DarioHealth Corp.

Greetings and welcome to the Dario Health third quarter 2023 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, followed by two. As a reminder, this conference is being recorded. Thank you. It is now my pleasure to introduce your host, Glenn Garment. Please go ahead.

Thank you, operator, and good morning, everybody. Thank you for joining us today for a discussion of Dario Health's third quarter 2023 financial results. Leading the call today will be Erez Rafael, CEO of Dario Health. He'll be joined by Rick Anderson, president. After the prepared remarks, we'll open the call for Q&A. An audio recording and webcast replay for today's call will also be available online as detailed in the press release invite for this call. For the benefit of those who may be listening to the replay or archived webcast, this call is being held on November 2nd, 2023. This morning, we issued a press release announcing our financial results for the third quarter of 2023. A copy of the release can be found on the investor relations page of Dario Health'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 Dario Health'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 factor section and elsewhere in the company's third quarter 2023 quarterly report on Form 10-Q. 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 Arez Rafael, Chief Executive Officer of Dario Health. Arez?

Thank you, Glenn, and thanks to all of you for joining our call this morning. Q3 financial results are continuation of our multi-year strategy and evolution of our financial profile. We continue to look forward with added conviction in our advancements in the digital health space. As we communicated in our recent investor day, our revenue stream can be viewed as threefold. First is our historical direct-to-consumer or B2C business. Second is the recurring revenue from health plans and employers or commercial B2B2C. And the third revenue stream that we call commercial strategics which comes from partners like Sanofi and is milestone driven. In the first quarter, our B2C business continued pace to achieve the expected 8 to 9 million in yearly revenue while remaining cash natural or slightly positive. We expect this trend to continue into 2024. On the commercial strategic side, Our commercial strategic revenue remain on track for annual run rate of approximately $6.3 million a year. The current quarter resulted only with $200,000 recorded as revenues which negatively affect revenue compared to the previous quarter and the third quarter of 2022. We want to reiterate that desk partnership revenues should be viewed on a yearly base and not quarterly base. and the economic value for us on a yearly basis has not changed. We expect our commercial strategic revenue to continue at an annual rate of $6 to $8 million a year. The fundamentals of our core B2B2C commercial ARR business that comes from recurring revenue from employers and health plans continue to grow. In the third quarter, the revenue from this channel grew by 22.7 percent compared to the third quarter of 2022, and up 57 percent for the nine months ended compared to the same period in 2022, and totaled $3.9 million in 2023, compared to $2.5 million in 2022. Our current total signed contract estimated value is over $60 million a year, which will be recognized as ARR in the B2B2C channel as we continue to penetrate member populations. We believe that our annual revenue growth target, 100% to 170% in the B2B2C business channel, can be achieved and expected to see faster revenue ramp-up when we enter into 2024. To reach this target, we use metrics surrounding historical enrollment rates and other data from members and clients we have. This revenue stream shows an adjusted growth margin above 70%, which will continue to drive overall growth margins higher as the B2B2C business channel becomes a larger percentage of our business. Looking forward, the growth of this B2B2C ARR channel should accelerate because of the following three building blocks. First, implementing signed contracts. We estimate that we have a $60 million in ARR in contract value. Second is the land and expand approach, an opportunity to expand existing clients either by adding new chronic conditions or expanding to additional population. The third is our partnership strategy that gives us potential access for 87 million members Securing just 1% of this population is about $17 million in ARR, so that's a very large potential. I would like to touch base on our strategic relationships, and I'll start with Sanofi. We continue to see significant financial and people resources dedicated to Dario by Sanofi in marketing the solution and conducting the recent clinical studies. The results from three real-world clinical studies done by Sanofi and third-party hired by Sanofi were published this year. The studies showed impressive results on the clinical side. Immoglobin A1c improved between 1 to 2.3 points, and also from a cost perspective, with an average annual savings of more than $5,000 per member per year for users that are operating on the Dario platform. This is an impressive result and useful matrix to deliver to payers and partners. On Aetna, the highly anticipated launch of the Dario Powered Behavioral Health Platform is on track to January 2024, and we have insights into five employers that will enroll to the platform starting January 2024. We also expanded our relationship with Aetna, and Rick will provide more details about it in a few minutes. We believe that the partnership is only getting stronger and the size of the opportunity is getting larger than what we originally anticipated. Another large opportunity for us is the GLP-1 revolution. We are happy to say that through the development we made with Sanofi, we launched a product offering that defined the Dario platform as a solution for users on GLP-1 and other weight loss drugs. According to published FDA statements, the drug needs to be supported by proper behavioral change. This includes onboarding and onboarding the drug, as well as managing nutrition and exercise while taking it. This is exactly the type of behavioral management that our solution addresses. Our product is already fundamentally a complement to this new market opportunity. Another potential area that we are exploring within the GLP-1 opportunity is assistance in navigating the allocation of the drug to the right patients. Given its price implications to health plans, we see a need for data-driven assistance in making sure that the drug is prescribed to the right people at the right time. Let's take a deep dive into the rest of the financial results. One important matrix is the gross margins. We see how performer gross margins of 48.8% for the third quarter of 2023, a slight decrease from 51.5% of the revenues in the second quarter of 2022. Gross margins in the B2B2C channel have remained consistent at around 70%, which is our target rate. Margins will continue to improve towards 70% level in the longer term as the B2B2C continues to grow. Looking at the operating expenses and operating loss, we are seeing an operating leverage of the infrastructure that we have built and real economic advantage of the multi-condition approach. Our operating expenses on the non-GAAP basis for the nine months we've ended September 30, 2023, are down to $32.3 million from $39.3 million for the nine months ended September 30, 2022. We expect an additional 15% reduction in our operating expenses in 2024 as we continue to consolidate, automate, and scale. Operating loss excluding stock-based compensation, amortization of acquisition-related expenses, and depreciation of the third quarter of 2023 was approximately $9 million, compared to $8.4 billion for the third quarter of 2022, and $7.5 billion in the second quarter of 2023. For the nine months ended September 2023, Our non-GAAP operating losses was $23.8 million compared to approximately $30 million for the nine months that ended September 2022. This was due to decrease in operating expenses. We expect to continue the OPEX reduction as well as the net loss reduction as our financial profile continue to take form. We expect our non-GAAP operating expenses to decrease about 10% to 15% during 2024, and our non-GAAP operating loss to decrease between 20% to 30% in 2024. We have a strong cash position of $44 million, which provides estimate runway during 2025. We believe that we will become cash flow positive at about $80 million in ARR, a goal that we see very little as we continue to improve our financial portfolio. With that, I want to hand it over to .