Good morning, ladies and gentlemen, and welcome to the DarioHealth Second Quarter 2024 Results Conference Call. At this time, all lines are in a listen-only mode. After the presentation we will conduct the question-and-answer session. This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Kat Parrella, Investor Relations Manager at Dario. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us today for a discussion of DarioHealth's second quarter 2024 financial results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He'll be joined by Steven Nelson, Chief Commercial Officer. 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 Thursday, August 8, 2024. This morning, we issued a press release announcing our financial results for the second quarter of 2024. 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 second quarter 2024 quarterly 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 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 this morning's press release. With that, I'd like to introduce Erez Raphael, Chief Executive Officer at DarioHealth.

Thank you, Kat, and thanks to all of you for joining our call this morning. Q2 2024 marked another step forward in our journey to profitability. Our core B2B2C business, the engine driving our recurring revenue from health plans and employers, has demonstrated continued growth with 60% sequential growth between Q1 to Q2. This represents 28% organic growth before factoring in the positive impact of the Twill acquisition. This channel remains our primary revenue driver, contributing approximately 75% of our total revenue with an annual run rate of $21.6 million. This high-margin business with SaaS-like characteristics is gaining traction, demonstrated by 82% non-GAAP gross margins in this quarter. Coupled with the aggressive cost-reduction initiatives implemented post-Twill merger, we are confident in our ability to achieve a substantial 40% reduction in non-GAAP operating expenses from Q1 2024 to Q1 2025. On a pro forma basis, we have already seen a reduction in OpEx from Q1 to Q2 of this year of approximately 10%. This financial discipline will be evident in our results over the next three quarters in a more intensive way. Our gross margins continue their upward trajectory toward the 80% target by early next year. As mentioned, our B2B2C has already reached 82% non-GAAP gross margin. In addition, we anticipate a large reduction of over 70% in non-GAAP operating losses between Q1 of 2024 and Q1 of 2025. This progress aligns perfectly with our roadmap to profitability by the end of 2025. In the last few quarters, we made a series of strategic decisions in a very challenging market environment. We believe that those decisions positioned us as one of the strongest players in the digital health space with a stronger financial profile. We have built one of the most comprehensive platforms in the market covering six different conditions from diabetes to hypertension, prediabetes, musculoskeletal, well-being, and behavioral health. Billions of data points collected through years of direct-to-consumer engagement have created a substantial competitive advantage. This data-centric approach has produced a best-in-class solution, validated by real-world evidence of improved health outcomes and reduced costs for employers and health plans. Beyond the financial results, we see compelling evidence of our growth trajectory. Our combined product offering following the Twill acquisition is driving cross-selling success already, with many Dario clients adopting the Twill platform. Our GLP-1 product has seen rapid adoption with nine clients already on board. While GLP-1 is a proven weight-loss medication, its potential is maximized when coupled with behavioral support. By integrating Dario-Twill's behavioral health capability, we have created a comprehensive solution to support GLP-1 adoption among employers and health plans. Our offering provides a streamlined approach to delivering GLP-1 therapy and driving optimized patient outcomes. On the pharma channel side, we see that the pharmaceutical industry is undergoing a significant transformation. With many leading companies seeking direct-to-consumer member engagement solutions, we see a substantial opportunity to leverage our integrated offering to meet this growing demand. While past partnerships with Dario and Twill clients generated mainly milestone-based revenues, we are focused on redefining our integrated offering to leverage this market opportunity for direct patient engagement and transition our pharma business to a more stable and recurring revenue base. To accelerate the shift, we made a strategic decision to issue a $1.1 million price concession impacting our top line for this quarter only, but positioning us for long-term growth. We anticipate a return to normal revenue patterns on the pharma channel toward the end of this year. While our product offerings are strong and we boast a classic client base, including top S&P 500 companies, our revenue growth has not fully materialized to our expectations. To address this, we have undergone a strategic organizational transformation, including flattening our structure and appointing a seasoned Chief Commercial Officer. Our goal is to create a commercial organization focused on two key areas: first, to continue focusing on acquiring new clients; and second, to maximize the growth of our existing customer base, where we see an opportunity to do much better. We believe this dual approach will accelerate revenue generation and better leverage our strong market position. I'm pleased to introduce Steven Nelson, our new Chief Commercial Officer. Steven will provide more details on our commercial strategy and the steps we are taking to drive top-line growth. I'll turn the call now to Steven.

Thank you, Erez. Good morning, everyone. I'm Steven Nelson. As many of you are aware, I started in June 2024 as Chief Commercial Officer at Dario. I have had the privilege of spending over 20 years in the payer industry and most recently led a direct employer company for five years named Contigo Health. Early in my career, I honed my B2C skills through experiences in packaged goods and retail. Today, I'm excited to share some context around my four key focus areas since my arrival and discuss some details on our Q2 2024 financial results. First, refining our strategy and operational processes. Our roots in B2C companies and the comprehensive multi-chronic condition product offering have built a solid and unique value proposition that most of our competitors lack, especially in this market environment where we see a consolidation of vendors. Dario has an impressive client base that is very unique in the market, and I believe that with a refined strategy and well-designed commercial operation, we can accelerate revenue growth. We have recently completed a detailed product market-fit strategy, providing us with focused insights to drive more credible revenue across all segments. With these insights, I have collaborated closely with our commercial team and others in key cross-functional roles throughout the company to implement a focused, scalable operating model within the commercial department. This model is meticulously designed to enhance operational efficiencies, streamline processes, and, to Erez's point, strengthen our pipeline for new clients while ensuring we accelerate revenues from existing clients. By understanding and anticipating our customers' needs and their modes of operation, we can focus on what we do best, enrolling and engaging with more members for every account we serve. Second, we have and will continue to accelerate B2B2C growth. Our B2B2C channel is a powerhouse of potential, and we are determined to unlock its full value. While we have established a solid foundation, we recognize that there is much more to achieve, especially in how to extract revenues from our client base on a faster and larger scale. My goal is to accelerate growth in this channel by having specific focus and accountable resources allocated to existing clients as well as deepening existing strategic partnerships with the right strategy, leading to higher utilization of existing contracts in terms of member enrollment and expansion of our customer contracts with both expanded offerings and access to a larger population. This will help us solidify a robust recurring revenue base that is crucial for long-term sustainability. We are leveraging our existing relationships and assets to drive more value from our B2B2C channel. This includes actively pursuing cross-selling and upselling opportunities with our current partnerships, targeting both employers and large health plans. Our GLP-1 product, for example, is gaining significant traction already implemented by nine clients with several more in the pipeline. This product represents a rapidly growing segment that we are prioritizing in our client contracts. In the second quarter, our B2B2C channel was the primary driver of growth with a 315% year-over-year increase and a 60% sequential rise from Q1. Looking forward, we see a sizable opportunity among specific client segments, and I am confident in our ability to expand these relationships. For instance, health plans like Aetna are making timely progress, and with our focused approach to product set, they are poised for much higher growth given the potential size of the business. We are initiating collaborative strategies for them to use our newly combined behavioral health platform to compete in a differentiated way with the market. Our large employers, including Amazon, Microsoft, and Google, among others, have been very supportive of our current products and are open to exploring how our assets can further solve health problems. We must lead health plans through effective activation, engagement, and reducing their cost to deliver health care with our SaaS-based digital health technologies and expert experience journeys. Worth noting, our cross-selling efforts are gaining momentum with at least ten initial clients targeted for the Twill platform or vice versa. Third, enhanced pharma collaborations. The pharma market is undergoing a significant transformation with companies increasingly seeking ways to engage consumers directly. This shift presents a huge opportunity for DarioHealth, one that is currently underutilized. Our integrated Dario-Twill top-of-funnel and navigation capabilities offer exactly what pharma companies need, as demonstrated by successful projects with clients. To capitalize on this opportunity, we are driving an innovative change in our business model, moving away from milestone-driven revenues to a more sustainable recurring revenue model. Our commercial pharma channel is a critical pillar of our growth strategy, but we believe this redesign is integral to maximizing its potential. This shift will lead to a temporary slowdown in revenues for this channel this year as we transition to a more stable and predictable revenue stream, an adjustment that is essential for creating long-term value and ensuring that we remain aligned with pharma industry trends and positioned as a premier partner. The recent integration of the Dario-Twill platform significantly enhances our offering, making it more attractive to pharma clients. We are engaged in promising discussions with key clients like Merck and others who are interested in how our SaaS-based consumer engagement capabilities can bolster their efforts. This technology has historically supported our pharma channels and can now go further with our newly formed consumer hub model. Our decision to grant a one-time price concession of $1.1 million to a strategic partner underscores our commitment to balancing short-term adjustments with long-term growth prospects. This price concession accelerates the time line of this transition to a higher quality revenue stream supporting our goal of reaching profitability by the end of 2025. The future of our pharma collaborations is bright, and we are excited about the potential for growth in this area. Fourth, our comprehensive integrated product offering. We believe the combination of Twill's behavioral health expertise and Dario's cardiometabolic foundation creates a powerful platform that delivers exceptional value to employers and health plans. By integrating AI-driven navigation tools, we enable clients to optimize care delivery, improve member outcomes, and achieve significant returns on investment. Our platform's ability to match numbers with the right programs at the right time sets us apart. Behavioral health is a foundational component of managing any chronic condition, including metabolic disorders. Our platform seamlessly integrates behavioral health interventions with other therapeutic areas, providing a comprehensive and holistic approach to care. Finally, we are leveraging our AI capabilities. We believe AI will be a meaningful change for DarioHealth as we proceed with our focused product and technology roadmap, integrating and updating aspects of AI that have already been deployed in the past and accelerating generative AI and microservices in a targeted way within product development or technology, which can further revolutionize our industry-leading content, activation, engagement, and personalization capabilities. Our proprietary data sets, especially within the B2C segment, provide us with a unique advantage, enabling both internal and external monetization in this rapidly evolving market. The future of AI in health care is incredibly promising, and we are at the forefront of this exciting transformation. Our AI capabilities will enable us to offer unparalleled value to our clients and drive our growth in new and innovative ways. In conclusion, DarioHealth is on a transformative journey, and I am incredibly optimistic about our future. The strategy we have developed underscores our commitment to sustainable growth and innovation. We are well positioned to continue our momentum and deliver exceptional value to our stakeholders. Thank you for your trust and support as we embark on this exciting journey together. Erez, back to you.

Thank you, Steven. We have identified three key strategic areas that will help us accelerate growth and drive business to profitability. First, we will optimize our operations to increase revenue generation from existing employer and health plan clients. Expanding the adoption of our GLP-1 offering is also a priority for us. Second, we will capitalize on the pharmaceutical industry shift toward direct-to-consumer models by leveraging our unique Twill-Dario solution. Our focus is transitioning from a milestone-based to a recurring revenue stream in this specific sector. Lastly, we remain committed to regularizing cost management. By aggressively controlling operating expenses, we expect to deliver tangible results in the coming quarters. As mentioned, we see our operating loss reducing by at least 70% by Q1 of 2025 on our way to profitability by the end of 2025.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Charles Rhyee from TD Cowen. Your line is now open. Please ask your question.

Hey. This is Lucas on for Charles. Thanks for taking my questions. I was wondering if I could ask about how your cross-selling efforts are progressing since the Twill acquisition as well as some restructuring and your commercial operations. And how that's trending – just early reads on how it's translating into bookings. It appears that maybe X12 B2B2C growth was up mid-single digits in Q2. Can you remind us what the target for B2B2C growth is for 2024 and kind of what your expectations are now for the second half?

Yeah, absolutely. Just to answer your specific question about the cross-sell, as Steven and I mentioned on the call, we already have numerous Dario clients that we have cross-sold to the Twill platform. These are relatively small clients, and we have a specific few other opportunities for larger clients that are either Twill clients looking into Dario or Dario clients looking into Twill. As we mentioned on the call, the sequential growth, the organic part of the B2B2C between Q1 to Q2, just the organic was approximately 30% between Q1 to Q2. On an integrated basis, for Twill, it was 60%. That's the numbers we have at the moment. We anticipate that the overall growth of our revenues for B2B2C for the entire year is going to be larger year-over-year. It's going to be larger than 30%. It should be in the ranges above 50%. That's the expectation. The other area where we see a cross-selling opportunity is in Pharma. On the pharma side, both Dario and Twill had a business model that was very milestone-driven, which created a lot of issues in the revenue recognition, some of which we saw in the quarter when we had to provide a concession, and we did some changes. So we are trying to streamline this revenue stream to a recurring revenue structure as there is a specific opportunity in the market currently when pharma is transforming to be much more direct to consumer, and we have the platform to help them go directly to patients. This capability is a result of the combination of the Twill platform with what Dario has. This is why we see an opportunity also for transformation there. On the Twill side, the B2B2C for employers and health plans was not growing between Q4 to Q1 to Q2. This is due to the financial situation that we experienced before we acquired them, and we anticipate that this will change in the next two quarters as Twill will go back to growth once we stabilize the situation. So that's on the revenue side. On the OpEx side and the operations side, as we mentioned in the script, we had two significant events: one at the beginning of May, the other one at the beginning of August, where we reduced headcount and expenses related to non-headcount. In this quarter, we have seen a 10% reduction in the OpEx pro forma between Q1 to Q2, and we're going to see significant reductions in Q3, Q4, and Q1. Overall, the companies are managing much faster than we had anticipated at day one when we made the acquisition. We believed it would be around 30% over eight quarters; it's going to be something more like 40%, even more than 40% over three to four quarters. So that's the merger standpoint. From an operational perspective, we see many synergies between the companies, more synergies than we had initially anticipated, and this is good news because we believe we can retain revenue, grow revenue, and take the OpEx down in parallel. This is why we are positive about our ability to reach cash flow positive by the end of next year.

Got you. Thank you for the color. I guess I want to dig in on the price concession that you provided to your preferred partner. In your 10-K, it mentions this might be related to a suit. I guess, in terms of, one, what brought about this price concession, if I can ask. And then does it have any impact on the expected $6 million to $8 million in payments that were expected from this partner? I understand that you're talking about transitioning to a more recurring revenue stream. Can you kind of give us more details on what brought about this price concession?

Yeah. I'll start from the end. We're not going to see this kind of concession or anything like that in the future. This is a one-time occurrence that appears in this quarter. It's related to recognition we had in previous quarters. So it's a one-time event; it's something that is not going to be repeated. That's number one. Number two, I don't want to mention the name of the client, but we had discussions with them about the transformation from one business model to another. We are trying to transform from Dario-only or Twill-only to something more combined. That's number one. And number two, we are trying to move into a recognition that is more recurring. As part of these discussions, we made changes to work that had already been delivered. Eventually, we negotiated something to be able to look into the future, sacrificing something small to gain something larger down the road. So that's our perspective on it—balancing future growth versus present revenues.

Yes, that's helpful.

Lucas? Lucas, I lost you. Okay. I think that we lost Lucas. I had to give it another 30 seconds to see if he is calling back. Lucas?

We're not hearing any response from him at the moment.

Any other questions in the queue?

We don't have any questions right now.

Okay.

Thank you. We don’t have any questions right now. This concludes today's conference call. Thank you for your participation, and you may now disconnect.