Good morning, ladies and gentlemen, and welcome to the DarioHealth Second Quarter 2024 Results Conference Call. At this time, all lines are in a listen-only mode. After the presentation we will conduct the question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Kat Parrella, Investor Relations Manager at Dario. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us today for a discussion of DarioHealth's second quarter 2024 financial results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He'll be joined by Steven Nelson, Chief Commercial Officer. 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 Thursday, August 8, 2024. This morning, we issued a press release announcing our financial results for the second quarter of 2024. 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 second quarter 2024 quarterly report on Form 10-K. 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 at DarioHealth.

Thank you, Kat, and thanks to all of you for joining our call this morning. Q2 2024 marked another step forward in our journey to profitability. Our core B2B2C business, the engine driving our recurring revenue from health plans and employers, has demonstrated continued growth with 60% sequential growth between Q1 to Q2. This represents 28% organic growth before factoring in the positive impact of the Twill acquisition. This channel remains our primary revenue driver, contributing approximately 75% of our total revenue with an annual run rate of $21.6 million. This high-margin business with SaaS-like characteristics is gaining traction demonstrated 82% non-GAAP gross margins in this quarter. Coupled with the aggressive cost reduction initiatives implemented post Twill merger, we are confident in our ability to achieve substantial 40% reduction in non-GAAP operating expenses from Q1 2024 to Q1 2025. On a pro forma base, we have already seen a reduction in OpEx from Q1 to Q2 of this year of approximately 10%. This financial discipline will be evident in our results over the next three quarters in a more intensive way. Our gross margins continued its upward trajectory toward 80% target by early next year. As mentioned, our B2B2C has already reached 82% non-GAAP gross margin. In addition, we anticipate a large reduction of over 70% in non-GAAP operating losses between Q1 of 2024 and Q1 of 2025. This progress aligns perfectly with our road map to profitability by the end of 2025. In the last few quarters, we made a series of strategic decisions in a very challenging market environment. We believe that those decisions positioned us as one of the strongest players in the digital health space with a stronger financial profile. We have built one of the most comprehensive platforms in the market covering 6 different conditions…

Thank you, Erez. Good morning, everyone. I'm Steven Nelson. As many of you are aware, I started in June 2024 as Chief Commercial Officer at Dario. I have had the privilege of spending over 20 years in the payer industry with [Indiscernible] and Highmark Blue Cross Blue Shield and most recently led a direct employer company for 5 years named Contigo Health. Early in my career, I honed my B2C skills through experiences in packaged goods and retail. Today, I'm excited to share some context around my four key focus areas since my arrival and discuss some details on our Q2 2024 financial results. First, refining our strategy and operational processes. Our roots in B2C companies as well as the comprehensive multi-chronic condition product offering have built a solid and unique value proposition that most of our competitors lack, especially in this market environment where we see a consolidation of vendors. Dario has an impressive client base that is very unique in the market, and it is my belief that with a refined strategy and well-designed commercial operation, we can accelerate revenue growth. We have recently completed a detailed product market-fit strategy, providing us with focused insights to drive more credible revenue across all segments. With these insights, I have collaborated closely with our commercial team as well as others in key cross-functional roles throughout the company to implement a focused, scalable operating model within the commercial department. This model is meticulously designed to enhance operational efficiencies, streamline processes, and to Erez's point, strengthen both our pipeline for new clients, but even more important, ensure we accelerate revenues from existing clients. By understanding and anticipating our customers' needs and their mode of operation, we can focus on what we do best, enroll and engage with more members for every account…

Thank you, Steven. We have identified three key strategic areas that will help us accelerate growth and drive business to profitability. First, we will optimize our operations to increase revenue generation from existing employer and health plan clients. Expanding the adoption of GLP-1 offering is also a priority for us. Second, we will capitalize on the pharmaceutical industry shift toward direct-to-consumer models by leveraging our unique Twill-Dario solution. Our focus is transitioning from a milestone based to a recurring revenue stream in this specific sector. Lastly, we remain committed to regularize cost management. By aggressively controlling operating expenses, we expect to deliver tangible results in the coming quarters. As mentioned, we see our operating loss reducing by at least 70% by Q1 of 2025 on our way to profitability by the end of 2025.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Charles Rhyee from TD Cowen. Your line is now open. Please ask your question.

Hey. This is Lucas on for Charles. Thanks for taking questions. I was wondering if I could ask about how your cross-selling efforts are progressing since the Twill acquisition as well as obviously some restructuring and you guys' commercial operations. And how that's trend -- just early reads on how it's translating into bookings. It appears that maybe X12 B2B2C growth was up mid-single digits in 2Q. Can you remind us what the target for B2B2C growth is for 2024 and kind of what your expectations are now for the second half?

Yeah, absolutely. So far just to answer your specific question about the cross-sell, as Steven and I mentioned on the call, we already have a ton of Dario clients that are -- that we cross-sell, and we sold them the Twill platform. This is relatively small clients, and we have a specific -- a few other specific opportunities for larger clients that are looking either Twill clients that are looking into Dario or Dario clients that are looking into Twill. As we mentioned on the call, the sequential growth, the organic part of the B2B2C between Q1 to Q2, just the organic was approximately 30% between Q1 to Q2. On an integrated base, for Twill it was 60%. That's the numbers that we have at the moment. We are anticipating that the overall growth of our revenues for B2B2C for the entire year is going to be larger year-over-year. It's going to be larger than 30%. It should be in the ranges of above 50%. That's the expectation. The other area where we see a cross-selling opportunity is the pharma. On the pharma side, both Dario and Twill had a business model that was very milestone driven, which created a lot of issues in the revenue recognition, some of it we saw now in the quarter when we had to provide a concession, and we did some changes. So we are trying to streamline this revenue stream in a way that it's going to be a recurring revenue also. We can do that because there is a specific opportunity in the market now when pharma is transforming to be much more direct to consumer, and we have the platform to help them go directly to patients. These capabilities is a result of the combination of the Twill platform, the Twill…

Got you. Thank you for color. I guess I want to dig in on the price concession that you provide to your preferred partner. In your 10-K, it says maybe related to suit. I guess, in terms of, one, I guess, what brought about this price concession, if I can ask. And then does it have any impact on the expected $6 million to $8 million in expected payments that we were expecting from this partner? I understand that you're talking about just converting maybe to more recurring revenue stream. Can you kind of give us more details on what kind of came about at this price concession?

Yeah. I'll start from the end. We're not going to see this kind of concession or something like that in the future. So this is onetime that appears in this quarter. It's related to recognition that we had in previous quarters. So it's a onetime. It's something don't going to repeat again. That's number one. Number two, I don't want to mention the name of the client, but we had a discussion with them about the transformation from one business model to another business model. One of the things that we are trying to do is to transform from Dario only or Twill only to something that is more combined. That's number one. And number two, we are trying to move into a recognition that is more recurring or revenue that is more recurring. As part of the conversations, we made a change to and work that -- or milestones that were already delivered. And eventually, we negotiated something in order to be able to look into the future and giving up something small in order to get something big in the future. So that's the way that we're thinking about it. It's more like balancing future growth versus the presence of the revenues that we have. I hope that I gave you enough color on that one.

Yes, that's helpful.

Lucas? Lucas, I lost you. Okay. I think that we lost Lucas. I had to give it another 30 seconds to see if he is calling back. Lucas?

We're not hearing any response from him as of the moment.

Any other questions in queue.

We don't have any questions right now.

Okay.

Thank you. We don’t have any questions right now. This concludes today's conference call. Thank you for your participation, and you may now disconnect.