then when we think about the revenue ramp for the rest of the year, it sounds like what you're saying is expect the B2C revenue to kind of stay in this low $2 million a quarter range. This is sort of a breakeven part for your business. Obviously, a good quarter in B2B, but it sounds like we would think of sequential improvements in revenue for B2B and one coming sooner from this arrangement. But then if you think about Aetna rolling on, correct me if I'm wrong, I think that's still slated for a third quarter start? And then we should have that $35 million ramping up over the course of the year. Is that the right way to think of it on top of the existing B2B base?

Yes. That's what we think we're going to see. I mean, as we said, Aetna is planning to launch the platform on July 1, and we think that it's going to take a few quarters to ramp up for this full revenue. This is from the visibility that we have at the moment for the Aetna relationship. On this baseline, we're supposed to see a more significant ramp-up into the second half of this year. I did also for Alex the calculation of the $67 million and how much is coming from Aetna. So we have visibility to that as well.

Okay. And I guess last question for me then. If we think about any kind of incremental spend as we think about particularly the OpEx line? Obviously, you guys have done a good job bringing adjusted EBITDA loss down. Should we expect continued sequential improvements in that line as well even with having spend related to some of these new partnerships or is this a function where it's more driven by leverage on revenue and gross margin?

Yes. I think that we did an amazing job taking the burn rate down to only $4.7 million in this quarter. This is a transformation that was done over three to four quarters along 2022. Just to remind investors, we slowed down B2C. We did a lot of activities of offshoring. We have seen a lot of digital health companies out there in the US that have very high OpEx. We are very offshore driven, and we also consolidated all the acquisitions that we did in a very efficient way. I think that we're going to see stabilization of our OpEx on this kind of run rate. It might be a few hundred thousand dollars every quarter moving here or there, but that's going to be a baseline. On this baseline, we're going to grow gross margins and on this baseline, we're going to grow the revenues up, and this is something that is going to take us to cash flow profitability. That's the OpEx that is kind of baseline to how we want to move forward.

Great. Last question for me. As we think about the gross margins expanding, can you remind us where you think sort of your target gross margins are at — like where do you think that it can get to?

Yes. We were clear that this year we should stabilize on 60% plus. I think it's going to be 60% to 62% this year. And we're already showing this quarter that we are above 60%. I'm talking about non-GAAP. We think that for a single account, we see numbers that are closer to 75%. We think that moving forward, and we want to see it already next year 2024 that we're going to exceed 70%. So that's how we look into the business. I think we can do higher, but conservatively I think that investors should think about it as 70% gross margins. Looking purely at the B2B if you take out the B2C, we are already meeting this number for the last three quarters including this quarter. So it's not something that we are dreaming about; it's something that we are already doing. The B2C is in the range of 45% to 49% and this is why the full business is still not on the 70%. But this is something that will arrive once the merge is going to be in higher favor of B2B.

Great. Thanks a lot, guys and congrats.

Thank you, Chuck.

Our next question comes from Rahul Rakhit with LifeSci Capital. Please go ahead.

Hey guys. Thanks for taking the questions. Rick, on the last call, I think you'd mentioned that the platform has high customer satisfaction rates with some customers discussing the potential of expanding conditions to the broader platform beyond the current scope of their contracts. I apologize if I missed this earlier, but I was just wondering if you could provide any update on how those conversations are progressing? And two, if you could give us a sense of how many of those existing customers are exploring this option?

Thanks for the question. We have two types of customers, probably more than that, but two big portions of customers on the platform. One are the behavioral health customers that came in as behavioral only. We have several of those that I would say are on the larger side of our behavioral health customers that are now looking at expanding into the overall solution. We have a number of our early customers who came on in 2021 and 2022 with single conditions that are now looking at expanding to additional conditions or in some cases the full suite. Those conversations are continuing as part of this 2023 sales cycle for a launch in 2024. We're pleased with where we are in terms of those expansions. I guess the positive and the negative, to some extent, is the customers that we signed in 2022, especially in the back half of 2022, a lot of those were already full suite or multi-condition deals. So, there's less ability to expand in those as it relates to that. But I would say of those that would be good targets for what we're doing, we're seeing 70% to 80% of those looking at further expansion, and we'll see how that concludes throughout the rest of the year, but I think we're pleased with where those are in the conversations.

Got it. That's helpful. And then just one more for me. Of the contracts that were added in Q1, can you just help us understand what percentage were full platform versus multi-condition versus single condition? And maybe if you can just provide those percentages for the broader customer base as well. Thanks for taking the questions.

In terms of adding in the first quarter, I don't have the exact numbers in front of me, but I would say that it's probably about 10% were single condition, most of those being behavioral health versus multi-condition. I don't believe on the non-behavioral side, we added a single one that was a single condition like diabetes ailment.

Our next question comes from Benjamin Haynor with Alliance Global Partners. Please go ahead.

Good day, guys. I just have a couple of quick questions. It looks like some nice data on the health care utilization rate study. I was curious about the reaction that you've gotten from folks out there with current customers and potential customers. Anyone what the response has been there?

So, we just released the data obviously just yesterday.

Few days old, yes.

It's a little early for me to give you a full response on that. I mean, I think that the feedback – I will give you the anecdotal feedback to that in the last day which has been extremely positive. The feedback we're getting from more sophisticated customers, especially what we're seeing in the marketplace, is health plans especially are looking for better and better data that's out there. It's hard to understate the significance of the overall design and size of the study. There are close to 10,000 people in total that were in it. If you take the Dario Group and the comparison group, the way that propensity-matched comparison group was done, I mean Sanofi really brought their entire evidence team to it. They controlled the study and did it. Not many, if any, independent studies are out there. I think all of those things are very positive. I would say that it gets more reception in the health plan market than the employer market, mostly because health plans are looking for that. But if you think about the fact that health plans are also providers of services to downstream customers and the fact that employer side customers are looking for partner-based solutions, I think that this also supports that. Plus, percent reduction in hospitalizations, which is one of the largest cost drivers out there, is significantly important.

Okay. And then if you had to kind of put a savings dollar figure on it, I mean would there be a somewhat ballpark way of doing that just saying like the average inpatient cost for admission is X and multiplying it by the differential between the two groups and come with a savings thing, or isn't it quite that straightforward?

So, relative — yeah, no, directionally, that's right. I mean, obviously, hospitalization costs depend on geography as much as anything else in terms of how much hospitalization is. But if you think about a hospitalization, it's probably going to be somewhere in the range of $15,000 on average. Maybe in some cases you could argue a bit more. I think that gives you a generalized idea. We also saw almost a 10% reduction in overall utilization. That one is a little harder to translate into cost exactly in terms of the way that you were doing it, but that's overall health care utilization. Given that we're talking about members with chronic conditions, the cost reductions are significant. One of the things that we've definitely seen accelerate in the last quarter is there is more and more focus on cost reduction and ROI across the board. That's always true in health plans, but we're seeing it more and more on the employer side of the business as well.

Okay, I understand. That's helpful. My last question is perhaps a bit silly, but regarding the Index date for the two user groups versus non-users — for Dario users, it was the registration date. For the other users, I believe it was their first medical encounter, likely within the same month or quarter based on the matching. If the first medical encounter happened to be a hospitalization and was included in the look-back period instead of the go-forward period, wouldn't that make the comparison between non-users and Dario users appear more favorable than it actually is? That's all.

Yeah. I understand your question. I have to, and I'm happy to get you more information in terms of — with the clinical staff that did the study to give you an exact answer to that. I can tell you that members were matched on a 3:1 basis. So when you look at that across the population, I believe they controlled for that. But I'd be happy to get you somebody more knowledgeable in the exact details.

Okay. I would be curious on that. I don't know if it's meaningful, and I presume that, given the folks that it was well considered. I was just curious on that. Okay. Great. Well, thanks for the color, guys. That's all I have.

Thank you, Ben.

Our next question comes from David Grossman with Stifel Financial. Please go ahead.

Thank you. Good morning. I'm wondering if we could just go back to Aetna and Sanofi for a minute. I think you laid out a couple of important milestones for this year including getting it up and running in the second quarter or in the third quarter, with Aetna and Sanofi about transferring some of the activity from the PBM customer on your platform. Are there any other milestones that we should be aware of or focused on for those two partners this year?

Let's start with Sanofi. Just in terms of clients, I mean, the pipeline is growing and the teams are out selling. This PBM that we have signed on is not the last one. We're seeing a trend and a very healthy pipeline. We should expect additional deals that will come from this partner this month. I think it's the 13th or the 14th month since we started this strategic partnership. So this is number one. Number two, as I mentioned in my summary, if you look into the Sanofi and Dario relationship both sides consider the relationship successful for multiple aspects. From a development service aspect, we continue to gather and share a vision for where digital health is going, and the teams are collaborating on expanding the platform. From a data perspective, Dario's platform that collected users for many years has a lot of valuable data for Sanofi. The result we published earlier this week is significant for them, and we think that more of those will come. In terms of commercialization, we had the first PBM, and we believe we will have a few more clients this year. We see success in all three categories and a good relationship and collaboration.

Got it. And then, as we think about Aetna, is the July 1 kind of go-live date or early July go-live date early enough in their selling cycle for next year, given most employers are on a calendar year benefit cycle?

Yes. It is early enough. From what they've communicated, I believe they are also out there in the market currently even though in advance of the launch date. So yes, I would say that for 2024, they are actually sort of in the cycle at the moment.

Okay. And then for the Sanofi PBM that you're transferring, do you have any visibility right now since that revenue is just being transferred over — it sounded at least to me that it was just being transferred over to your platform. Do you have any visibility on how large that is to Dario?

Yes, we have some visibility to it, because we know how many members they have on the existing solution and we know what the overall rest of the population looks like. As I mentioned before, we believe that opportunity is in the lower end of the single-digit millions of dollars on an overall basis. There is significant revenue that would be attached. The absolute dollar value that will represent is also dependent on what portion of the current membership transfers over. Internally, we've taken a bit of a haircut to that. I don't expect that 100% of those currently using one solution will transfer to another. I do believe that, based on past experience with transferring out for other populations, we will get the vast majority of those folks. What we see in the market, especially because this is the diabetes solution, is that people really like the Dario solution. This is due in part to the direct-to-consumer background and the device, which people like a lot compared to other devices on the marketplace.

Okay. Got it. And then a couple of quick financial questions. If I heard you right, Erez, you talked about the DTC margin improving. And if I heard that right, what are the dynamics that you expect to drive that up other than just volume, because it sounded like it was supposed to be flat?

Yes. The DTC, in terms of gross margins fundamentally, is the same. However, we have seen improvement mainly because of inventory and supply chain issues when we had post-COVID period we created relatively high inventories. Some of it was at Amazon. We had to eliminate some of it last year mainly in Q3 and Q4, which destroyed the gross margins. The B2C is down is around 19%. I think that at some quarter, we had a negative. This is something that took down the whole B2C gross margins. On a steady state, the B2C gross margins are in the ranges of around 45%. That's in a steady state if we are not considering issues of supply chain and inventory. So we have seen improvement, but it's not a fundamental improvement in the business itself. In the B2B, we're already above 70%. So the way to calculate the future gross margin for the full business will be the combination of the two and what is going to be the merge between B2C to B2B. We think B2C is more or less in a steady state. We don't want to burn money on the B2C. We want to look at it to steer our product teams and R&D team.

Okay. So just to be clear, the direct-to-consumer business that that business is not quite at that 45% range currently. Is that right? It's getting there, but it's not there yet?

It's in the range of 40% — yes, it should be in the 40% to 45%. At the moment, it's in the range of 40% I think.

Okay. Got it. All right. And then just if you could provide us with some pro forma data given that you did the financing post-quarter in terms of pro forma share count we should be using as well as pro forma interest expense and interest income if you could.

Yes. So, the deal that we did is very important to mention. So, number one, pro forma cash position as of the end of Q1 is $61 million. That's number one. Number two, we refinanced the debt in a way that we are not amortizing it. The combination of $15.4 million that we raised plus the refinancing is extending our run rate by at least four to five quarters or even more comparing to where we have been before. That's number one. Number two, as you can see from the report itself, the burn rate was significantly lower than the previous quarter and the year before, only $4.7 million burn. That's point number two. In terms of the share count, the way that we were running this deal, we created a deal that is in a preferred structure. This is something that was successful for the company in the past. We did it in 2019. As opposed to other deals that we see for microcap companies that are raising money in deals that provide immediate discounts to investors here, we did the deal at market. Hence the deal was at $3.33, without discount, which was according to the NASDAQ rules. It was no discount. It was the average of the last five days. This is the definition of at market by NASDAQ rules. We're providing a dividend that is given in shares as investors hold the shares. We are providing dividends for five quarters. It's 5% every quarter, and the fifth quarter is like 10%. The amount of shares that we added immediately is the $15.4 million divided by $3.33, and this is something that you should add to the existing share count. You're not going to see it on Yahoo Finance or other places because usually they don't show the preferred shares. Those that are going to convert the shares will be able to sell it, but they're going to lose the dividend. That's how the mechanism is working.

Okay. Got it. And so what does that do to interest expense compared to where you've been?

Yes. I wouldn't connect the preferred structure, the equity deal.

Got it. Okay. Got it.

Just being paid in shares, so we know in advance the amount of shares that are getting paid.

Right. Okay. Got it. So we just need to dilute the share count as opposed to adding anything to the P&L. Right. Got it.

Okay.

Very clear. Thank you.

Thank you so much, David.

This concludes the question-and-answer session. I would like to turn the conference back over to Erez Raphael, CEO. Please go ahead.

Thank you. I would like to thank everyone for joining our call and for following the company. I wish you all a nice day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.