DarioHealth (NASDAQ:DRIO) Q2 2020 Earnings Call

0:00 Hello, everyone, and thank you for joining today's Dario Health Second Quarter 2020 Earnings Call. As a reminder, all phone lines are in a listen-only mode, but after your prepared remarks, you will be given the opportunity to ask questions, and instructions will be shared at that time. To get us started with opening remarks and introductions, I am pleased to turn the floor over to Mr. Glenn Garmont, Investor Relations. Good morning and welcome, Glenn.

0:24 Thank you, Jim, and good morning, everyone. Thank you for joining us today for a discussion of Dario Health's second quarter 2020 financial results. Leading the call today will be Erez Raphael, President and Chief Executive Officer. He'll be joined by Zvi Ben-David, Chief Financial Officer, and Rick Anderson, General Manager of North America. And, of course, after the prepared remarks, we'll open the call for your questions. An audio recording and webcast replay for today's conference call will also be available online in the investor section of the company's website. For the benefit of those who may be listening to the replay or archived webcast, this call is being held and recorded on August 12, 2020. This morning, we issued a press release announcing our financial results for the second quarter of 2020. A copy of the release can be found on the investor relations page of the company'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 involve known and unknown risks, uncertainties, and other factors that may cause actual results or performance to differ materially from those projected.

1:35 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 annual report on Form 10-Q for the quarter ended June 30, 2020. 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 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 operations and prospects for the future. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is included in today's press release regarding the company's quarterly and year-to-date results. And with that, I'd like to turn the call over to Erez Raphael, Chief Executive Officer. Erez?

2:44 Thank you, Glenn, and thanks, everyone, for joining us this morning for our call. We're going to keep our comments brief this morning to allow enough time for a longer session of the Q&A. Joining me this morning, Svib and David, our Chief Financial Officer, and Rick Anderson, the President and the General Manager for North America. As in every quarter, I want to reiterate the three main pillars that are guiding our ongoing transformation into a leader position in the digital therapeutic space. The first pillar is the transformation into a SaaS software-as-a-service business model. The second one is the expansion of our platform into multiple chronic conditions beyond diabetes. And the third one is our ongoing transformation from a direct-to-consumer model into business-to-business-to-consumer enterprise. Today, I'm pleased to report that we made a significant progress in all three pillars. but we are mainly excited from the third pillar under which we made a significant progress and we are getting to a late stage of discussions with several large entities that will give us access to a big pile of type 2 diabetes population. We hope to announce more specifics of this contract in the very near future.

4:07 Steve and David will cover the financials shortly, but I want to give you a few highlights on a few of the financial KPIs that we had. On the revenue side, we generated $1.78 million in revenue, which is exceeding the consensus analyst expectation. It's also 7.2% sequential increase from the first quarter of 2020. While we were pleased with the sequential quarter as well as the year-over-year growth that we had on the revenue, in terms of absolute dollars increase, it's not reflecting yet our potential, and we anticipate that moving forward we're going to see much more significant growth. When we are looking into Q3 and Q4 and the several contracts that we have in the pipeline, we feel comfortable that we can get them signed and having a specific agreement with payers and providers that will make much more meaningful growth for the company. On the losses side, we strongly manage our expenses that result in a lower reported net loss of $4 million only.

5:12 This is below the analyst consensus and also approximately 25% lower than the second quarter of 2019. On the margins front, The growth margins declined from 46% in Q1 to 36% in Q2. This is a temporary reduction due to devices that we sold on the B2C side, and this is something that we expect to be temporary. And as we move forward into the B2B2C, given the fact that we have a unit economic of 70% to 80% growth margins, we believe that we're going to be back to track and keep our growth margins going moving forward. Looking back at the last eight months, we feel that the last eight months were very, very transformational for our company, and we are well positioned to scale ourselves and to create a significant growth in our revenue.

6:05 As you know, we are coming to the B2B2C market with a very compelling product. We have 55 active paying users on the platform. Most of them were generated from the B2C market. We know that we have a very good product that is very engaging and we are top rated in terms of user experience. We are 4.9 stars on the App Store and 77 in terms of Net Promoter Score. We also managed to prove that a very good user experience that leads to a very good engagement results in a very good clinical outcome. And we managed to show it in 13 different clinical papers that we submitted in the last few years for a significant amount of users.

6:51 And this is something that we are providing as evidence to potential payers and benefit managers where we show that we can save a lot of money for them. In terms of building the organization, we made a significant progress where we built a world-class team operating in the US that have the experience penetrating into the fair market and implementing big projects with big health plans. This is something that our team already done. In terms of the transformation into B2B2C, we feel that this transformation and had a potential of significant growth in our sales and revenue as we are generating for every user on average between 60 to 80 bucks per member per month as opposed to 25 bucks that we did on the BDC side. So practically, once we are getting this agreement signed, we believe that we can scale up ourselves relatively quickly. So overall we are very satisfied from the good feedback that we are getting from the potential clients that we have and we feel that our competitive advantage resonates very well with health plans and self-insured employers.

8:04 Rick is going to elaborate about it a bit more as we are getting to his part. One more significant milestone that we had recently is a very good fundraising that we did a few weeks ago. In fact, we had a very successful private placement that was oversubscribed. We raised $28.6 million. We did it in a straight common deal, no warrants and no discounts. and we feel that while the overall terms of the deal were very good for the company, we're even more excited from the profile of the investors that participated in the deal. We had a respected healthcare and centric and institutional investors participating in the deal. So together with the $30 million that we have in hand by the end of Q2 on June 30, we have a pro forma cash of approximately 38 million dollars in the bank with no debt.

9:03 We feel that this amount of cash should take us forward for the next few years and should be helpful in terms of implementing and executing on all our commercial plans. In terms of the use of proceeds, we already start to build the very strong teams that will enable us to implement the potential project that we're going to sign. and we're gonna also triple the size of the sales and commercial team in the US in order to leverage on the opportunity. And obviously one of the important things for us is to keep ourselves very competitive and in leadership position in terms of our offering. So we are planning to invest more into our personalization of the platform, artificial intelligence, and also into our ability to support multi chronic condition.

9:52 One more milestone that we had is the nomination of Denis Messias to the board of directors. Denis is the president of Optima Health, a multi-line health plan with more than 850,000 covered members. His background including leadership position in some of the largest nations' health plans in the country, including Anthem, Cigna, Humana, and others. and Dennis Insights and Guidance are going to be crucial for the business that is going to be around as we move forward. With that, I want to hand over the call to Rick Anderson, the President and the General Manager for North America.

10:38 Rick? Thanks, Erez. Last quarter, I discussed Dario's competitive advantages and what any digital health companies need to be successful in a B2B model. I am pleased to report that we have continued to strengthen our foundation on these key elements. In June, at the American Diabetes Association 80th Scientific Sessions, we presented new data from two studies. These studies increased the clinical outcome data on our visual therapeutic for diabetes, and importantly, were the first studies demonstrating significant improvement in hypertension through our platform. And of course, improved clinical outcomes translate into real, and in many cases, significant cost savings for payers. Studies such as these create the foundational support for adoption of our solutions by payers, employers, and providers.

11:26 They also create an increasing competitive advantage in the space. As we discussed last quarter, COVID-19 has created both challenges and opportunities for us in the digital therapeutic space more broadly. During the second quarter, we saw some of our self-insured employee opportunities remain paused while customers dealt with the impact of the pandemic on their business and employees. However, in other cases, we have seen increased interest from employers and payers and a strong provider interest in our remote patient monitoring solution. Digital health has seen a surge of interest during the pandemic and we expect that interest to continue in the future. We are well positioned for this era of virtual care with a clinically proven digital therapeutic that provides the ability to monitor and care for patients virtually and an open platform that enables integration with virtually any provider or system.

12:19 We further enhanced our flexible, powerful solution in the second quarter with our partnership with MediOrbis, a telehealth provider specializing in chronic conditions. We anticipate we will see further partnerships in the coming quarters as demand for virtual care solutions grow. Our transition into the B2B market continued into the second quarter. We've expanded our coaching and enrollment management talent, to meet the needs of our new customers and give us the ability to rapidly scale up our teams to meet demand. Efforts to build name recognition with health plans, employers, and benefits consultants has paid off with opportunities to participate in several requests for proposals for RFPs and the growth of our sales pipeline to over $200 million in potential revenue across the three B2B channels.

13:05 We have made a concerted effort over the last quarter to increase our name recognition and educate benefit consultants and employers on Dario solutions. These efforts have resulted in a number of milestones, including being named a short-lister preferred vendor, being added to the Mercer VIP platform, reaching the finalist round in RFP for the first time, and winning business over Omada and Lubongo in that process. We believe these RFP wins have validated our value proposition and competitive position in the self-insured employer market. In addition to our direct sales efforts, we started selling to employers through the Vitality platform in the second quarter, and I've already had our first win on that platform. These recent direct and partner wins are currently in contracting with some anticipated to launch in the second half of 2020 and some plan to start on the normal benefit cycle in January 2021.

13:58 These wins are in addition to a large employer in the northeast which has moved into late stage contracting. While the contracting process has been slow, we have recently started implementation with the objective of launching later this year. As I discussed in last quarter's call, we only recently started selling to health plans. While health plans typically have very long sales cycles, we have been very pleased to have generated significant traction in a short period of time. As in the employer market, we believe this high level of interest is attributable to our competitive positioning and value proposition. We previously noted that we are in late stage discussions with a large health plan, and that plan has now moved into the late stage contract negotiations and the implementation process has begun. We anticipate being in a position to launch this customer later this year. Encouragingly, momentum in this market segment continues beyond this early traction with the addition of payers that have already moved into late stage discussions or contracting, setting us up for additional launches in late 2020 or early 2021.

15:04 At the same time, we have seen an acceleration interest in adoption of remote patient monitoring or RPMs. particularly in providers and patients who are justifiably hesitant to visit a hospital or provider office during the current pandemic. In June, we announced our first two RPM contracts and another in the UK in July. Our RPM offering integrates the company's existing open platform, application technology, and our DarioEngage coaching platform to provide physicians, health systems, and large provider groups with a turnkey solution to leverage the recently approved Medicare Remote Patient Monitoring reimbursement codes. RPM is a new offering for us, and needless to say, we are very encouraged by our early momentum. At this point, I'd like to turn the call over to Zvi for a review of our financials.

15:51 Zvi? Thank you, Ray. I would like to provide a brief overview of our financials. Additional details on our results can be found in our form to MQ five years to the evening. Revenues for the second quarter were around $1.78 million and increased from $1.67 million in the first quarter of 2020. Revenues were again derived mainly from the sales of products and from the offering of our membership plans to our customers in the U.S. We anticipate modest sequential revenue growth through the back half of this year, reflecting our continued transition to a SaaS revenue model. Gross profit in the second quarter ended June 30, 2020 was $636,000, an increase of $310,000 or 95% compared to a gross profit of $326,000 in the second quarter ended June 30, 2019.

16:52 Our gross profit margin increased to 35.6% in the second quarter ended June 30, 2020 from 19.7% in the second quarter ended June 30, 2019 and was subject to a sequential decrease compared to the quarter ended March 31, 2020. The increase compared to the second quarter of 2019 was mainly due to the increase in revenues generated from our membership plans. The sequential decline in the gross profit in the last quarter is a result of our overall analysis of the cost of acquisition of new customers. We reached the conclusion that reducing the initial access cost to our platform for new users pays off in a much lower acquisition cost.

17:43 Implementing price reduction campaigns during the last quarter resulted in reduced marketing expenses compared to the second quarter of 2019, which led to a reduced operating loss and a lower burn rate. Our non-GAAP marketing expenses for the second quarter ended June 30, 2020, were therefore only $2.4 million compared to $2.9 million in the second quarter ended June 30, 2019. During the second quarter of this year, we have also implemented additional saving measures, including temporary salary reductions due to the raising uncertainty following the COVID-19 breakouts. These savings were in addition to the long-term voluntary saving measures implemented by our board members and management over the last few years to preserve cash by receiving part of our earned compensation in shares instead of cash.

18:43 These voluntary cash waivers contributed more than $4 million to the company's cash flow during the last five years. All the above reduced our cash burn to only $2.6 million during the second quarter, representing a 42% reduction compared to the previous quarter. As of June 30, we had cash and cash equivalents totaling $13.2 million, and subsequent to the end of the quarter, on July 31st, With all the private placement financing of common stock, the yielded gross proceeds of $28.6 million. As a result, as of today, our performer cash balance is approximately $38 million. Now back to you, Erez.

19:27 Thank you, Sri. So before opening the course for questions, I want to make a comment about our path for revenue growth in 2021. At the moment, the research estimates for the full year of 2021 revenue is in the range of $10 to $12 million for 2021. While we are not in a position to provide a specific guidance this morning, we do believe that this will prove to be conservative in light of the opportunities that lay in front of us. As I've indicated previously, during Q3 and Q4, we do believe that we're going to announce on a large transformational deals with health plans and other institutions. and while we know and understand that implementing such a project might take time, we do believe that the access for tens of thousands of users will make a significant impact on our revenue.

20:25 And just to remind you, on the B2B2C side, when we are selling to plants, every 10,000 users should generate for our company between eight to $9 million every year, which is a significant growth comparing to where we are today. With that, I want to conclude our comments for this morning and hand over the call for a Q&A session. Gentlemen, thank you. And to our audience joining, if you would like to ask a live question over your telephone line, simply press star and 1 on your telephone keypad. Pressing star and 1 will place your line into a queue, and we will take your questions one at a time. Also, a friendly reminder, If you're joining us today on a speakerphone, please return to your handset prior to pressing star and 1 to be certain that your signal does reach our equipment. Once again, ladies and gentlemen, that is star and 1.

21:15 Firstly, this morning, we'll hear from Alex Nowak at Craig Hallam.

21:20 Great. Good morning, everyone. Some really good updates here on the call. I just wanted to dive into a couple pieces that were mentioned. When you're submitting RFPs, What are the insurers of the self-employed lands primarily looking to evaluate? Obviously, price is a major component of it, but what else are they looking at when you submit the RFPs?

21:43 Thanks, Alex. So, they're looking at price, obviously, as you said, but also looking at the overall solution. So, they're evaluating the data that exists supporting the solution. What the satisfaction scores look like, what the functionality of the platform and the application is like, and sometimes that also includes demonstrations of the product and the like. But, you know, as you would expect, sort of an overall review of the product, the solution, and how users are going to use it.

22:14 Okay, got it. And then the plans that you would expect to announce in the coming weeks are, Thank you so much for having me.

22:45 I think they really run the gamut in terms of size. I mean, some of them are small to medium-sized employers all the way up to what I would classify as a jumbo-sized employer that we have currently in late-stage contract negotiations. In some cases, some of the additional plans that we've seen come online here in just the last couple of months have moved to contracting. Some of those will be what I would call kind of larger initial implementations and that we would expect those to grow over a period of time. The ones that are kind of more in the medium to large size and including the larger health plan, we expect to be full implementations.

23:31 The health plan I'm talking about are all regional players, although some of them are large.

23:39 Are most of the RFPs going out to self-employed insurer plans, or is it a good mix between self-employed and traditional health plans?

23:50 All of the traditional RFPs that we've participated in have been self-insured employers. In a couple of cases, we've responded to more requests for information for health plans, but most of our health plan work is direct sales, so not RFP-related.

24:09 Got it. And for these contracts for the RFPs, are there contract minimums? And I'm just trying to get to the mention around the 2021 revenue growth. I mean, obviously, you have a good picture of how big these employer plans are and what sort of potential they could bring to the startup business. But are there minimums associated with it? So if the deal closed, you know for sure at least what the minimum is going to be next year?

24:40 No, in all cases, our contracts are contracts for us to be able to enroll the members in either the health plan or the employers. But we have a fairly decent idea both based on past experience that we have here at Dario, past experience we have in the industry, and other people in the space in terms of generally what we can expect to be able to enroll in the program.

25:08 Okay, got it, got it. And then just last question on this topic, and then I'll move to another piece here. But just want to clarify, did you say you would expect to sign at least one of these called transformational deals this year, or are there a couple of deals that are in the work that could convert? A couple. Okay, got it, got it. All right, so just moving over to the RPM side, can you just walk us through, just for clarification purposes, What you're ultimately providing to the clinicians, to the patients, you know, transactionally, who buys the Dario's device and gives it to the patient under RPM sort of agreement? And then how does reimbursement work there?

25:51 So generally speaking, the way that the business model works is we contract with the provider, provider group, or health system to provide them with the technology solution. So basically our devices, the application, the coaching, if they want us to do the coaching or, you know, one of the nice things about our platform is other people can coach on top of the platform because it is open. So we can either do the coaching or not do the coaching. And that matters as it relates to the codes associated with that. The providers are the ones who are giving the devices access. to the members and then either that or they're inputting it into our web portal and then we provide the devices directly.

26:39 We then do the onboarding with those members and we continue to quote unquote monitor them remotely. So it's really just an adjustment to our standard product, if you will. It's just really kind of delivered a little bit differently. And For those members that meet criteria for billing, and there's basically three codes for remote patient monitoring for Medicare patients that were approved at the beginning of the year. One is an implementation code that's a one-time code. One is a, let's just call it a technology monitoring code. So if members are participating with the program and measuring on a sufficient basis each month. They can be billed to Medicare, and then there is a code for doing coaching on that, and that's what I just referenced in terms of who's doing the coaching is how that depends and how we charge for that.

27:30 We provide the provider with a list of members that meet the criteria each month, and then they bill Medicare directly for those.

27:42 Okay, got it. And then as you're looking across, you know, RPM and then the health plans of the self-employed insurers, what do you believe, which market is more attractive slash better suited to Dario if you had to choose one?

28:00 I don't know that I can choose one. You know, I look at kind of the employers and the health plans as being intertwined given the interreliance of those two parties oftentimes in the marketplaces. and they are slightly different from the perspective that, you know, health plans have large populations that come all in one. So they're, you know, elephants, whereas employers, you know, there's certainly more self-insured employers out there. There are various different sizes, you know, so I find those attractive from that perspective and the demand there in the market. Health plans obviously are typically longer sales cycles than employers. The remote patient monitoring Thank you for joining us. have to sell that product a little bit differently to a different marketplace.

29:05 And we expect that that's probably going to be the smaller of those three markets over a period of time, but is likely a source of revenue over the next 12 to 18 months.

29:18 That's great. And then just last question here. With Livongo getting acquired, how does this change the competitive landscape and How did it change at all your strategic focus going after the B2B market?

29:36 Do you want me to take that one, Erez, or do you want to?

29:39 Yeah, please take it.

29:42 So, you know, obviously that's a large deal that changes the face of the industry to some extent. But the reality of it is from a strategic point of view and competition on the ground, as they themselves have pointed out, there's not a lot of overlap as it relates to what they're doing. So it really doesn't change our value proposition or our competitive position against them. As I said, you know, we've been in the market competing against them directly. and have seen that customers respond well to that value proposition. So from that point of view, it doesn't change it that much. I think what it does do is accelerate to some extent, especially probably in some of the largest players out there, the concept of virtual care.

30:30 And I think we're going there anyway. That was not a big surprise. Obviously, that creates an entity that has that. I think it does accelerate potentially interest of other players in the market to match their offering as it relates to it. And, you know, I think strategically, as I mentioned, we will continue to expand, you know, our partnerships and offerings as it relates to being able to be in a position to do complete remote virtual care for chronic conditions. I think that benefits the market on an overall basis. I think it addresses things like access to care. All right. Understood. Very helpful. Appreciate the update. Sure. Our next question will come from the line of Scott Shanehouse at Stevens.

31:43 Hi, Erez and team. Thanks for taking my question. Just as a follow-up to the B2B pipeline, are these health plans and self-insured companies already using a competing chronic illness platform? Mostly, are the clients just starting to use digital therapy, digital health solutions? Is it a mix of both? Can you kind of comment on that mix? And then as a follow up to that, are your contract locked in over a set period of time for these pipeline of clients? And can you discuss the average lengths of the contracts?

32:23 Sure. So in terms of the average length of the contract, sort of the industry standard and ours as well are in the three-year range. Obviously, there can be variations in that. In terms of whether these are customers that are new to a solution like this or they're using another product to start with, it's definitely a mix of those. If I had to guess, I would say it's probably in the 70-30 range. or 6040 in terms of folks that are new to the solution. This market is not penetrated. So we're going to see lots of business from people that are not using a solution. I think also with the remote patient monitoring coming online from a Medicare perspective is one thing, but there's also interest in the commercial side, which really kind of is a bit more like our standard digital therapeutic product.

33:20 That especially, that market, the users there have not been using another product. But, you know, probably 30 to 40 of those folks that we're talking to have another solution. And when I'm saying talking to, I'm talking about the ones that are very late stage. If I look at the overall pipeline, it's probably more like 50-50.

33:39 Got it. That's very helpful. And I guess just as a follow-up question, you've obviously done a successful recent capital raise. Can you talk about how you plan to use this capital for future growth? You briefly talked about it, but we'll be more focused on M&A. We'll be focusing on growing your sales efforts to win and grow your B2B pipeline. Can you just tell me how you think about the priorities of the recent capital raise?

34:09 Yeah, so thanks for the question, Scott. We do believe that we have the right product and the right offering in the market. So our first priority is to be able to implement on the potential clients that we're going to have in order to ramp up the revenue and to show a significant growth. This is priority number one, implementing on the existing pipeline. The priority number two is to be able to expand the pipeline by having more sales capabilities. And that's something that, as I said on the call, we want to at least triple our ability to go up the pipeline on the existing offering. We do believe that we have the right offering for the right timing of the market.

34:56 So that's the first two priorities, which is in the boundaries of what we already have today. It's very straightforward and we need to be successful doing that. Moving forward, we do believe that we're going to see consolidation in the space of digital health and digital therapeutics. There are a lot of interesting solutions out there. And once we are creating this bridge into the health plans and the employers market, We believe that we're going to see expansion of our platform by having more technologies, but this is a third priority and not first or second priority at the moment. We think we need to be very, very focused in making what we have super successful.

35:41 Thanks, guys.

35:43 Thank you, Scott. Next, we'll hear from Ben Hainer at Alliance Global.

35:51 Good morning, gentlemen. Can you hear me? Great, thank you. So just on the sales pipeline, I think I heard you mention about $200 million that's available to you there potentially. How do you calculate that? I mean, is that an annual opportunity? Is it over the average three-year life of contracts? How do you look at that?

36:21 We're looking at it on an annual basis. That would be the annual opportunity.

36:25 Okay, great. And then do you have a sense of or a goal in terms of close rate on the pipeline or any color that you can provide there?

36:39 You know, what we've seen so far has been much greater, faster interest than I would have anticipated historically. So I think it's a little too early to really comment on that. I mean, if I was going to say, hey, what did I normally expect, I would say something in the area of 20% that we would expect to close. But right now I think we're seeing a lot greater success as it relates to that in that area. So I'm not entirely certain where that one's going to play out.

37:15 Okay. Fair enough. And then in terms of implementing the projects once you win them, I mean, how long does that take? Is it a month? Is it a quarter? Is it multiple quarters? And how much do you think that factors into the decision of the potential customer?

37:34 In terms of potential customers, I think, especially on the health side, people are looking for solutions that are easy to implement. They've got a lot going on. you know, things that are complicated, heavy lists that require them to utilize more resources internally are judged more negatively than those that are an easy list. In our case, you know, I really think this is an ease to implement type of program. I mean, essentially what we need is the information to be able to determine who is eligible and we can do most of the rest of that. So, you know, typically I would expect implementations to be in the Thank you for joining us. You know, so I would expect that we have a shorter timeframe in that case.

38:45 Okay, got it. And then just lastly for me, kind of more of a housekeeping question. I think you mentioned last quarter having about over 50,000 users on the platform. You know, how many do you have on the platform now? And then can you give us kind of a breakdown of where they fall? Are they more subscription-based? Are they more You know, kind of on the piecemeal plans, you know, any color there would be helpful.

39:16 Yeah, so as I stated in my script, in my comments, we have 55 active paying users on the platform at the moment. 95% of them are in the United States and around 40% of them are members, 40 to 45% are members. and we do look to transform the business fully to SaaS so we expect that in the next couple of quarters we will have only members on the platform. So this is one of the transformations that we are doing in parallel of penetrating into the B2B2C market. We're also changing our B2C in order to have members only. So this is a transformation and migration that we are planning to do in the next two quarters.

40:09 Okay, great. Thanks for taking the questions, gentlemen, and congrats on all the progress.

40:14 Thank you so much, Ben. Next, we'll hear from John Vandermosten at Zacks SCR.

40:22 Good day, everyone, and thanks for taking my questions. Starting out with a question on remote patient monitoring services. I know you had announced a few deals on the last quarterly call and wanted to get a sense of, you know, how the trend there has continued as we move into the sixth month of the pandemic.

40:44 Thanks, John. We have continued to have some strong interest and some larger players that move a little bit slower than the smaller ones. that have been in the process, and we continue to get strong interest there. And actually, as Erez mentioned, that in particular is a market that we intend to invest additional sales resources in. The reality is that we reallocated some of our resources from that market into the health plan market, given the interest that we were getting on the health plan side. was a bit greater than we originally anticipated. But I think the trend is continuing. I expect it to continue. There was a little bit of hesitation in some of the customers in the first quarter in terms of trying to understand what did the new reimbursement codes mean.

41:35 CMS is not always entirely clear about what the criteria for billing are, things of that nature. as we've been able to work those out and folks have gotten more comfortable with that. And as they continue to get comfortable with that, I expect that that will continue to increase.

41:49 Okay. And, Rick, you know, you had mentioned that you actually were up against Livongo in some of these competitor deals. And I was just wondering, you know, what attributes stand out for potential clients that – that help them select you over a competitor out there. What are they looking for that Daria specifically has that others don't?

42:15 I think that the feedback that we got from the marketplace is that the flexibility and transparency of the solution that we're offering, the ability to, in some cases, for them to do coaching or us to do coaching, our ability to share and integrate data with other solutions is very attractive. Thank you so much for joining us.

43:04 And as you guys mentioned, there are a few agreements that are imminent. And as those deals close, hopefully, what milestones should we expect to see? I think you mentioned there's something like 60 days you anticipate to kind of get things done. But what should we see in that time period? And then how long will it take to get full penetration into the plan, the total number of members to get them kind of actively using the Dario product?

43:36 So, you know, in terms of milestones, you know, really we would look to from the larger ones, we probably will look to, you know, release that obviously to the market. When we can do that, the timing of that is somewhat dependent on, you know, customers as well in terms of approving such announcements. And then, you know, really in terms of penetrating the accounts, you know, The smaller ones will probably penetrate a bit faster, but generally speaking, what we're providing for in our internal forecasting, if you will, is penetration over three to six months, depending on what that looks like. It could vary from that, obviously, based on the situation on the ground.

44:22 Okay. And this last question for me is on the studies. How important are those? How important is efficacy in the decision-making process? And what new studies do you anticipate conducting to answer potential questions out there from partners?

44:42 So at a certain level, it is table stakes. You have to have data that supports the solution, especially, you know, we're members of the Digital Therapeutics Alliance. That requires that you have data that supports it. It separates what we're doing from, you know, a lot of the healthcare apps and things of that nature that are out there. So from the perspective of a buyer, data is important, and it really plays into also what the expected outcomes financial outcomes from that bar. So, you know, there's many studies that are out there that show that a reduction in A1C will generate savings. And so that's part of the validation of the overall product. In terms of additional studies, we anticipate we will see more studies coming out on hypertension on our platform, as well as, you know, in the area of weight loss, and things of that nature as we continue to move and broaden the product as we go in that direction. Also, probably some specific financial outcome studies as well.

45:47 Okay. Thanks, Rick, Erez, Steve. Appreciate it. Thanks, Sean. Our next question comes from an investor, Ashok Kumar.

45:58 Yes, thank you, and congratulations on the results. Just take-home messages, Erez, could you just provide the take-home messages from your dashboard metrics, right? So the three-part question would be, one, on the SAS model transition, what's your timeline for the 70% gross margin? And then the other side of that question is the OPEX timeline. you know given that you're normalized what's the normalized expenses on a quarterly basis are either absolute or percentage relative to the 4.6 million in Q1 and question two is again in the B2B2C where is your cost per acquisition per user and what's your steady state where do you see that as a target where do you see that bottoming out and also the mix of The revenue mix at the $5 to $7 per user per month to the $60 to $70 per user per month, right?

47:01 So what's the mix right now and where do you see that, you know, I think over the next 12-month period? And the last question is the health plan channel, you know, what is the length of the sales cycle right now and also the traction? Right. in engaging for a single chronic condition to multiple chronic condition. Thank you.

47:29 Yes, I'll start from the expenses. I'm not going to go according to the order, but in terms of the expenses, we believe that we're going to see increase in the... Thank you very much. and this will be one or two legs behind the revenue that will get in that will offset that. I think that in terms of expenses and losses, we're gonna go a bit higher. In terms of the overall transformation from a direct to consumer, I mean, on the SaaS level, eliminating those that are device users and having We have a legacy kind of asset which is a few tens of thousands of users that are from the old system. They are getting us a lot of value in terms of the data that we are generating which is significantly contributing to our ability to improve the platform and develop our AI.

48:54 So while it doesn't look good from a gross margin perspective, it does contribute to our overall R&D efforts. So we are not in a rush to kill it tomorrow morning and we're going to do a very thoughtful transformation. So overall, the transformation into the 70%, most 70% gross margins, this is something that will take us, we believe, between 8 to 12 quarters from now. In order to be there, we need to scale up the B2B2C and to reach a place where 80% or 90% of our sales are coming from health plans and payers, and we think it's going to take a big time. until we reach this goal of 70%.

49:42 So let's say like two years or so. That in terms of the growth margins. And in terms of the cost of acquisition and the B2B2C, we believe that while on the B2C side, we were in the ranges of a hundred bucks, On the B2B2C side, we need to be in the ranges of 20 to 30 bucks, including some kind of a cost for the enrollment part. The enrollment teams are already being established, and we believe that the overall average that we're going to see per user is in the ranges of 30 bucks, and this is how we are building our models forward. If you are looking on the overall difference between B2B2C to the B2C, which is our legacy, on the ARP, or average revenue per user per month, we're going to increase from $25 to around $60 to $80, depending on how many chronic conditions we are managing.

50:44 And in terms of cost per acquisition, we're going to go down from $100 to $30. That's the expectation. So you can imagine what is the impact that we're going to see on our business. I hope I covered all your questions, Ashok.

51:00 Thank you very much. And just the last question, right, in terms of the length of the sales cycle with your health plan channel, right, setting this qualitatively or otherwise. Thank you very much and all the very best.

51:13 Thanks. So in terms of sales cycles for health plans, I mean, typically what I would say is it's 12 to 24 months. in terms of the sales cycle, I've seen them go as long as five years. So generally speaking, they're fairly slow. We have seen some, as I said, traction instead of what we would normally anticipate. And I think that we have an opportunity in front of us to close a couple of health plans above and beyond the ones that we have in the very late stage before the end of the year, which would run them more in the six to nine you know, sort of month sales cycle, which is quite fast. And I wouldn't anticipate that that would continue in the future.

52:00 I expect we would see stuff more in the 12 to 24 months. That specifically relates to health plans. Thank you. Yep. Nathan Weinstein at Aegis. Your line is up, sir.

52:17 Good morning. Erez Raphael. Congrats on the many accomplishments in the quarter. Thanks for taking my question. Just one quick one for me. Noting that there's many chronic conditions suffered by patients outside of diabetes, maybe just discuss a little bit more about your roadmap and what areas you could see the company expanding into in the future.

52:39 Yeah, so thanks for the question, Nathan. We do believe that the mindset or the technology that we build combining medical devices together with a service where you have in the center a software platform that understands very well the habits of the user and the routine of the user is extremely beneficial in order to change behavior. And this is what we are doing here. We are trying to change behavior of people with chronic condition. So a lot of things that are applicable for the diabetes market are also applicable for those that have hypertension. and other chronic conditions and in fact we think that the traditional management of chronic conditions in silos doesn't make sense and once you are approaching users and a lot of the Things that we are talking about in digital therapeutics is providing a very personalized solution that is driven by data.

53:40 So obviously someone that have diabetes and have comorbidities like hypertension and other diseases This is something that we want to be able to tackle when we are approaching the user either digitally or through our coaches. So as we are moving forward, we're going to expand into more conditions. We think we're going to get into more devices. We are looking very closely on integrating CGM. We are looking also in integrating more artificial intelligence in order to make our overall platform much more personalized. So that's the general direction that we see on our business. And we feel that we can even extend our competitive advantage with regards to by implementing this direction.

54:37 Great, thank you, and congrats again on the progress and the growth in the quarter.

54:43 Thank you. Thank you.

54:44 Thank you. We'll hear next from Raphael Raquit at LifeSciCap. Hello, Mr. Raquit, are you there?

55:00 Can you guys hear me? Yes, we can now. Go ahead. Awesome. Hey, thanks for taking the question, guys, and congrats on a great quarter. Just looking at, you know, the growth in revenue that you saw quarter over quarter and year over year, can you just provide some additional color on what, you know, if anything in particular really contributed to that growth?

55:21 Yeah, so I guess that you're talking about my last comments before I wrapped up about the potential growth into 2021. So as I stated, we do know that the overall analyst production is somewhere between 10 to 12 million dollars for the full year of 2021. We do believe that if we're gonna get the contract that we think we're gonna get, signed, it's going to get us access to tens of thousands of users. And assuming an ARP, or average revenue per user, that is between $60 to $80, that can generate for us $8 million on every 10,000 users that are enrolling to the platform, and you need to remember that we are under a SaaS model and under recurring revenue, every dollar that we're going to generate from a new user is going to be added on top of the run rate that we have today. So all these kind of elements gives us the confidence that the estimates that at the moment analysts have might be relatively conservative to where we can be. And I think that investors will have to follow us very closely in the next few weeks and the next few months.

56:40 to see on how we are making progress on signing this contract and enrolling patients into the platform. So the acceleration, once we are signing this contract, the acceleration in terms of growth might be very high. That's why we feel that we can get better numbers in 2021, but we'll be in a position to provide guidance maybe later this year or early next year.

57:11 Got it. Okay, thanks. I know Rick touched on the sales cycle for the health plan. So once you have an agreement with the new health plan in place, what does the onboarding process look like and how long do you think it takes to see an initial tangible increase in revenue?

57:28 So in terms of onboarding, it's going to usually be 30 to 60 days is what we'd anticipate. We will see some variation around that, obviously, depending on the individual customers. And then, you know, right now what we're internally looking at it as is three to six months in terms of really kind of ramping up the enrollment within those plans. You know, what we've seen historically with the customers that we've done so far is a bit faster than that, but that's what we're planning for.

58:04 Got it. Okay. That's helpful. Thank you. And then, you know, last one, just kind of thinking more broadly, your ongoing discussion with health plans, you know, what about the platform has really been resonating with these payers?

58:17 As I mentioned a little bit ago, I think, you know, the main thing that resonates are the flexibility and the transparency that we're providing, and then really the user experience. There is more and more interest in the market on an overall basis in terms of what's the experience for the user, how much are they using it, how do they use it, because people view that, I think rightly so, as will they get the clinical and financial results in the long term. So a lot of focus on user satisfaction, utilization, data that's coming out of people using it. So outcomes data, I think that's where some of our studies that are more than two years in length you know, tens of thousands of users in some cases that we're looking at is, you know, really valuable and resonates with folks.

59:09 And then I think ultimately the fact that we are only billing for truly engaged members and our pricing strategy there is working well in the market.

59:21 Got it. Okay. Really helpful. Thank you. Well, I think that's it for me. So congrats on a great quarter, guys. Thank you. Thanks, Rahul. And I believe we did have a signal from Mr. Jonathan Christman. Your signal has dropped from our queue. Mr. Christman, would you hit star and one once again for me? I'm going to allow just another moment. Mr. Christman, I'm not seeing this signal from your line, sir. It's star and one. Be sure that you return to your handset as well. And gentlemen, I believe Mr. Kreitzman has dropped.

1:00:18 I'll turn it back to our leadership team for any additional or closing remarks.

1:00:24 Thank you, Jim. So thanks everyone for joining our call this morning and thanks for the large interest in the space and in what we are doing. Looking forward to seeing you again in the next quarter.

1:00:36 Have a great day.

1:00:37 Bye-bye.