Greetings, and welcome to the DarioHealth Third Quarter 2023 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. Thank you. It is now my pleasure to introduce your host, Glenn Garmont. Please go ahead.

Thank you, operator, and good morning, everybody. Thank you for joining us today for a discussion of DarioHealth's Third Quarter 2023 Financial Results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He'll be joined by Rick Anderson, President. After the prepared remarks, we'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 2, 2023. This morning, we issued a press release announcing our financial results for the third quarter 2023. A copy of the release can be found on the Investor Relations page of DarioHealth's website. Actual events or results may differ materially from those projected as a result of changing market trends, reduced demand or the competitive nature of DarioHealth's industry. Such forward-looking statements and their implications may involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. The forward-looking statements discussed on this call are subject to other risks and uncertainties including those discussed in the Risk Factors section and elsewhere in the company's 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 Erez Raphael, Chief Executive Officer of DarioHealth. Erez?

Thank you, Glenn, and thanks to all of you for joining our call this morning. Q3 financial results are a continuation of our multiyear 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 streams 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, we call Commercial Strategics, which comes from partners like Sanofi and its milestone driven. In the third quarter, our B2C business continued pace to achieve the expected $8 million to $9 million in yearly revenue while remaining cash natural was slightly positive. We expect this trend to continue into 2024. On the commercial strategic side, commercial and strategic revenue remains on track for annual run rate of approximately $6.3 million a year. The current quarter resulted only with $200,000 recorded in revenues, which negatively affect our revenue compared to the previous quarter and the third quarter of 2022. We want to reiterate that test partnership revenues should be viewed on a yearly base and not quarterly basis. And the economic value for us on a yearly basis has not changed. We expect our commercial strategic revenue to continue at an annual rate of $6 million 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 of this channel grew by 22.7% compared to the third quarter of 2022 and up 57% for the 9 months ended compared to the same period in 2022 and totaled $3.9 million in…

As Erez mentioned, in the third quarter, our B2C business continued on pace to achieve $8 million to $9 million in revenue while remaining breakeven to slightly profitable. And we continued to see growth in our core business line, recurring revenue from health plans and self-insured employers in the third quarter. Our strategic revenue was lower in the third quarter than in the third quarter of 2022 and lower than we had originally anticipated for the quarter. The majority of this was due to the timing of the milestones delivered as a result of Sanofi internal changes. These internal changes do not impact the annual revenue or the overall relationship with Sanofi, as Erez mentioned. As we discussed last quarter, our Aetna Behavioral Health platform has moved to their commercial division, and we are pleased to report that they are on track to have members on platform with identified customers starting in January of 2024. As a reminder, we earn revenue from this platform on a per employee per month basis for all employees who have access to the platform, which means revenue will commence in January. We expect that the population on the platform will continue to grow over several quarters post launch as Aetna continues to sell the platform through to their self-insured employer customers. I am also pleased to report that we had a significant win with Aetna in the third quarter as we were selected to replace 1 of their existing vendors in providing digital cognitive behavioral therapy. This represents a separate win and additional revenue that will commence during the first quarter of 2024. In addition to the significant ARR revenue this will add starting in the first quarter of next year, we also believe this demonstrates the strength of our relationship with Aetna and…

Thanks, Rick. As we look back to the strategic changes we have made in the company over the last few years, such as moving from single to multi chronic conditions and from direct-to-consumer to B2B2C. We see how massively impact fully well to our goal and enhancement of our business across the channel. From a product perspective, as we explained in our Investor Day a couple of weeks ago, our platform is best in class with clinical goal of efficacy that has been validated by [indiscernible] Data as well as our partners. Our core business is functioning very well and the financial profile of the company is continuing to improve. We are very happy with the development of the partners like Aetna and Sanofi and continue to see them in progress to be strong. We remain dedicated to keeping the investing public educated on the progress of the business across the multiple channels we have defined to [indiscernible] commercial strategic revenue will be measured on an annual basis, as it is milestone-driven. We expect to see this staying in line with our estimation of $6 million to $8 million a year. Scalability, employers and health plans is recurring and should grow as we continue to implement our signed accounts, we expect to see this revenue channel grow between 100% and 170% annually. On the B2C side, we are going to be stable on breakeven cash flow or cash flow positive with $8 million to $9 million per year. In 2024, we expect to see OpEx reduced by additional 10% to 15% non-GAAP. Net loss reduced by additional 20% to 30% non-GAAP. All this proof as evidence of continued improvement of our financial profile on a consistent going forward basis. Thanks, everyone, and I would like to open it now for Q&A.

[Operator Instructions] Your first question comes from Charles Rhyee, TD Cowen. Charles?

Erez and Rick, maybe just give us a sense on sort of how the strategic partnerships are going. And obviously, we didn't get as much contribution this quarter maybe a little bit more about the Sanofi relationship and how that's progressing? And then secondly, in light of this and sort of the pace that we're expecting with Aetna next year and sort of your expectations on some of the new customers that could come on board, how should we be thinking about next year's revenues?

I'll start with Sanofi and Rick can talk about Aetna, I also can talk about Aetna. When we think about the relationship with Sanofi, I mean we are looking into a few types of revenues. We have development services. We have elements that related to clinical publication and data. And 1 of the things that we were showing and reiterating in our Investor Day, is all the achievements that we had in the last year with this kind of relationships. We had 3 different clinical publications that were done on top of our [indiscernible] Data that we collected over the year, and we had like one of the top clinical guys from Sanofi on the stage talking about it. That's a long way to say that the relationships are very good. We are making progress in terms of achieving objectives from the clinical aspects to the development services aspect. Just to remind you, we developed together behavioral change capabilities that related to the GLP-1, which is also something that was done together with Sanofi on the development side, we are also doing well. And also on the commercial side, we are working together to get clients and actually MedOne is one of the clients that we work together with Sanofi in order to achieve, and we think that we're going to get another few clients, including health plans that is coming from the relationship with Sanofi. So looking back, we signed on this agreement on March 1 last year. Looking back on all 3 streams, the clinical development services and the commercial and there is a satisfaction from both sides. I think that the challenging part is the way that we anticipate how this $30 million deal is recognized and delivered because it's very milestone-based. And it's very hard for us to communicate with the market when we're going to recognize what part of the revenue, and I think this is what created the challenge. And one of the things that I was trying to be very, very clear on the script, on the earning call itself is that the relationships are moving to the right direction. And we believe we can also take it to the next level beyond the $30 million. This is something that we said before. And we think that the relationships are stronger than ever. Rick, do you want to say something about Aetna and the launch?

Sure. So I mean I think our relationship with Aetna continues to be very strong. They are -- as we mentioned, they have now identified customers on the platform, the mine companion platform, which is the private label version they're selling to their customers and they've brought more and more to be involved in the commercialization effort of that. So that continues to deepen. Plus, as I mentioned, we won another piece of business, which was actually taken from Teladoc and that's going to launch in January. So our understanding from them is they're looking to continue to consolidate vendors. And we've benefited from that. I think that, that speaks to the relationship. I think there will be other opportunities over the next 12 months with him also to be able to expand that. So I think the relationship is strong. It's showing up in terms of the business that we're increasing with.

And in terms of the revenue charts, I want to make sure that I'm addressing that part of the question and how you should look into revenues towards next year and the year after. We think that the B2C, our strategy is to keep it because it generate the data that we need, and it helps us to create the sandbox in order to improve the platform. And this one, we are keeping on cash flow neutral or a bit positive or slightly positive. And this is in the range of $8 million to $9 million a year. The other part, which is the strategic, and we recognize this year some strategic that is coming from Aetna and also Sanofi. So these are the 2 revenues that we had under the strategic and next year, we think that we have a range of somewhere between $6 million to $8 million for that part, it can be even more. Sanofi is kind of guaranteed to some extent, and it just depends on how it's going to be recognized before in the quarter. So that's another part. We also work on other relationships that related to pharma, in companies that related to clinical and data. And we believe that we're going to have more clients contributing to this revenue channel, what we are calling commercial strategic. And the third part, which is the most important part, which is the B2B2C ARR, all the membership that is coming from employers and health plans, here, we are looking into a growth that is somewhere between 100% and 170% growth. This is very hard to predict, but the more we are implementing it becomes more predictable. And we are aware to the challenge that investors have and analysts have in anticipating how the ramp-up is going to look like on a quarterly basis, and that's a challenge that we are trying to address. Also with our partners with Sanofi and we'll try to get it as steady as possible, but the business is a bit complicated, but it's ramping up. So we are confident that we are in the right path to create a growth which is more significant as we move forward.

And sorry, just to clarify, though. So if we look at the services revenue, which is I'm assuming mostly is all the B2B2C. And we know we don't have really any strategic like Sanofi related revenue in it. If we look at sort of -- if we kind of annualize that number, is that the number we should be growing the 100% I think you said 170% as we think about next year? And then obviously, we have a steady state in terms of consumer on the B2C and then obviously some contribution from strategics.

No, no, not exactly. I said that theB2C, it's between $8 million to $9 million, which is the cash flow positive, that's number one. Number two, the strategic, I provided a range of $6 million to $8 million or more, max range that is strategic. This year, we had strategics that are coming from both Sanofi and Aetna. And this is something that was total, including Q3, it was a $6.5 million for this year, and we have another quarter. So far, year-to-date, it was $6.5 million. But looking into next year, we are still looking into a range of between $6 million to $8 million or more. And on the last one, the ARR that at the moment is in the run rate of $5 million to $5.5 million. This one should grow between 100% to 160%, which is -- that's the core business. That's the membership that the ARR that is coming from employers and health plans. We are counting under this bucket the Aetna and the membership, what we are going to launch in January, that Aetna related to building the platform, investing into the platform in a way that it can be integrated with the rest of their platform we were considering this revenue as a strategic revenue because we did specific customizations for them, and we got somewhere around $3.5 million so far. But next year, once we are getting the platform to production, and we're going to generate per member per month on a monthly basis, this 1 will be considered under the B2B2C ARR, which is the portion that is going 100% to 170% year-over-year. Is that clear?

Yes, okay. I got it, yes I am with you.

Your next question comes from Rahul Rakhit, Lifesci.

I know you touched on this kind of a little bit just now. But I was wondering if you could just provide a little more detail on the milestones that were delayed this quarter. But maybe just help us understand what it will take to get those milestones completed and to obtain the associated revenues. Is it something that can be done and seen in pushed off to Q4? Or is it something that might take a little while longer to see those revenues come in?

Yes. Overall, when we introduced this deal to the investors community, we're always talking about a $30 million deal. It should be delivered over 4 to 5 years. In Q2, the agreement was adjusted in order to enable also acceleration of this $30 million deployment to 4 years. And eventually, the overall strength of the $30 million is between data and clinical publication, the other part related to market access and another part related to development services. I think that the most kind of lumpy and less predictable part is how we are making progress from an operation standpoint with the development services that we want to do. So for example, this year, we developed medication cabinet and other elements that will support GLP-1. And all these kind of things depend on the internal operation within Sanofi and also us in terms of defining the requirements and defining when these kind of things can and need to be delivered. And there are a lot of things that are internally discussed inside Sanofi on how they want to get these kind of features and development delivered. The best way to think about it is to think -- and I think that we also talked about it on the Investor Day a couple of weeks ago. I think the best way to look at it is to think about it on a yearly basis and looking to like $6 million to $8 million on a yearly base average, and that's how we are trying to impose all these specific milestones. What we'll try to do next year is to try to have it as flat as possible or as balanced as possible. So it will be less fluctuated and then going to be easier to predict and to model. And that's a…

Yes, please go ahead.

Just to add a little just specificity in terms of the changes. So the Sanofi deal is the 3 pieces, commercial data and the development piece, and there was changes in the personnel on the development piece, the people that are doing the data and studies and doing the commercial have not changed or not materially changed. And so there's been a period where the new folks have been getting up to speed and that slowed down some of the things that would be normally happening in this quarter related to the development. So it will stretch out -- that makes that stretch out a little bit but they'll still happen. It's just in terms of -- it took longer for them to get up to speed and for us to coordinate those activities as it relates to that.

I guess in the process of trying to get people to better understand what goes into these milestone revenues, it also just might be helpful to under to get some color from you guys on how dependent these milestones are upon each other. If we see certain milestones get pushed off in 1 quarter. Does that mean that it's going to shift everything back in subsequent quarters? And things are going to get lumpier and maybe shift back into 2024 as well across those 3 aspects, the commercial data development, are they all -- within the milestones within each of those channels are they dependent on each other? Or can they be achieved independently?

So the commercial and the data side are not milestone driven. So the commercial is really just -- their market access team is selling the Dario solution through to their end customers which are going to be health plans and PBMs as we saw MedOne come out and they continue to make some actually really good progress with some of the other PBMs which I think is a significant opportunity. On the data side, that's continuing to function or continuing to do and finalize the 2 studies that they did. Those 2 studies are in publication at this point, and there's follow-on analyses, et cetera, that were being done. So those are not interrelated with each other. And if you think about the development piece as sort of being your standard cycle of coming up with what we want to do, agreeing on that, coming up with the specific specifications for it, having that approved on an overall basis in doing the development associated that's delivering pieces within there is what those milestones are. And we don't expect that there was -- I mean, I don't see those like stacking up or getting different and becoming lumpier. It's just the question of when exactly does something get approved when it shifts from 1 quarter or another, it moves the milestone from 1 quarter to another.

Thank you. There are no further questions at this time. Please proceed.

Thanks, everyone, for joining our call this morning. Have a good day.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.