Greetings, and welcome to the DarioHealth Corp. fourth quarter 2021 results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Glenn Garmont of Investor Relations. Thank you. You may begin.
Thank you, Derol, and good morning, everyone. Thank you for joining us today for a discussion of DarioHealth's fourth quarter and full year 2021 financial results. Leading the call today will be Erez Raphael, Chief Executive Officer of DarioHealth. He'll be joined by Zvi Ben-David, Chief Financial Officer, and Richard Anderson, President and General Manager of North America at DarioHealth.
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 and recorded on March 22nd, 2022.
This morning, we issued a press release announcing financial results for the fourth quarter and full year 2021. 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 2021 annual report on Form 10-K filed this morning.
Additional information concerning factors that could cause results to differ materially from the company's 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 today's press release regarding quarterly and full-year results. With that, I'd like to introduce Erez Raphael, Chief Executive Officer. Erez?
Thank you, Glenn, and thanks everyone for joining our call this morning. We're very excited with the results of 2021. In fact, this is a fundamental year on executing on our long-term strategy. As we are doing at every earnings call, I like to report on the progress by referring to the main three pillars that we discussed in the last few years, because we like to be very consistent and show all the execution that we did in the last few years.
The three pillars, as most of you are aware too, is one, the transformation from direct to consumer into the B2B, mainly health plans and the employers channels. Number two is the transformation from single condition into multi-condition. Number three is continuous improvement in the financial profile of the company and building what we are calling digital therapeutics as a service company in the healthcare environment, which is pure SaaS company, high margin, recurring revenue profile.
I'll start with the expansion into the multi-condition. We started with diabetes and in between 2018 to 2020, we expanded into other metabolic areas from diabetes to hypertension and weight loss. In 2021, we completed, like in 12 months between January 2021 to January 2022 on three acquisitions. Two of them are in the musculoskeletal space and another one on the behavioral health space. It's not just about the execution of the acquisitions, it's also about the integration of these acquisitions into a full suite.
In fact, we anticipated the consolidation of the digital health and digital therapeutics market, and we anticipate the demand that is gonna come mainly from self-insured employers that wanna adopt integrated solution. This is something that is reflected also in the demand that we see in our pipeline, where 80% of the pipeline is for those that are asking for more than one condition.
The expansion into multi-condition is executed, and today we are one of the most comprehensive platform in the space. Pillar number two, which is super important, is moving the business from direct to consumer that have a very tough financial profile with relatively low gross margins and high cost per acquisition into high gross margins, lower cost per acquisition, and a channel that is scaling up between employers, health plans, and providers.
On that end, we executed in 2021, and we were growing from five accounts to 54 accounts. The total ARR value behind this account is $35 million in the full implementation. This is something that we already reported on the webinar that we did on January 19th. This is not including additional revenue that should come from the strategic deal that we announced two weeks ago with Sanofi, that should contribute additional $8 million this year. We also showed a very strong execution capabilities in terms of the enrollment rate of the accounts that we are implementing, and Ric is gonna elaborate about it. We are seeing wins over the competition based on the portfolio of solutions that we have built into one integrated suite.
Today, we have at least one account that have the full suite implemented and installed in production, which is something that speaks to the strong execution capabilities in terms of integrating all the acquisitions together into one suite. This is something that is not straightforward, post-acquisition in a very quick time. If I'm taking the two first pillars, the expansion into multi conditions, the transformation from B2C into B2B and looking into the financial profile, this is something that should create a compounding impact on our financial profile. Number one, the average revenue that we can extract per every user is higher.
Number two, the amount of dollars that we can extract per every account that we are signing on, if they are signing on more than one condition, can go as high as 4.5x more dollars per every account, which is something that will improve and is improving our financial profile. With these two things that are happening, plus the accounts that we have signed on, we are super confident with the significant growth that we're gonna show in 2022. Also in terms of growth margins, we believe that in 2022, we're gonna show, in a non-GAAP measure, growth margins that are gonna grow to somewhere between 50%-60%. The overall goal, just as a reminder, is gonna be between 70%-75% growth margins to the business.
This is what we are targeting, and we're gonna show an improvement between 2021 to 2022. Overall, if we are looking on the financial profile from a burn rate and from loss, we believe that the transformation from 2021 to 2022 will reduce the losses of the company and will reduce the burn rate of the company, mainly because of the fact that the gross margins of the B2B is higher. We're gonna see more revenue getting from the B2B, and also because the B2C is gonna slow down, and that's something that is gonna help us provide a financial profile that is much more efficient, with lower loss and lower burn rate.
One of the things that we announced two weeks ago that is speaking also to the intensity that we are under which we are operating, we signed a significant deal with one of the biggest pharma companies in the world, Sanofi. One of the things that is going alongside with the deal is a revenue that should contribute $30 million in the next few years, from which $8 million will be recognized in year one. Ric is gonna elaborate about it. I felt that after talking with investors post this deal, that people felt that it's only about the $30 million. I think that this is a small part of the potential deal of Sanofi.
We believe that the core commercial activities that we're gonna have, and in fact, Sanofi putting their name and their capacity in terms of sales activities behind Dario, that's something that is gonna help us grow our revenue. That's something that is gonna be on top of the $30 million multi-year revenue that is gonna generate from this deal. This one is significant deal for our company. We are looking also into other strategic initiatives that are under discussion. If we are looking specifically into Q4, we already talked about the top line, and we disclosed that during the webinar, we pre-announced that it's gonna be between $5.8 million-$6 million for the quarter.
One of the things that we are showing in this report is that the gross margin, the non-GAAP, is reduced. We have seen in three quarters in a row that it's going from around 37% in 2020 to 37% in 2021. In Q4 specifically, it reduced to 20.1%. The reason for that is a very expensive shipment that we had to do through the air. This is a one-time event that we had, the combination of shipment and some discounts that we did on the B2C.
We are looking now into the Q1 that is evolving, and I'm gonna talk about it in the summary, and we believe that the gross margins in Q1 are gonna look much better. For the full year of 2022, it's gonna recover and grow somewhere between 50%-60%. That's the expectation. With that, I wanna hand over the call to Ric. Please, Ric.
Thanks, Erez. In 2021, we added more than 50 customer contracts across all three channels, including a national health plan. Of the accounts announced prior to 12/31, all but one provider account are implemented and are contributing to 2022 revenue starting in the first quarter. The last provider agreement will launch shortly. Most of the employer contracts we announced prior to year-end are on a January to December benefit cycle, so they started in the first quarter, and we will see a repeat of that pattern, by the way, in 2022 as well.
We have continued that momentum into the first quarter, announcing nine additional agreements to- date, including one regional health plan on our path to a goal of 100 total accounts by the end of the year. The majority of the agreements we are announcing now are off-cycle employer health plan and provider agreements, and as such, are expected to also generate revenue in 2022.
Generally, it takes us about 60-90 days to implement these types of customers. With the addition of these new agreements, our contract value is now in excess of $36 million, up from what we announced on the investor call just this last January. This excludes Sanofi, which represents an additional $30 million in contract value. As Erez mentioned, we continue to see good operational metrics in the launched accounts, with enrollment of approximately 40% and retention on the platform at approximately 80%.
Our integrated multi-chronic condition platform strategy continues to generate interest in the employer and health plan markets, with customers recognizing the value of both having less vendors and more conditions per vendor, and one member journey for their employees or members. One coach, one journey, one integrated experience versus our competitors that our customers are describing as having modules even when they cover as many or nearly as many conditions as we do.
Approximately three-quarters of the pipeline is multi-condition at this point. As we have discussed in the past, the multi-condition offering provides more value to both customers and approximately 4x-5x more revenue to Dario than single-condition solutions. We were very pleased to enter into the strategic relationship with Sanofi in the first quarter.
This agreement, as far as we are aware, is the first where a major pharmaceutical company is partnering with a digital health company to enter the digital health space generally, rather than to provide a software companion to their drugs or devices. We know that Sanofi did an extensive evaluation process, and we are pleased to be selected by them to go with them on this journey.
This is a $30 million multi-year commercial deal, of which we anticipate recognizing $8 million in revenue in the current year. This agreement has three main parts. Co-promotion, under which Sanofi will promote the entire Dario suite to health plans and some select employers. This immediately increases our health plan sales resources by more than 10x, and brings additional data and targeting resources to the Dario sales efforts.
Revenue earned under this co-promotion is in addition to the $30 million contract value. Development of a new or enhanced solutions on the Dario platform that will be distributed by Dario and through the co-promotion agreement is the second part of this agreement. Lastly, Sanofi is leveraging their internal data and real-world evidence teams to create studies and additional data around Dario solutions.
We believe this will have an increasing value as the market is expected to demand increasing levels of evidence from digital health providers over the next 2-5 years. All of these streams have been launched already under Sanofi, and we expect the co-promotion efforts to the customers to actually begin later this month or early next month. We expect to see activity across this year. We are still selling to health plans, so we expect that there will be a sales cycle associated with that, but we're very excited about the additional traction we anticipate this giving us.
We continue to make progress on the sales side with all three channels. In employers, we are in the early part of the sales cycle for self-insured employers that are on a January 1 to December 31st cycle. About 70%, as I've talked about in the past, of employers are on this cycle. We will see RFPs for the next few months, with contracting in late in the third quarter and early in the fourth quarter, and launch in the first quarter of 2023. As I said, this excludes those that are off cycle, which we continue to see.
We are seeing the benefits of the progress that we have made in increasing the name recognition with benefits consultants through continuing RFP volume. Outside of this main employer channel, we continue to see strong demand for our standalone behavioral health offering and expect to announce several additional contracts this year.
On the health plan side, in addition to the two plans that we have announced, we have a handful of plans that are late-stage contracting and vendor management, and we expect another one to two plans in the coming quarters. In the past, we mentioned that the national plan that we've already signed was anticipated to have some additional phases that we were expecting would be closed later this year or 2023. We are pleased to tell you that these phases have been pulled forward.
We have agreed to the major terms for them and look forward to completing that expanded agreement in the second quarter. This has the potential to bring more than 10 million members onto the platform over the next couple of years. In 2022, we anticipate recognizing multiple millions in revenue from this agreement. On the provider side, we have continued to see contracts with providers and expect we will continue to see additional contracts in the second quarter. With that, I'd like to turn it over to Zvi.
Thank you, Ric. Revenues for the fourth quarter ended December 31st, 2021, were $6.03 million, a 7.1% sequential increase from the third quarter ended September 30th, 2021, and 190% increase from the $2.08 million in the fourth quarter ended December 31st, 2020. The increase in revenues resulted from the new product line acquired during 2021 and the expansion into the B2B market. Gross profit in the first quarter of 2021 was $548,000, a decrease of $1,000 compared to a gross profit of $549,000 in the first quarter of 2020.
Gross profit as a percentage of revenues decreased from 26.4% in the first quarter of 2021, 2020 to 9.1% in the first quarter of 2021. The decrease in the gross profit and gross profit as a percentage of revenues resulted from amortization of expenses related to the acquisition of Upright and wayForward, and from higher shipping expenses and price reductions as part of the direct-to-consumer promotion campaigns in the first quarter.
Pro forma gross profit, excluding $782,000 of amortization of expenses related to the acquisition of Upright and wayForward, was $1,330,000, or 22.1% of revenues for the three months ended December 31st, 2021.
Total operating expenses for the first quarter of 2021 were $22.2 million compared to $9.6 million in the first quarter of 2020, an increase of $12.6 million or 131%. This increase resulted from an increase in our research and development activities, sales and marketing, administrative expenses, and stock-based compensation. Total operating expenses excluding stock-based compensation, acquisition expenses, and depreciation for the first quarter of 2021 were $16.4 million compared to $7.5 million in the first quarter of 2020. Net loss was $21.6 million in the first quarter of 2021, an increase of $12.6 million or 140% compared to the $9 million net loss in the first quarter of 2020.
Cash- and- cash equivalents totaled $35.8 million on December 31st, 2021, and our net proceeds from the offerings that closed at the beginning of this month was $38 million. Now back to you, Erez.
Thank you, Zvi. To summarize this call, one of the important things that I wanna tell all the investors is that the fundamentals of the business was never in a better position than today. Also in terms of the whole space of digital therapeutics, we see how the healthcare industry is not about if solutions should be adopted, but more about what are the solutions that should be adopted. I'm very proud that we are building one of the best companies in the digital therapeutics category. And we see all the fundamentals improving every day, which is to some extent the opposite of how the whole sector is behaving in the market and in the stock market.
We see a very intensive adoption of solutions, and 2022 is gonna provide acceleration in growth. We feel super confident with the analyst estimates. We have the signed accounts, we have the strategic deals, and we have all the components in place in terms of the suite of products. We also see the trend improving into Q1. When we are looking for the full year of 2022, we are targeting a gross margins in a non-GAAP of somewhere between 50%-60%, which is another improvement comparing to 2021. We also see a reduction in the loss and reduction in the burn rate, and we also see this trend happening already in Q1 that have a better financial profile, much better financial profile than Q4 of 2021.
Overall, we ended the year with $35.8 million plus the additional $40 million that we raised. We have a runway to go through 2023. In addition, we have a few strategic opportunities to get additional capital in equity later this year, which is something that we might pursue. The point is that this company is very well-funded. That's another very important point in this market environment. With that, I wanna stop here and turn the call for the Q&A session.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for your questions. Our first question has come from the line of Alex Nowak with Craig-Hallum. Please proceed with your questions.
Great. Good morning, everyone. Thinking about the growth you're expecting this year, Ric, if we take your comments about all the new contracts that were signed last year and now currently online and generating revenue, is it fair to assume that by the time we get to the end of this year, end of 2022, you'll essentially have $35 million of new run rate revenue that you then add on top of the $24 million of revenue exiting 2021, and then even potentially add on Sanofi of $8 million on top of that. Maybe just help us take those comments and apply to the revenue ramp or how you're thinking about it for this year.
I don't think you on a run rate basis, yes, you can look at it that way, as we exit the year. Just to be clear, I don't expect that you can take the $35 + the $21 and say that's 2022 revenue. On a run rate basis, it should approximate that exiting the year. Yes.
Okay. No, that's really good to hear. Maybe expand a bit more on the Sanofi deal. Just what is Sanofi looking to build out internally here on the digital therapeutics side? Potentially speak to what other therapeutic options do they wanna add to the channel, and maybe speak to that competitive tender process and ultimately why they picked Dario.
Well, starting in reverse, I can't speak for them exactly in terms of what their final decision was composed of. Although what they have told us is that, you know, when they looked at the solutions in the market, the results that we were getting in terms of the clinical results, the fact of the quantity of clinical results that we had, and really the integrated user experience, they felt like was compelling in the marketplace and something that they could build off of. You know, speaking to the digital therapeutics, and what they're looking to do going forward, it's building off of the Dario platform.
I think that, you know, taking the member experience they were already seeing and thinking about where they wanted to go in the future, and wanting to go in the future with Dario, that was an important factor as well. We're in the process right now of defining what the 2022 development piece will look like in terms of specifics. There's areas around expanding for specific patient populations, as well as opportunities that we've discussed in terms of expanding the number of conditions that are on the platform.
Got it. The $8 million of sales from Sanofi this year, what is the trigger for that? Is that basically viewed as a service contract? What is the triggers, I guess, to recognize the remaining $22 million?
The agreement as it relates to the economics is primarily made up of the co-promotion pieces related to co-promotion, preferred partnership, and development. This year, the components would be the preferred partnership elements of it, which are, you know, really more, you know, time-based. The development pieces revolve around delivering the first development plan, which we expect will be, you know, sometime in the next few months, and then continued development on the platform.
Okay. Got it. Then just lastly, we've talked about these new digital therapeutic reimbursement codes before. I feel like it's getting a lot more traction in the marketplace. Maybe expand on what this does for the provider channel. We didn't talk on it much today, but just are you seeing more endos looking at providing remote patient monitoring now that there are reimbursement codes that are actively being discussed?
You know, we're two years into the original RPM codes that were announced. There were some additional RPM codes that were announced at the beginning of this year, primarily actually related to MSK. Over, you know, I'll just say the last two years, we're seeing more acceptance of the RPM codes.
There still remains in the marketplace some level of, you know, show me because you're dealing with the government but b ecause of the fact that we're seeing people get reimbursed for the RPM codes, that people are starting to sort out the operational aspects of it, I think there is more excitement around the RPM codes from the provider side. It'll be interesting and, you know, we're keeping a close eye on how reimbursement in this marketplace proceeds.
Because in addition to that, obviously most of the reimbursement when you look at employers and health plans was coming through, self-insured employers paying for the solution. Yet, you know, we've seen recently that the government came out and said that, you know, they felt like that they would reimburse for prescription digital therapeutics, which we're not doing, but as an indicator around the market.
That was preceded by I think about a week of the major health plans coming out and saying they didn't think there was enough data to reimburse for those digital therapeutics. I think it's going to be on an overall basis, a little bit of a volatile market as it relates to reimbursement over the next few years, but we definitely expect that there will be more forms of reimbursement. We expect that RPM in general will become more accepted and more integrated over, you know. I mean, it's already been some, but we expect that trend to accelerate.
Okay. That's great to hear. Appreciate the update. Thank you.
Yep.
Thank you. Our next question has come from the line of David Grossman with Stifel. Please proceed with your questions.
Hey. Thanks, guys. Going back to that $8 million on Sanofi, I guess when does the year one kind of start and end? How does that, like, get recognized? Is it pretty even throughout each quarter, or is there kind of lumpy? I guess on revenue and cash flow for how the lumpiness works would be great.
It's a calendar year, so when we're talking about year one, we mean 2022. As it relates to the-
Okay. Got it. Oh, sorry. Go ahead.
Yeah. No, no. Yes, we are currently expecting that we will recognize $8 million of that revenue in 2022. You know, it's a little bit front-loaded in terms of the cash flow and, because you've got the preferred partnership payments up front, as well as the launch of the development piece. Then we expect that the last of that will come in towards the end of the year from a cash flow perspective. From a revenue perspective.
Yeah.
If you look at the rest of the year, it's, you know, not exactly even, but it should work out to be relatively spread.
Okay. Does that include Q1? Like Q2, Q2 and Q2, o r should it be starting 2Q?
It'll start in Q1. We anticipate it'll start in Q1.
Okay. Got it. On looking at the breakout you gave in the 10-K of the hardware consumables versus services, looks like that was about 87% and 13% of revenue. It was kind of flat throughout the year. How should we expect that to sort of trend and then exit 2022 from a, like, how big should the services be as a percentage of revenue when we exit the year?
Moving forward into 2022, we're gonna see more software and less what is called hardware or product or services. This is due to the transformation from the DTC into the B2B. In fact, Q4 we feel was the last quarter where the portion of the hardware or what we are calling the product was that high. That's something that you should expect will be changing at the beginning of 2022, already from Q1. Overall, that's something that will help meet our targets of gross margins for the business for 2022 of between 50%-60% on a non-GAAP measure.
Got it. Since we're, you know, at a fairly, you know, low starting point for the gross margins and you're saying the whole year should be 2022? Sorry, all of 2022 should be 50%-60%?
Yes. On average for the full year, between 50% and 60%, that's our target. We're gonna see a significant improvement from Q4 of 2021 to Q1 of 2022. It's gonna improve over the year from quarter- to- quarter. The higher the B2B portion in the revenue is gonna be, the higher is gonna be the gross margin. 50% to 60% as an average for the full year with improvement from quarter- to- quarter.
Okay. Do we have an idea for what the exit rate should be? Because that would seem like it could be fairly significantly above 60% if we're gonna improve that high or improve that throughout the year.
That's correct.
Okay. All right. Got it. That's all I got. Thank you.
Thank you.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. There are no further questions at this time. I would like to turn the call back over to Erez Raphael for any closing comments.
Thank you, operator. Thanks everyone for joining our call, and we are looking forward to meet on the next call. Thanks everyone, and have a good day. Bye-bye.
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