Rob Fink - Executive Vice President and General Manager, Hayden IR Erez Raphael - Chief Executive Officer and Chairman Zvi Ben-David - Chief Financial Officer.

Mark Lanier - Pegasus Capital.

Good day, ladies and gentlemen, and welcome to the DarioHealth first quarter 2017 earnings call. All lines have been placed on a listen-only mode. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Rob Fink of Hayden Investor Relations. The floor is yours..

Thank you and good morning, everyone. I’d to welcome everyone to DarioHealth’s first quarter 2017 earnings call. Hosting the call today are Erez Raphael, Chief Executive Officer, and Zvi Ben-David, Chief Financial Officer.

Before I turn the call over to management, I’d like to remind everyone that this conference call may contain projects or other forward-looking statements regarding future events or the future performance of the company. DarioHealth does not assume any obligation to update that information.

Actual events or results may differ materially from those projected as a result of the changing market trends, reduced demand and the competitive nature of DarioHealth’s industry as well as other risks identified in documents that are filed with Securities and Exchange Commission.

In addition, certain non-GAAP financial measures will 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 to investors understanding and assessment of the company’s ongoing core operations and their prospects for the future. Unless it is otherwise stated, it should be assumed that any financials discussed in this conference call will be on a non-GAAP basis.

Full reconciliations of non-GAAP to GAAP financial measures are included in the earnings press release that was issued earlier today. And with that said, I’d like to turn the call over to and introduce Erez Raphael, Chief Executive Officer. Erez, the call is yours..

Thanks, Rob. Good morning and welcome to DarioHealth’s first quarter 2017 earnings call. Thank you all for joining us today, this morning. We are very proud and excited from the first quarter results. In fact, this is a record for our company in terms of the revenues that we managed to grow. We did a bit more than $1 million in revenue in this quarter.

And this is something that we're very excited about and give us the flow to keep the growth as we're moving forward. The overall penetration in the US post the soft launch that started in March and continued into June proved to be very effective.

We managed to sell overall 25,000 devices so far in the US and the majority of it was done in this nine months since the soft launch. We also managed to cleanse our capital structure and to introduce some marketing partnership this quarter. And, overall, as I stated in our previous call, we are trying to get more and more access to the market.

And one of the things that we did also this quarter is gaining partnership with third party in order to get access to more insurance companies in the US. So, we are getting more and more access to users.

And at the moment, we feel that we have the very good foundation in order to build a very profitable business based on a very good product and also a very good strategy of direct to consumer.

So, we’re very pleased with the way that things are progressing in the US, but at the same time we’re also looking on the rest of the territories where we’re building penetration also into UK, into Canada, into Australia.

We see that our users are very engaged and this is a very important portion that will help us increase the customer value in the future.

And also, at the same time, we feel that the go-to-market and the B2C foundation makes it more easier for us to reduce the overall acquisition cost and it is something that will help us take the overall business through profitability. So, in the overall numbers, we also managed to have more than 67,000 installs worldwide.

One of the things that investors should look at is the overall revenue that came from consumer test strips. We did 76% from test strip and this is an overall growth of 20% from Q4 2016, which is a very positive number and very prolific KPI because, when we’re looking on the overall business, we’re expecting that the growth will continue the momentum.

But at the same time we want to get the overall burn of the company down, so we can show investors that we start to have a trend toward profitability next year.

So, this kind of improvement in the customer value by having more consumables, at the same time, a very effective direct-to-consumer machine that we’re improving from quarter to quarter while increasing the customer value, these are two key components that will help us get the business to profitability and this is something that we’re going to look carefully also in Q2 and Q3 growing the sales, but at the same time reducing the overall burn rate of the company.

As you know, we are dealing with digital health. This is how we are positioning our company. It’s not a device company. It’s a company that is transforming a market from pure monitoring and device to be more disease management. And further than that, we're talking about digital therapeutics.

So, we are engaging with users over platform and we’re helping them improve clinical outcomes. We’re doing it in a very, very user-centric approach, which is something that traditionally you don't see in traditional medical devices companies. So, we are very confident by the fact that we have users that like the product.

By the way, one of them is Dominique Wilkins that used our product for three months and now he’s our presenter in the US. We announced on it in Q1.

So, having users that are engaged, that are using the device and the overall platform more, and at the same time, we’re communicating with them directly means that we are starting to be more and more viral, we’re starting to get high customer value, and this is the key point in order to drive the sales forward.

When talking about access to the market, obviously, we have another very important milestone to hit in the next months, which is the clearance of the Android in the US. This is something that is extremely important for the company.

And we feel that while having this kind of milestone as well as other milestones that will give us more access to the market will enable us not just to keep the growth, but also to accelerate the growth and to bring the business to profitability.

Another very important milestone is to continue the coverage of our overall solution with insurers in the US. So, we just started in Q1, but we’re going to continue in Q2 and Q3. So, having more access to our overall solution from consumers will enable us keep the growth and to accelerate the growth of the business in a faster way.

Another milestone that we’re planning for later this year is the launch of the product in Germany. So, while it's very important for us to grow the business in the US, we feel that that from a strategic standpoint as well as from valuation standpoint, it’s extremely important to service other markets.

We feel that we are mature enough in order to go into additional markets that is not pure English speaker market and we decided that the next market is going to be Germany, and this is what we are planning to do by September.

Another very important point that investors should look at is the fact that we believe that our product can be implemented also for other applications. We have users that are using our product for prevention and we feel that this is a market that was not touched by the traditional medical device industry.

And while we have a very digital and very cool solution, we feel that we can tuck into the prevention market, and this is also something that we are planning at least to pilot later this year and also to start build our revenue channel also into this direction.

So, looking on the overall picture, we have a lot of ways not just to grow the business, but also to do it in a way that we’re less sensitive to a specific territory.

We’re having a very worldwide growth, at the same time also introducing other business lines under the same product and also increase the customer value by having everything more and more digital and more and more communicated directly with our users.

Looking into a more long-term, medium to long term, I think that we’re taking here a very good foundation to deal with other chronic conditions. So, the patents that we have for overall turning smartphone to be a device and monitor can cover also for other fluid test like cholesterol, which is something that we’re looking at.

Also, something that we feel should happen and will happen in the medium-term is the big data. So, one of the big reasons why we are doing that is that we believe that eventually we can create a digital coaching, digital therapeutics where people will improve clinical outcomes.

We can achieve that by capturing a lot of data points and by creating a lot of big data analysis and also creating artificial intelligence on top of the platform. So, we already started to see the first results. When looking in our database, we have users that are improving clinical outcomes.

We see specific trends that related to food and glucose level. We see specific trends that related to medication and glucose levels. And the fact that we are one of the only solutions in the market that capture 100% of the data and doing it real-time bring us a huge advantage in terms of big data and monetization on this data.

So, this is something that we’re sure that in that medium and long-term will contribute highly to the valuation of this company. So, we feel that the overall mindset of investors is about our performance, in terms of revenues and profitability. The big data push we believe will be added to it in the future.

This is extremely important portion of what we do. So, overall, we're expanding. We’re selling at the moment in UK, New Zealand, Netherlands. Australia, Israel, Canada and Italy. Germany is on the corner. And expansion into mobile platform in the US is also on the corner.

With that, I would like to turn the call to Zvi Ben-David, our CFO, to give some detailed review about our financial results. Zvi, please go ahead..

As Erez alluded to earlier, during the first quarter of 2017, we sold more than 5,900 devices in the US. Revenues for the first quarter ended March 31, 2017 was $1,007,000, which is a 77% increase from the $568,000 in the first quarter ended March 31, 2016 and a 20% increase sequentially from the fourth quarter of 2016.

The increase in revenues is mainly a result of continued market penetration into the United States and Australia. Revenues for the first quarter of 2017 included direct-to-consumer sales in the US as well as direct-to-consumer and business partner sales in Australia and product sales to distributors in the US, Italy Canada and United Kingdom.

Gross profit of $106,000 was recorded in the first quarter ended March 31, 2017, an increase of $208,000 compared to a gross loss of $102,000 in the first quarter of 2016. This represents a gross profit of 10.5% as strips and other consumables become a major 76% of the quarterly revenues.

Operating loss in the first quarter ended March 31, 2017 increased by $2.3 million to two-fold $4.2 million compared to $1.90 million operating loss in the first quarter March 31, 2016.

This increase is mainly due to the increase in our direct sales and marketing expense in the US and Australia as well as expenses related to stock-based compensation to management.

Note six to the financial statements details the increase in stock-based compensation by $1.2 million to $1.6 million in the first quarter ended March 31, 2017 compared to $324,000 in the first quarter ended March 31, 2016. Net of this increase in stock-based compensation expenses, operating expense then decreased by only $1.3 million.

And again, this increase is mainly due to the increase in our direct sales and marketing expenses. Financial income in the quarter was $7.4 million compared to a financial expense of $445,000 in the first quarter ended March 31, 2016.

This change was mainly due to reversing the warranty valuation expense recorded in the fourth quarter of 2016 due to the price protection feature included in warrants issued to investors in March and August 2016. This price protection feature expired on March 8, 2017.

And as a result, we transferred the liability related to these warrants by recording financing income of $7.4 million. Net profit attributable to holders of common stock increased by $5.6 million to $3.2 million in the first quarter of 2017 compared to a loss of $2.4 million in the first quarter of 2016.

This was mainly attributable to the increasing financial income previously described. As of March 31, 2017, cash and cash equivalents totaled $2.8 million.

Subsequent to the end of the first quarter on April 5, 2017, the company closed the public offering of 1,450,000 shares at a purchase price of $3.10 per share for an aggregate consideration of $3.8 million net of issuance cost. That’s all for me. Now, back to you, Erez..

Thanks, Zvi. As you can see, we made a meaningful progress against our long-term goal strategy. We feel that we have the good – a very good product. We’re getting daily feedback from our users. This is the most important thing.

This is something that impacts the customer value that is growing every day and we're doing a lot of digital work in order to grow the customer value. At the same time, the cost per acquisition and our ability to penetrate the market becomes also more and more effective.

And this is the second parameter that is very important for the future profitability of this business.

At the same time, we’re gaining more access to get to more users, whether it's going to be the Android platform in the States, getting more insurance coverage in the States or increasing the globalization, talking about Germany, expanding the sales also in other markets like UK. So, all these kind of actions are being taken.

At the same time, we see our database growing with a lot of data points and remember that we have a very unique solution because we are one of the only solutions in the market that capture 100% of the data in real time, which means that, well, the digital health is talking about future coaching or digital therapy.

We have all the foundation in order to implement it, which is a huge revolution for the current medical device market.

We’re turning device into a pure digital therapy, which is something that the market need and we believe that our solution will – it’s [indiscernible] database that we’re improving clinical outcomes, but we believe that we’re going to do it in a more efficient way, which is something that the market needs.

So, having all these arguments, all these parameters together, give us the confidence that we can take the business forward, to keep the growth in 2017, while reducing intensively the burn rate of the company. And we are sure that in that medium in the medium and the long term, the monetization of the data is another very important element.

In a lot of big data analytics that we are doing, we see the value and we’ll have to find our ways in the future to monetize on that.

So, overall, we’re excited in the first quarter with revenue that is above $1 million and I’m looking forward to continue the hard job to one of the next milestones in the future, to exceed $2.5 million a quarter, which is $10 million a year. This is a very good milestone that we want to achieve in the coming future.

So, with that, I would like to open the call for questions.

Operator?.

Thank you. [Operator Instructions] And our first question comes from Mark Lanier from Pegasus. Mark, state your question..

Congratulations on the quarter, gentlemen. My question has to do with the markets in the UK and Canada that you are opening up. And would you compare and contrast the approaches that you're taking in both territories and give us a more granular update on your progress there? Thank you..

Yeah, absolutely. Hi, Mark. So, UK was one of the first markets that we started the launch in, much before we went to the States. And the history of the company matters here because when we started the overall launch in UK and then in Canada, we were approaching the market in a very B2B way. We hired like the traditional medical devices company.

We hired distributors that were working under exclusivity in the region. And the majority of the initial sales was done by the distributor through the clinicians. Later on, we wanted to create something that is more effective. We understood that the nature of our product that is very digital.

And also, I have all the qualities of a medical device, but also can operate as something that feels for users as a semi-gadget. We thought it’s going to be very effective to spend more effort and more time in order to make it more direct to consumer.

And when we started this effort in Australia, we thought that it’s highly effective and we decided to launch in the States in a very direct-to-consumer way. So, the two countries that you just mentioned, UK and Canada, are two markets that we decided to transform from B2B to be more B2C oriented.

So, while we keep the distribution agreements and the distribution partners in Canada and in UK in place, we worked together with the two distributors in Canada. We’re talking about A&D Medical and in UK we’re talking about Advanced Therapeutics.

We reached an agreement with these partners based on our performance in Australia and also in the State that we want to launch the B2C as a side-by-side approach.

So, we are operating in Canada side-by-side, I think, from Q4 and introducing direct-to-consumer and selling online, while we’re having the distributors support us from the ground with fulfillment. We started like a week or two weeks ago.

We announced that in UK we also reached an agreement with our distributor in the UK, Advanced Therapeutics, and now we are starting to sell online also in the UK. So, from the numbers standpoint, I think that we should be able to accelerate the sales in the UK as well as in Canada, like we did in Australia and also in the States.

This is what investors would see in the next quarters. It’s extremely important for us to keep the right balance of users and sales between the States to the rest of the territories in order to ensure that we’re doing a very balanced growth and keeping the company very global. We think that it’s going to be very important for the future..

And turning to the United States and the challenge of dealing with insurance companies, could you talk about how long that takes, roughly how many critical insurance companies you feel are necessary to gain a majority of exposure to the United States and roughly what your expected timeline is to secure insurance coverage in the United States? Thank you..

Yeah. So, this is something that we should look at from a few angles. The glucose monitor market, and specifically the test strip market, is something that was highly reimbursed all over the world, not just in the US. So, users used to pay zero for supplies. The market is changing.

The market is changing because the commercial insurance or private insurance companies today are asking for what is called co-pay. And the co-pay over the years has become higher and higher.

So, the sensitivity to whether your test strips or Dario test strips are being covered by the insurance, as of today, or what it’s going to two years from now, is not the same thing that we had like five years ago. So, this is one element that is changing in the market.

Also, the pricing of Dario that is very competitive when you’re signing up on the subscription makes it much more easier to sell out of pocket.

Having said that, we do see that for specific insurers, the co-pay is relatively still very low and we do want to get more users and we do want to get the opportunity to more and more users to buy the Dario device and enjoy the overall capabilities of the digital therapeutics that we’re providing. Therefore, we are starting to get the coverage.

So, in terms of the mode of operation, we are partnering with third parties that are sort of distributors that have this agreement already with insurers.

And by signing with them and by providing the lead that we’re creating from the digital marketing to this partner, we are managing to get users that are approaching our website and want to get our device and test strips, through these third parties, we are doing it in an online way.

So, we are collecting the lead and then we are providing it to the third party that makes sure that it’s being delivered to the user and the reimbursement. We believe that in order to cover at least 50% of the insurance, we need to have somewhere between three to five agreements with third-parties. We already signed with the first one.

We’re now working with the next three to four partners and we believe that – in Q2 and also in Q3, we believe that we’ll be able to execute at least on the next two or three third parties that, eventually, will take us through at least 50% coverage of the insurance.

At the same time, we do think that our pricing strategy should stay competitive to allow users to make it also out of pocket.

So, if you're looking from the US market perspective, the Android, together with these insurance coverage, should give us a very good access, which is in the ranges of 50% to 70% of all the people with diabetes in the State that will have access to our product in the next two quarters. This is our hope. And this is what we're aiming for.

And this is not including the other prevention market that we were talking about, which is a total different story that should also highly contribute to our ability to generate sales..

That’s exciting. I wish you all good luck..

Thanks a lot, Mark. I appreciate it. .

And there appear to be no further questions in the queue. Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day..