Greetings and welcome to the DarioHealth Fourth Quarter 2023 Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kat Parrella, Investor Relations Manager.

Thank you, operator, and good morning, everybody. Thank you for joining us today for a discussion of DarioHealth's fourth quarter and full year 2023 financial results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He'll be joined by Rick Anderson, President. After the prepared remarks, we will open the call for Q&A, where we will be joined by Twill co-founders, Tomer Ben-Kiki and Ofer Leidner. An audio recording and webcast replay for this 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 Thursday, March 28, 2024. This morning, we issued a press release announcing our financial results for the fourth quarter and full year 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 full year 2023 annual report on Form 10-K. Additional information concerning factors that could cause results to differ materially from our forward-looking statements are described in greater detail on 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 this morning's press release. With that, I'd like to introduce Erez Raphael, Chief Executive Officer of DarioHealth. Erez?

Thank you, Kat, and thanks to all of you for joining our call this morning. 2023 financial results are a continuation of our multiyear strategy and the evolution of our financial profile that is now being accelerated with the Q1 accounts that are launching and accelerated further with the Twill acquisition. Before analyzing the potential contribution of Aetna and other accounts that we launched in Q1 and that we continue to launch in Q2, I would like to first remind you of the three revenue streams which remain the same post the Twill acquisition as we operate in the same channels. First is our historical direct-to-consumer or B2C business. Second is our core business, the recurring revenue from health plans and employers or what we call commercial B2B2C with clients like Blue Shields, California, Aetna CVS; in Twill's case, it's clients like Cigna, Elevance, Amazon, Google and others. The third revenue stream that we call commercial strategy which is milestone-based rather than project-based with clients like Merck, Eli Lilly and others. In the fourth quarter, our B2C business generated approximately $2 million which is consistent with the channel expected $8 million to $9 million annual revenue run rate. This number has been managed down to a cash flow neutral or slightly positive run rate which has proved accretive to our strategy of allocating resources to growing our B2B2C channel, reducing operating expenses and improving gross margins. On the commercial strategic side, while our commercial strategic revenue remains on track for annual run rate of approximately $6 million to $8 million a year, in the fourth quarter, we recorded $582,000 in revenue which is less than the average quarterly strategic revenue for the first half of the year. This is due to simply the milestone-based timing of revenues from our strategic channel. We want to reiterate that this partnership's revenue should be viewed on a yearly basis and not on a quarterly basis. And the economic value for us on a yearly basis has not changed. We expect our commercial strategic revenue to continue at an annual run rate of $6 million to $8 million on a Dario stand-alone basis. Due to the demand we have already seen from pharma for the integrated Dario-Twill offering since the acquisition was announced, we expect to be able to grow this commercial strategic revenue stream throughout 2024 and 2025. The fundamentals of our core B2B2C annual recurring revenue business with employers and health plans continues to grow and is also accelerating in Q1 2024 with the launch of Aetna and multiple employer accounts. For the year 2023, B2B2C channel revenue grew by 39% year-over-year. This Dario's stand-alone B2B2C revenue stream shows adjusted gross margins of above 70%. Going forward, with Twill, historic B2B2C margins that are above 90%, we anticipate the combined gross margin for the company to reach above 80%. The vast majority of both the immediate and expected future revenues from the Twill acquisition will appear in the B2B2C channel, pushing us much further ahead in our objective to grow our core business. We anticipate that with the launch of Aetna and other employer accounts in 2024, combined with the Twill B2B2C revenues, the B2B2C recurring revenue channel will be a majority of the total revenue for the full year of 2024 amongst the three revenue streams that we have. We also saw significant interest in multiple employers' adoption of the Dario GLP-1 Behavioral Change program as well as expansions of current customer relationships on the metabolic side. Our product is already fundamentally a complement to the new GLP-1 market opportunity. We have seen solid growth in our core B2B2C business in 2023 and see that accelerating in 2024 on a stand-alone basis. We anticipate larger growth and scale with the transformational acquisition of Twill that we announced last month, an acquisition that we believe will accelerate the timeline to cash flow positive. This acquisition creates the most disruptive digital health platform, displacing the previous offering. It provides the ability to leverage Twill's innovative approach to engagement and navigation and breadth of offering to increase sales opportunities, revenue per customer, our enrollment rate, and the lifetime value of our members. The combined company will tackle six conditions: diabetes, hypertension, prediabetes, musculoskeletal (MSK), behavioral health and mental well-being and pregnancy support, as well as redesigning the top of the funnel to increase enrollment pace through innovative member navigation. The acquisition nearly doubles our pro forma revenues. It creates immediate scale across big-name clients in the health plans and pharma space with clients like Cigna, Elevance, Amazon, Google, Microsoft, Merck, Eli Lilly and others. Though the companies are very synergistic on the operational side, we expect to achieve 30% annualized cost synergies within two years. Most importantly, we expect an accelerated pace to profitability in 2025 to revenue scale, increased gross margins and cost synergies. We believe our new cash flow positive point is approximately $62 million in revenue. We ended the year with $37 million in cash, and on top of that, we raised an additional $22.4 million alongside the acquisition. This puts us in a great position to execute on our strategy. With that, I would like to hand the call over to Rick to elaborate on the commercial side.

Thanks, Erez. We were pleased to complete the 2023 employer sales cycle last quarter and have launched or will launch more than 15 new customers on the platform in the first quarter of 2024 or within the next couple of months. In addition, we launched the first members on the private label Aetna platform in January and have seen Aetna continue to add customers throughout the first quarter. We expect that our revenue from Aetna will continue to grow over the next several quarters as they continue to sell the solution to their customers. Last quarter, we announced that we have been selected by Aetna to replace one of their existing vendors in digital cognitive behavioral therapy. This separate piece of business we anticipate will launch with more than 5 million members within the second quarter. Please keep in mind that our behavioral health business is priced on a per employee per month basis at a much lower price than our whole suite product. In aggregate, these launches are expected to significantly increase our revenue in the first quarter of 2024 with further increases into the second quarter. As Erez noted, our core B2B2C revenue increased 39% in 2023 over 2022, which reflects our investments in building the Dario brand and reputation in the self-insured employer and health plans space over the last several years. As I have discussed in the past, the B2B2C market yields step growth in a reinforcing cycle that requires a significant amount of work at the beginning to build reputation, benefit consultant relationships, and reference customers. When successful, this cycle builds on itself each year. We are seeing the continued fruits of our efforts in early 2024, which is off to our best start ever as measured by the number and size of opportunities in the pipeline at this point of the year. Currently, our average size of employer in the pipeline is more than 200% larger this year than the average in our current book of business. And this does not reflect the Twill stand-alone pipeline. The building of reference customers is also reflected in existing customers expanding, including a self-insured financial services customer that expanded in the first quarter and both of our Medicaid customers seen in the process of expanding, which is anticipated to impact 2024 and 2025 revenue. We have further expanded our relationship with Blue Shield California through our partner, Solera, and we expect to launch a second condition within a month. In addition, we expect to add to our list of health plan customers during 2024 including at least one additional large health plan. Of course, the most significant recent development commercially is the acquisition of Twill Health. We believe this will enable us to provide a comprehensive and differentiated platform to our customers that will increase our win rate, revenue per customer, lifetime value per member and gross margins. It gives us significantly more B2B2C scale by approximately tripling our B2B2C revenue, adding marquee employer customers, including three of the largest technology companies and two additional health plans. The fact that both companies are selling into the same channels with no customer overlap provides significant opportunities for cross-selling, especially since Twill customers have historically expressed interest in chronic conditions. This has been validated in the last month through discussions with our largest customers and partners who have expressed an interest in understanding how they can access a larger array of our services from the combined entity. We are very pleased to have such affirmation so soon after the acquisition. And like Dario, Twill has several large opportunities in the pipeline for 2024 and 2025. Twill also has significant relationships with pharmaceutical companies that we believe will enhance the strategies that we have been pursuing with B2B strategic as well as platform licensing opportunities. We expect this to result in more opportunities to leverage our combined platform, including relationships already in the pipeline that we expect to come to fruition in 2024. In summary, between the stand-alone and combined opportunities, we expect to increase B2B2C revenues in the first quarter of 2024. And we see the ability to dramatically accelerate our revenue in 2024 and 2025 across our B2B2C and strategic B2B channels. With that, I would like to turn it back over to Erez.

Thank you, Rick. As we look back on the strategic changes we have made to the company in the past few years, such as moving from single to multi-condition and from B2C to B2B2C, we see how impactful they were on the financial profile and path to growth and profitability. The expansion of our product offering, especially post-Twill, has delivered the most comprehensive platform in the industry, validated by clinical results among members as well as billions of deeply analyzed data points. Our plan of expanding our B2B2C core business has been progressing at a good pace and will accelerate more in 2024. With Twill, this channel of recurring revenue becomes even larger and will be larger than the other two channels combined when we look at the full 2024 revenues. This will be the main driver for the acceleration to profitability, at a $62 million revenue target. Today, Dario has a massive client base and book of business, including three out of the top eight national health plans, such as Cigna, Elevance and Aetna, as well as big-name national employers such as Amazon, Google and Microsoft and key pharma companies such as Sanofi, Merck and Eli Lilly. We are very encouraged by the interest of Dario and Twill clients to expand the contract into the full offering post-acquisition. The domestic jump start we are seeing for 2024 leads us to believe that our path to profitability is clear and direct, and we plan to continue our upward trajectory toward this goal on a quarterly basis. With that, I want to hand over the call to the operator for a Q&A session.

Our first question comes from Charles Rhyee of TD Cowen.

This is Adam on for Charles. It's great to see many new customers have launched on the platform already in 2024, both on the white label Aetna solution and the core Dario platform. At the Investor Day, you talked about how the average customer in terms of units was larger in terms of employees versus the average customer size in 2023. So it's good to hear the prepared remarks that the average size employer pipeline is 200% larger versus the existing book of business. Can you talk about from the new customers that launched so far in 2024, what the average customer is like that Dario is winning, both in terms of the number of employees and also their size and from prior experience with digital health?

Thanks for the question on that. I think that really what I mentioned in the remarks as well, the fact that what you see in the business is really a step function of that. So I would say that the average size of customer is what we would call large middle-market to smaller enterprise-sized customers would be the average, although there are some that are sprinkling in there that are bigger in 2023, and we see, as I mentioned, a big step-up of that in 2024. Most of those are employers. I don't think there's really a standard in terms of type of business, etc. We have had good traction actually in labor as well as in transportation companies. So what one may think of as not necessarily traditional high technology adopting companies, we are actually seeing good traction. I think that speaks to the fact that diabetes, hypertension, and prediabetes are sort of universal concepts and that those are challenging employers across the spectrum. Geographically, they're also fairly well distributed across the U.S. So there's not really a typical industry or type of customer from that perspective.

That's very helpful. And another question on adjusted operating expenses: it looks like it decreased sequentially in the fourth quarter, driven by what looks like lower digital marketing expense. Can you talk about what drove this lower digital marketing spend, whether it is a function of customer acquisition cost trends or something else in the quarter? And a follow-up to that would be with Twill, can you remind us how you're thinking about operating expenses trending in 2024 for the combined entity?

So the strategy that we had in the transformation from B2C to B2B, we deliberately or intentionally decided to slow down the B2C to improve our financial profile. So you can see clearly in the last six quarters that we quarter by quarter reduced the operating expenses, improved the gross margins while reducing B2C. And the way we think about B2C is that it's on an average of $2 million a quarter, $8 million a year, and that's the cash flow positive point. And I think that relatively between Q3 to Q4, we have seen more or less the same number. So we don't see a real decline in the B2C. That's the stable run rate looking into this kind of channel. Regarding Twill, generally speaking, Twill does not generate B2C revenue. So this is only a Dario channel. Twill generates what we are calling B2B2C which means health employers and health plans which is our second channel. And the third channel that Dario has is strategic, which comes mainly from pharma. On that channel, Twill is also active. So the way to look at the evolution into 2024 and 2025 with Twill is that the second channel, which is B2B2C with employers and health plans that drives annual recurring revenue and monthly recurring revenue, is going to be the majority of the revenue of the company in 2024 and is going to account for more than 50% of the revenues of the company, which is something that will contribute to continuous improvement in the gross margins that will improve potentially to more than 80% on an integrated basis. This channel is going to be the main driver that will help us push the company to the cash flow positive point that we are targeting for the second half of 2025 according to our plans.

That's very helpful. And the last question for us is how should we think about growth expectations for 2024, whether for the stand-alone businesses? Is it still right to think about 100% to 170% B2B2C revenue growth? And for the integrated business with Twill, what's the right way to consider the outlook for potential growth for B2B2C in 2024?

So on the B2C, we disclosed that we're going to keep it stable in the range of $8 million. On a stand-alone basis, Dario was talking about 100% for the second channel. On an integrated basis, given the revenue is much larger, we're not going to see this level of growth on the B2B2C. It's going to be less than 100% on an integrated basis for now including Twill. And for the third channel, which is strategic, we expect that the company will be able to close more deals because we already see interest in the integrated platform and we've had very concrete discussions with a few clients. So the average of $6 million to $8 million has the potential to grow between 2024 to 2025. Overall, we do think that we're going to see growth for the second and the third channels, B2B2C and strategic, on an integrated basis, both Dario and Twill.

We have another question from David Grossman at Stifel.

Erez, maybe first, just to follow up on that last comment about the strategic piece of the business. So $6 million to $8 million run rate, is that a good number to use for 2024 and the growth in '25? Or would you expect growth in 2024 as well?

I think that in 2024, there is some potential to grow. I think the majority of the growth is going to come in 2025. We are in concrete discussions that started even before the acquisition was announced with a few clients that were overseas. I think that this process will take time in terms of getting signatures, and I would anticipate that the majority of the impact will happen in 2025 and not in 2024, although the chances to have something in 2024 exist.

Got it. And in terms of Aetna, I assume that the ramp – the new business that you won as well as the new clients that you're onboarding will show up in the Enterprise segment, right, the second segment of your business. Is that accurate? And if so, can you give us a sense of what kind of visibility you have right now based on the business in hand with Aetna?

First of all, it's counted into the second channel, the B2B2C with health employers and health plans, specifically Aetna enrolling new employers into the platform. The more employers they enroll, the more revenue we have. At the moment, we have in the ranges of about ten employers that have gone on the platform, and this is something that is continuing to move forward into Q2 and Q3. This will gradually increase, and the visibility that we have is ongoing activities that we are having between our sales team and Aetna in order to introduce the platform to more and more employers. It's not like a full sales cycle like when we are selling directly to employers. This is something that is relatively faster and the platform is getting adopted. But we don't have a specific target of 40 or 50 or 60 employers by this quarter or another quarter. This is why we are relatively thinking about the growth in a conservative way, although the network that Aetna has is very wide. The win rate and the ability to get more clients is significantly faster than Dario on a stand-alone basis. So we're very positive about the potential growth here.

Sorry, just to add one thing. The new piece of business that we won that will launch in the second quarter is an existing piece of business. So all five million of those members will come in the second quarter.

Got it. And then sorry if I missed this or it was in the release, but did you mention just how large Twill was in the quarter and for the year in 2023 in terms of revenue?

Yes, this is something that we disclosed in the press release. So I think that between Dario and Twill together, the pro forma for 2023 is $37 million to $38 million, not audited yet. And that's the disclaimer that we put. We are working on the audits of Twill, which will be published next quarter. But on a non-audited basis, we are looking into $17 million to $18 million that is coming from Twill, of which between $14 million to $15 million is related to the second channel, employers and health plans, and another $3 million to $4 million that came from pharma. All the numbers are for 2023, obviously.

Got it. And just on Twill, maybe you can just help us understand, as you look at their existing book of business, they do obviously have a really strategic presence in the Medicaid segment of the market. How should we think of the sales cycle in terms of selling metabolic into that base?

Sorry, David, selling metabolic into which base?

Into the Medicaid base, like how should we think about the timing of your ability to do that? Is it more given Medicaid awards happen more on an annual basis? Is that something that can be added before that? Or is it really getting into that particular segment? Is that something that's more of a '25 kind of outcome than a '24 outcome?

One of the mixed aspects of selling to health plans that take on risk, such as managed Medicaid, managed Medicare, or Medicare Advantage, as well as fully insured commercial plans, is that they can initiate launches at their discretion. They do need to have the business in place to start, meaning if they want to expand or require renewals, that could affect the timing. However, we have observed that our Medicaid business has been launched around the middle of the cycle. Currently, one of our existing Medicaid clients is going through a rebid process, but even with that situation, they are still working on expanding their Medicaid services. Therefore, launches can occur at any time. We anticipate that expansions in Medicaid will enhance our population arrangements and revenue for 2024, and one of those plans is also considering expanding into additional lines of business in 2025. This explains our comments regarding 2024 and 2025.

Rick, is the utilization rate of metabolic in the Medicaid base different from the corporate average or is it similar?

There's actually a wide variation in the customers that we have, but I would say, on average, if you average both of them together, it's a little bit below. One of them is entirely consistent, maybe even a little higher than our commercial book of business, and the other one is lower. I believe that relates to the population that we started with in the one that's lower, and I believe that will come up. We started in a more challenging segment of that population.

Got it. And just last, Erez, just thinking about the cash burn in 2024, can you give us a sense of just how you're planning on the cadence of the cash burn? Given that we're closing the acquisition and I'm sure there's some work that has to be done in conjunction with that, how would you like us to think about again the cadence of the cash burn over the course of the year?

So first of all, I'll try with a stand-alone basis. Dario on a stand-alone basis reduced the operating expenses by more than 30% year-over-year. If you look at the operating expenses of Q4, we had another 11% reduction compared to the previous quarter. So Dario is clearly on a path to keep the operating expenses down, and the operating expenses on a stand-alone basis between 2023 to 2024 is going to go down just for Dario by 10% to 15%. That's number one. Twill is following a similar kind of path in 2022-2023. So we are entering this 2024 with an operating expense that is already reduced. On top of that, on a combined basis, because the two companies operate in a very, very similar way, practically, we are winning clients, enrolling members, retaining members, and making them healthier. That's the objective of both businesses and everything is being done in a digital way. If you look at the organizational structure and the operation, they are very, very, very similar. Based on a lot of the analysis that we did prior to the acquisition and also in the last four weeks after the acquisition, we are very confident that we are having numerous synergies that will create additional efficiency of 30% in the next couple of years, from which we think we can achieve at least 20% in the first year. This means that on an integrated basis, we will see operating expenses that are lower by at least 20% for the year 2024. If you apply the revenues, the potential growth, and the improved gross margins, we think that for the core business, gross margins are going to be above 80% because the Twill revenue has more than 90% gross margins. I believe that the overall loss of the company on the operational side is going to be down by at least 30% compared to Dario on a stand-alone basis in 2023. So you're looking into somewhere around $22 million to $24 million a year loss and that's our objective. The year after, as I said, we believe that with reduced operating expenses and growth in revenues, we will reach cash flow positive or very close to cash flow positive; that's the objective. From a cash perspective, we ended the year with $37 million, we raised $22.4 million that we announced alongside the deal. We paid $10 million cash on the acquisition of Twill and ended up with approximately $50 million in cash. We think that we are in a good spot and designing the right financial profile to manage the risk of cash burn while growing in a very responsible way.

And our next question comes from the line of Charles Padala at Lifesci Advisors.

Thank you, operator. Can you tell us more about the main benefits of Twill's care navigation technology?

Thanks, Chuck, for the question. So I think the main benefit of our care navigation solution is that it shifts the relationship with the user on a very fundamental basis from a transactional relationship of what do you need and how can you find it into something we like to call a longitudinal relationship. We're creating a top-of-funnel engagement that's really helping users feel confident and safe in that environment, knowing that they can manage their health journey with us during episodes and in between those episodes. What we've built into that layer of engagement are several proven modalities such as peer-to-peer support, intelligent personalized content feeds, and doctors that are supporting users, helping them answer questions, and guiding them deeper into care. From there, we take them into self-care solutions, coaches, or any other care that they need deeper into their journey. What we've done in this care navigation environment is essentially removed all barriers to access; you don't need to log into your benefit portal. You can log in and access it for free, which for employers is a huge challenge when it comes to families and dependents. This platform is an open platform. Essentially, we've created a total population solution that engages people at the top of the funnel, understands their unique journey, and drives them deeper into the support they need. Ultimately, when you engage more people at the top of the funnel, you can engage more people who need support in chronic conditions. As we mentioned before, in our database, about 36% of the users that have interacted with our platform at the top of the funnel have chronic conditions, many of which have metabolic conditions. So to summarize, we're moving from a transactional relationship to a longitudinal one, using better data and engagement to lead more people towards activations into the conditions.

That's very helpful. I know it's still very early, but can you speak more to any feedback or progress you've made on the Twill cross-selling efforts?

I'm happy to address that. As you heard from Rick, we are practically integrated on the commercial side of the house. We went to all of our large clients and introduced the new capabilities. I would summarize it to say that the thesis behind the combined entity and the multi-platform condition is moving from theory to execution right now, and that's where our focus is and what we're going to focus on over the next few quarters.

And lastly, what are some of the integration milestones that you're looking for in the short and medium term with Twill?

This is Tomer Ben-Kiki. Maybe I'll take this. We've been working diligently on the integration on multiple levels since the announcement of the acquisition and obviously, earlier than that. As Ofer mentioned, the first milestone that we targeted and achieved is the commercial team of Dario that took over the entire set of products from Twill in markets on multiple levels. They're selling the entire portfolio of products, and the vision is to provide a comprehensive set of services in digital health that allows an employer, health plan, or company to get access to all these digital tools with one relationship. The second component is selling the behavioral health stand-alone product suite of Twill, which is currently undergoing review. Thirdly, we are launching the combined vision outlined by both Erez and Ofer to allow the Twill care platform to optimize the flow of members and reduce the cost of acquisition for conditions covered by Dario, while also addressing the high prevalence of those conditions at the mental health level that Twill care will provide. That synergy is expected to be launched in the middle of the second half of the year, but we're actively selling it already. Additionally, on the organizational level, we've integrated our executive leadership teams, the senior leadership teams, and are now executing to deliver the financial profile and cost optimizations that we've presented to the market. This provides a few milestones ahead of us to extract the best possible outcomes. Lastly, there are some data, AI, and ML-related achievements that we're not announcing yet; however, we're deeply engaged in delivering state-of-the-art technologies to drive our KPIs up.

Thank you. And there are currently no further questions in the queue. So I'll hand the floor back to Erez Raphael, CEO of Dario, for the closing comments.

Thank you. I would like to thank everyone for joining our call today and for the interest in DarioHealth. Have a good day. Thank you.

This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.