DarioHealth Corp.

Good morning, ladies and gentlemen, and welcome to Dario Health's first quarter 2020 financial results conference call. As a reminder, today's conference call is being recorded. At this time, I would now like to turn the conference over to David Holmes of LifeSci Advisors. You may begin.

Thank you, operator. Good morning, everyone. Thank you for joining us today for a discussion of Dario Health's first quarter 2020 financial results. Leading the call today will be Erez Raphael, President and Chief Executive Officer of Dario Health. He will be joined by Zvi Ben-David, Chief Financial Officer, and Rick Anderson, General Manager of North America at Dario Health. After the prepared remarks, we will open the call for Q&A. An audio recording and webcast replay for today's conference call will be available online in the investor section of the company's website. For the benefit of those listening to the replay or archived webcast, this call is being held and recorded on May 12, 2020. This morning, we issued a press release announcing our financial results for the first quarter 2020. A copy of the release can be found in the investor relations page on the company's website. Actual events or results may differ materially from those projected as a result of changing market trends, Produce Demand, and the Competitive Nature of Dario Health Industry. Such forward-looking statements and their implications 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 quarterly report on Form 10-Q, for the quarter ended March 31st, 2020 to be filed with the Securities and Exchange Commission. Additional information concerning factors that could cause results to differ materially from the forward-looking statements are described in greater detail in the company's press release issued today and in the company's 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 operation and prospects for the future. A reconciliation of these non-GAAP measures and two of the most recent comparable gap measures is included in today's press release. And with that, I would like to introduce Erez Raphael, CEO of Dario Health. Mr. Raphael.

Thank you, David. Good morning, everyone, and thanks for joining our call today. Also joining me today, Svib and David, our chief financial officer, and Rick Anderson, the president and the general manager of North America. There are four pillars that guided the Daria ongoing transformation that we emphasized them in previous calls and I would like to reiterate them today is this is the way that we are measuring the progress that is related to our multi-year strategic plan. Pillar number one is the company ongoing transformation to a software as a service model that generates high margins, recurring revenue for the company. Pillar number two is the evolution from direct to consumer into business to business to consumer, which is something that is lower our cost per acquisition as well as creating a scale and accelerating our growth. Pillar number three is the expansion of our offering from a single chronic condition that was originally diabetes into multi-chronic condition and everything is under product excellence where we are striving to create the best performing product in the market. The last pillar, the fourth pillar, is the positioning of DarioHealth as the market leader in the digital therapeutic space that, according to Business Insider, is projected to be a $9 billion market by 2025. I would like to start with the first pillar. So as you heard in previous calls, we started the transformation from selling a standalone medical device into a full membership program that is integrating software, hardware, and service already toward the end of 2018. The membership program includes the ability to help users not just have the medical device, but also get digital intervention driven by our analytics and AI that helps them improve outcomes. The overall objective was to increase user engagement, to improve the outcomes of the users, and for the company, improve the growth margins and also increase the average revenue that is generated per member per month. We're already seeing an indication that the success into software as a service model is improving and is reflected in the financial profile of the company, especially on the growth margin part. While the revenues for the first quarter of 2020 were $1.67 million, a slight decrease from the previous quarter, both gross margins and overall gross profit were significantly higher relative to the previous year. Gross profit increased from 24.9% in the first quarter of 2019 to 47.3%. to 46.7% in the first quarter of 2020. This is reflecting an overall 87% improvement in our gross margins. The gross profit in the first quarter of 2020 was $779,000, an increase of $221,000, or 39.6%, compared to a gross profit of $558,000 reported in Q1 2019. This trend of improving margins is expected to continue in the next few years where the overall goal is to be above 70% margins as we move forward. The total operating expenses for the first quarter of 2020 were $11.2 million compared to $5.9 million in the first quarter of 2019. The increase in the operating expenses is mainly due to the increase in one-time stock-based compensation to directors, employees, and service providers. Operating expenses excluding the equity-based compensation for the first quarter of 2020 were $4.6 million only, compared to $5.7 million in the first quarter of 2019. This is a reduction of $1.1 million, overall reduction of 19% comparing to Q1 2019. The reduction in the total operating expenses reflect the reduced spending in the direct-to-consumer and transforming budget into B2B2C, so some of the reduction was offset by this increased investment into building the B2B team in the U.S. So overall, we already see evidence to the benefit The transformation into software-as-a-service model is impacting our financial profile, especially the gross margins and the reduction in the user acquisition cost. I would like to move from here to the second pillar, which is the transformation of the business from direct-to-consumer only into B2B2C channels. So here, despite the fact that B2B2C might have a long sell cycle, we see here a few significant benefits for this overall strategy. Number one is that through this kind of Business-to-business-to-consumer, we have the ability to access the border patient population, which is something that can accelerate the growth intensively. The cost per acquisition per user is reducing down once we are approaching this strategy. And also, we have the ability by selling our premium membership product to generate much higher revenue per member per month comparing to what we are doing today in the direct to consumer. I'd like to deep dive into the unit economic of the few membership programs that we have so you can understand the potential of the sales goals that we can generate in the next few quarters. So if we are looking on how the company was operating toward the end of 2018, we were selling a device and disposables where on average we were generating between $5 to $7 per member per month. As we move forward into the membership program still under the direct-to-consumer, we're generating $25 on average per member per month on our standard membership program. Once we are evolving into the business-to-business-to-consumer and selling our membership program, the price point here is between $60 to $70 per member per month depending on the number of conditions that the specific user is getting on the platform. If we simulate 10,000 users that will go on the platform under premium membership on the business-to-business-to-consumer channel, we are generating in revenue approximately $8 million per every 10,000 users on a yearly basis. This can be a significant improvement to our top line as we continue our transformation and executing on our B2B2C strategy. I'd like to move from here and give you updates on a few of the initiatives that we are doing on the B2B2C. And here the overall goal is to have access to a broader pool of users. We also have the overall target to reduce the cost per acquisition. And as a reminder, this is not something that we started today. This is something that we started by mid last year. And today, we can update that we made some progress here on the different channels under which we are operating. Just as a reminder, we are operating on the employers channel, on the retailers channel, on the health care providers channel, as well as on the insurers channel. So since we started in mid 2019, We already signed a few significant agreements with partners. Some of them already announced. I'm going to talk about one of them shortly. We also have a few contracts that are significant that are under negotiation, and we feel that in some cases the COVID-19 is pushing them forward. We also see a significant increase in our pipeline. So we think that already this year we can see the results of this transformation into B2B2C translating into concrete increase in sales. So I want to talk about one of the agreements that we already signed and we announced on it earlier this year on March. And this is a significant example for the progress that we are making on the self-insured employer market. I'm talking about the agreement that we signed with Vitality Group. This is a partnership with a company that is selling wellness programs. Vitality is an entity under a big insurer called Discovery Health that have more than 16 million insurers. And through Vitality, we have access to hundreds of employers in the States Well, together, we are marketing our overall offering on the disease management side. So we have Vitality as a strategic partner that also have equity interest in our company, and we have them as a motivated organization to get us an immediate access to the network of employers that they have that otherwise will have to do it one by one. So this is an example for a deal that provides the concrete evidence that the strategy of transforming our go-to-market strategy from direct-to-consumer into B2C is a strategy that is already bearing some fruits for us, and we are sure that we're going to see it in dollars later this year. Other than that, I would like to talk also about the health plan channel because we believe that this is one of the major channels for the company. We strongly believe that this is going to be our largest growth engine in the next five years. and we believe that the majority of the revenue for the company is going to come from this channel and we are spending a lot of time and efforts making sure that our solution will be appealing for health plans that we can help them with the most expensive patients and we can help them reduce the overall cost. We think that we have the right solution. We also proved with more than 50,000 users and with more than 10 different clinical papers that we submitted to multiple entities that users that were operating on our platform are improving outcomes in a way that we can show a concrete savings. And we know how to do that in a very, very cost-effective way. So on one hand, we can show a significant evidence that we are improving outcomes with real data from real users. But at the same time, we know how to do it in a very cost-effective way, which is something that we believe that insurers need to have. We also believe that the major success factor in making this overall move successful is having a best-in-class management team, a team that understands these channels very well and have the experience and the relationships to execute on this channel. Also here, we made a huge progress on executing on our strategic objectives. In January, we appointed Rick Anderson to be the president of the company, as well as the general manager for North America.