DarioHealth Corp (DRIO) 2021 Q3 法說會逐字稿

Greetings and welcome to DarioHealth Corp. Third Quarter 2021 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn this conference over to your host Mr. Glenn Garmont, Investor Relations. Thank you. Sir, you may begin.

Thank you, Laura. Good morning everybody and thank you for joining us today for a discussion of DarioHealth's third quarter 2021 financial results.

Leading the call today will be Erez Raphael, CEO of DarioHealth. He will be joined by Zvi Ben-David, CFO and Rick Anderson, President and General Manager of North America at DarioHealth. After 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 November 16, 2021.

Last night we issued a press release announcing our financial results for the third quarter 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 2020 annual report on Form 10-K, as well as the third quarter 2021 10-Q filed last evening. 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 last night 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 non-GAAP measures to the most comparable GAAP measures is included in today's press release regarding quarterly and year-to-date results.

And with that, I'd like to introduce Erez Raphael, Chief Executive Officer of DarioHealth. Erez?

Thank you, Glenn. Good morning everyone and thanks for joining our call this morning. Well, this quarter was one of the most exciting quarters for us as we have seen all the strategic pieces that we put together in the last 2 years coming together in a very impressive way. So in the last couple of years, we are talking about a few main pillars. Number one is the fact that the company is moving into platform that is multi-condition. We always thought that the market is going to consolidate and we're going to see the digital therapeutics industry getting -- coming together into one platform. The second pillar is about the fact that we are moving the company from direct to consumer into the B2B2C, in other words, selling into the payers market, employers market and the providers market.

And in the last 4, 5 months, we have seen that these 2 pieces come together in a very nice way on the multi-condition platform, post building organically all the metabolic pieces in the last few years, diabetes, hypertension and weight loss. We also made 2 acquisitions earlier this year Upright and wayForward for MSK and also for behavioral health. And further than that, we showed very strong execution capabilities by the fact that we managed to integrate the Upright solution into the Dario platform and we launched a few weeks ago, the Dario Move, which is the MSK solution for Dario. And we're going to also integrate the behavioral health part in Q4.

So in terms of performing the acquisitions, getting the technology integrated into the platform, we did -- we moved very fast and we created one integrated platform which is one of the most comprehensive platform today in the platform -- in the industry and we see a lot of very positive feedback from clients.

Even more impressive is what we have shown in the last 4, 5 months in terms of getting account signed. We keep talking about the 3 main channels, providers, employers and health plans. And today we have accounts that have been signed on all the 3 channels. Actually we had in Q1 around 5 accounts. Today we have 47. So in the last 4, 5 months, we have seen 85% of the accounts that we have ever [were] signed in the last few months and we think that this momentum is going to continue into the end of the year and into next year. So it's not about the number of accounts, it's about -- also about the quality of the accounts.

One of the accounts, as you probably know, is a big national health plan that's signed with the company. I think this is something that gives us a lot of credibility and this is something that should have a significant impact on our financial profile.

Further than that, we also showed that a few of the accounts that we have signed are also for multi-condition. And I think that this is another very important indication that the company's strategy is the right strategy because today we are not just selling into the multiple channels, we are also selling multiple product lines and we are selling the full suite, which is something that we thought from the first place that clients are going to be very interested in. So overall, we see that we are getting a full validation for both the channels and the offering of the company. And I think that the fact that all these points had happened in the last 4 to 5 months are telling the best story about our ability to execute on the strategy.

In terms of the pipeline, we reported that the pipeline has continued to be strong and it's above $1 billion. Obviously, we deducted from the pipeline the accounts that we signed on. So practically all those that have been signed and are going into implementation are not part of the $1 billion, which means that we had a significant growth in the pipeline as well. And another very important data point is the fact that 80% of what we have in the pipeline is for a multi-condition platform.

So again, it shows that we built the right platform and the right offering to the environment under which we are operating today. Overall, we see more excitement, overall, we see more interest and overall we see that we are operating in the best demanding environment that we have seen since the [inception] of this company. Overall, we see the momentum continue into the end of the year and into 2022 and we think that we're going to have more accounts before the end of the year.

A few words about the industry. So we see that the industry is becoming from -- moving from [doctor-first], what the telemedicine companies are selling, into consumer-first. And it's very important to understand the difference between telemedicine to digital therapeutics. We are creating a consumer-first platform. The industry is moving into digitalization and into value-based, and this is all the pieces that digital therapeutics platform are providing, including Dario and we are selling it in a model that we like to call it, digital therapeutics as a service. So overall, we see that we are starting to be a lead in the category.

From here I want to move to a few of the financial results of the quarter. Overall, we were growing by 176%. This is a very robust growth. And in terms of the pro forma gross margins, we reported 45% gross margins in comparison to 26.9% that we had a year ago. Overall, we still think that we are in the trajectory to generate gross margins that are above 70%. We think that the more we're going to move into the B2B, the more revenues are going to come from the B2B, the higher is going to be the gross margins. And we think that we're going to operate kind of a SaaS model company.

We see how all this strategic initiatives of multi condition plus the movement into the payers market is creating -- these 2 vectors are creating a compounding impact on our ability to generate revenue. And we think that this is something that will have a significant impact on our numbers in 2022, and we're going to see in 2022 a significant ramp-up in our run rate.

On the financial profile side, I just want to remind you how these 2 vectors are working together. So on a single account that we are signing, a company that have a single condition and most of the digital health companies are managing either diabetes or hypertension or MSK usually, 8% to 15% of the population have a single condition. When we are moving from single condition to multi-condition, we have a few KPIs that are improving drastically. One is the number of eligible members that are eligible to 1 or more of our products.

So on a multi-condition, we see the numbers going from like 8% to 15% to 40%. And the ARPU, the average revenue per user, is something that is much higher. It's going from $60 to $90. These 2 parameters together under the same assumptions of enrollment rate is something that is generating between 5 to 7x more dollars per every account under which we are implementing. And this is something that is not reflected yet in the revenues that we are generating today, but definitely will be reflected in the revenue we are generating next year.

Overall, on the implementation side, we are doing a good job here as well. We are -- on the accounts that we are already implementing, we are above 40% enrollment rate. And the retention rate is in the trajectory of 80% retention year-over-year.

With that, I want to hand over the call to Rick to give you a deeper insight into the accounts and into the implementation. Rick?

Thanks, Erez. I wanted to start with a few highlights on the operational side and some of these are ones that Erez just spoke about. But we continue to see enrollment for our standard accounts being greater than 40%, which is above the 35% that we use in both the pipeline calculation and our internal models. Current trends suggest that we remain on track to receive -- or excuse me, achieve 80% annual retention consistent with our historical trends.

And we have grown the users on the platform to approximately 210,000 people. We are in implementation for most of the recently-announced agreements with the majority for a first quarter 2022 launch and a few for fourth quarter 2021 launch. We believe that this positions us well for significant revenue growth starting in the first quarter of 2022 from the B2B pipeline.

On the sales side, the pipeline continues to grow, now more than $1 billion despite winning multiple deals in the last quarter. So this is a net pipeline. We have seen significant progress in all 3 channels in the third quarter, expanding from 5 contracts at the beginning of the year to 47 as of now, including health plans, employers, providers and channel partners, with 80% of those coming in the last 6 months. And we have about a dozen contracts that we have not yet announced that we anticipate closing before the end of the year and launching in 2022. These are either signed and not yet announced or in negotiation or contracting at this point.

As to the individual channels, starting with the health plans, we were very pleased to announce our first health plan contract this quarter with one of the top 5 national health plans. We anticipate that the health plan will contribute millions of dollars in revenue beginning in the first quarter of 2022, and we are already in discussions with the plan on expanding our relationship. And as I've talked about before, especially in health plans, landing and expanding is a large part of the business. And we have an additional plan in the final stages of contracting and another few that are very late stages of this process.

So we anticipate to continue to see more health plans as we go through 2021 and into 2022. It has been approximately 18 months since we began selling the health plans, a channel that has an 18 to 24-month sales cycle, generally speaking. So we remain pleased with the progress that we are making.

On the employer side, employers represent the largest growth in contracts in the third quarter as we continue in the 2021 sales cycle. Many of the wins that we've announced and those that we will announce in the coming weeks are through a competitive RFP process with some of our largest competitors. Announced our first contract for the entire product suite and we anticipate more full suite product announcements before the end of the year. These wins will not only add substantial revenue in 2022, but the number and quality of accounts and the consultants that we've dealt with should significantly increase our reference customers and opportunities that we can leverage to even greater number of wins in larger accounts during the 2022 selling season for employers, which will start in the first quarter of 2022.

We have also entered into agreements with several channel partners, including Virgin Pulse, which increase our visibility in distribution and should further accelerate our revenue growth in 2022. And I would like to call out that we continue to have good success with our behavioral health only product in off-cycle sales, a steady trend we see continuing into 2022.

On the RPM or provider side, we have also recently announced additional provider contracts. And we have several additional contracts that are pending final agreement that we expect in the fourth quarter or early next year. In addition, we are also seeing the size of the deals that we're getting done -- increasing, which is a very favorable trend for us.

And we continue to see strong demand in the market for the multi-condition solutions such as ours. 80% of the pipeline is now multi-condition or whole suite offering.

And the feedback that we're getting from the market is it's not only the integration of the front end and the back end for the customer making it easy for them, but they're also responding to the fact that we are one of the few in the industry that has a fully-integrated solution. Many of our competitors, even if they have multiple conditions, are doing it in separate modules where we've taken a different approach and really combined the user experiences. So one coach, one experience, and that's responding or resonating very well in the marketplace.

The metabolic suite is the backbone of the integrated solution, but our Dario Move, which is the MSK solution and the behavioral health solution are helping us build additional momentum and creating additional opportunities for us to pursue. And there is significant economic impact from moving to multi-condition deals. We expect that revenue from a full suite deal will be 5 to 6x that of a single condition for the same size customer.

As we look into 2022, we are confident that we will see strong growth. We have seen our efforts translate into contracts that will generate revenue, primarily starting in 2022. We continue to grow the pipeline. We have strong operational trends with our first employer customers that demonstrate our ability to translate contracts to revenue. We see strong growth of members on the platform.

We have grown our leadership team with the addition of Jerrod as Chief Commercial Officer, which we announced yesterday and are very excited about. We continue to see wins in competitive RFP processes against the most established competitors in the space, which personally, I find one of the most exciting things that we're seeing. With multiple channels and multiple partners, we have multiple growth engines. We are not dependent on any individual channel to achieve our growth objectives through the end of 2021 and into 2022.

With that, I'd like to turn it over to Zvi.

Thank you, Rick. Revenues for the 3 months ended September 30, 2021, were $5.6 million, a 7% sequential increase from the 3 months ended June 30, 2021, and 176% increase from the $2 million for the 3 months ended September 2020. Gross profit for the 3 months ended September 30, 2021, was $826,000, an increase of $277,000 or 50.5% compared to gross profit of $549,000 for the 3 months ended September 30, 2020.

Gross profit margin was 14.7% for the 3 months ended September 30, 2021, as compared to 26.9% for the 3 months ended September 30, 2020. Pro-forma gross profit, excluding $1.7 million of amortization of expenses related to the acquisition of Upright and wayForward, was $2.5 million or 45% of revenues for the 3 months ended September 30, 2021.

Operating loss for the 3 months ended September 30, 2021 was $22.5 million, an increase of $15.9 million, or 241%, compared to the $6.6 million operating loss for the 3 months ended September 30, 2020. This increase was mainly due to the increase in our operating expenses and stock-based compensation.

Net loss was $22.4 million for the 3 months ended September 30, 2021, an increase of $15.9 million, or 243%, compared to the $6.55 million net loss for the 3 months ended September 2020.

Non-GAAP adjusted net loss for the 3 months ended September 30, 2021, was $11.9 million, an increase of $7.2 million, or 151%, compared to $4.7 million non-GAAP adjusted net loss for the 3 months ended September 30, 2020. This increase was mainly due to increase in our operating activities. Cash and cash equivalents totaled $51.3 million as of September 30, 2021.

I'll turn now the call back to Erez.

Thank you, Zvi. So I want to wrap it up with 3 main points, 3 main takeaways that it's important that all of us will understand. Number 1, I want to talk about the health care industry that is changing dramatically now. We used to think about the health care industry as a doctor first. Now we see that it's becoming more consumer first, digital-first and more value based. And therefore, we think that digital therapeutics as opposed to telehealth or telemedicine, digital therapeutics is going to lead this transformation. And we believe that Dario is very well positioned to be the king of this category. And the category is having a huge potential, and we are just now scratching the surface in terms of the potential of this industry.

We see it all over the place where the client environment is changing as well. It's not about whether we need to adopt solution. It's about what is the solution that we're going to adopt. We see that clients want to be part of the ecosystem. And it's not anymore about just early adopters that are buying something from innovators. It's about really getting inbound requests from clients that want to adopt these kind of solutions. So the industry is there and it's happening.

Point #2 is related to the strategy and our ability to execute on the strategy. I think that we were very clear and those that are following the company in the last few years, we were very, very consistent with the pillars, multi-condition, moving from B2C to B2B, providing the best solution to payers. I think that we are executing very well along the pieces and the last 4 months are telling the best story about that. Overall, we think that the momentum into the end of the year is going to continue and we're going to sign additional 6 to 12 contracts, including health plan. And we also think that we're going to build the momentum into 2022, where we're going to see a significant higher revenue in 2022. So this was point #2.

Point #3 related to the previous 2 points. #1, because the industry is transforming and going digital therapeutics and digital in general, we see that more and more giants that are coming from the healthcare industry, I would call them non-digital giants think about pharma companies, think about big medical devices companies that understand that this is where the market is transforming, and they want to be part of this category. And we started to get a lot of inbound requests.

We are talking about it in the last few quarters, and we think that it might get to a maturity where the company will have the opportunity to have strategic relationships with one of the big guys, which is something that will help us push the platform faster into the market. So these are the main key takeaways. I think that overall, we are creating a very good momentum into 2022.

I'll pause here, and I will hand over to the operator for Q&A now.

(Operator Instructions) Our first question comes from the line of Alex Nowak with Craig-Hallum.

This is Trent McCarthy on for Alex. Can you provide more detail on the health plan win, the initial contract size, when that could start converting into sales and what additional investments, if any, you need to make to get the platform ready for?

So in terms of launching it, we anticipate that it will be launched by the first quarter of 2022. The ongoing activities to implement it are just about done. So there's a small chance it will happen still this year, but we're really looking at it starting next year. And what we said is that the contract is in the millions of dollars.

There'll be more detail forthcoming as we go. And we are in a discussion with them right now to expand this beyond what they're already doing. This is with their ASO clients. So they're selling our solution through as their own effectively. The lift to do this as sort of indicated by the time frame, I guess, is not very significant. We expect that we will have a bit more of a significant lift to launch Phase II when we get there, but it's nothing that's going to be significant in terms of dollar expenditure type. So we're very bullish on this continuing to expand into other opportunities and other areas in this health plan.

Got it. That makes sense. And just from a broader perspective, with the deals you've won and are expecting to win before the end of this year, can you just expand on how revenue is expected to ramp throughout 2022? And more specifically, do you still believe you can double sales next year as the Street indicates?

Yes. So thanks for the question. We think that we're going to see more accounts getting signed. We think that also health plan is something that we have a few more in the pipeline that are in a contracting stage. So we are very confident that we're going to get it as well. We are very confident in our ability to grow the revenue intensively. I don't think that the company is in a stage where we can say precisely if we're going to see the run rate jumping in Q1 or Q2 of next year, but we are very confident that we have enough accounts in the pipeline plus acceleration in the numbers of the accounts that we're going to sign on also next year that is going to grow the sales in a very intensive way. We cannot be precise on whether it's going to happen, we're going to see the hockey stick in Q4 this year or Q1 of next year.

This is too early to say, but we are talking about significant account. I can just give you an example. The health plan that we were talking about is something that can go in a few stages to double digits in terms of millions of dollars to the company. If it's going to happen in 2022, the 2 digits, it's one story. If it's going to wait for the beginning of 2023, it's a different story. So the ability to predict is a bit challenging at this point. But at the same time, because we are selling into multiple channels and multiple conditions, we have multiple growth engines. So to your -- the bottom line to your question, yes, we are confident that we can grow the revenue. Accuracy is not something that we have at the moment.

Okay. That's helpful. And just if I could squeeze one last one in here. Can you walk through the elevated spending? Is this current OpEx spend a good run rate or do you expect it to increase? And if you could just speak to the capital plans or how the cash burn is going to trend over 2022, that would be great.

Yes. So I think that now we are seeing some peak in the burn rate because we spend a lot of money in order to prepare ourselves to the launch of many accounts plus we also put together the few pieces of the multi-condition. We are investing also into R&D in order to take all these pieces together. In only 9 months, we are connecting 3 companies together into 1 platform. So this is something that created more expenses. And when the -- the accounts that we have signed on, including the big health plan, are not yet generating revenue, most of them, and it's going to take another couple of months before we see that.

So we see a peak in the overall burn. We expect that it's going to relax into next year once the significant revenue is going to get in on top of the run rate that we have today. And overall, we feel comfortable with the cash balance that we have. We know what is ahead of us in terms of the pipeline. We know what are the next accounts that we might sign on. We know about the strategic discussions that we are having. So we feel comfortable with the cash balance that we have. And we think that we have -- we still have a very long run rate. And we still have the ability to make the right decisions in terms of how in the future we want to fund the company in between the strategic opportunities that we have to the long run rate that we have.

Our next question comes from the line of Charles Rhyee with Cowen.

Congrats on all the new business and the momentum that you're seeing. Maybe if I could just ask a little bit about sort of the makeup of these new wins, 47 contracts. I think you said the majority are employers. And if we pull the national health plan client out of that for a second, can you give us a little bit more maybe directional kind of guidance in terms of what sort of the average size of these deals look like? What is sort of the implementation length? And does revenue -- and how will revenue get recognized? So if we're looking at 40% enrollment, is that within like the first month? Or should we be thinking about that over the course of maybe 3 to 5 months? Any kind of color around that would be helpful.

So let me start at the end and I'll go forward and just help me out if I drop one in the middle and happy to come back to it. So in terms of the revenue ramp or the enrollment ramp, we've seen pretty much so far reaching the enrollment rate that you're talking about within 2 months. So I would say for the most part, it should be somewhere between 8 and 12 weeks that we would reach that level of enrollment. And then obviously, we have ongoing efforts to sort of keep it at that rate or maybe move it up a little bit in a couple of cases that we've seen from there. In terms of sort of average deal size, it really varies a lot between those, and we're looking forward to kind of giving averages as we go forward. But these are everything from $100,000, $250,000 to the full suite product is probably about $1 million or just under $1 million a year run rate. So they're kind of all over the place. And so it's a little challenging to give you an average over the whole 47 or 46 if we take out the health plan contract.

Okay. So I mean, it sounds like if we thought of it that way, we're still averaging somewhere low mid-6 figures, is that -- if we were to ballpark it, is that kind of -- would we be in the range?

Yes. Yes. If we're talking about a metabolic or multi-condition, we're probably talking in that range. And as we go to the full suite for sort of your average sized customer, I'm not talking about jumbos here, but your average sized customer, you're probably approaching $1 million.

Okay. And then when we think about -- you noted that the majority of these contracts are going to start January of next year. Can you give us a little bit more -- like what percent of these new contracts will start here in the fourth quarter? Because I'm looking at consensus for next quarter and it ticks up. And at least directionally, is where consensus is, do you think a fair approximation for -- obviously, you have the Upright integration, you have some new starts coming in in the fourth quarter. Any sense directionally that where the market is probably pretty close?

So I will -- let me just answer the question because I missed it [from before]. I apologize. On the -- as it relates to the launch of the contracts, the -- other than one of the contracts for the metabolic and multi-condition will launch in the first quarter of 2022. Some of the behavioral health only contracts are launching kind of across the platform, those are on the smaller end of the size range. So just -- some of those are like 30-day implementations. The others for the most part, are going to be 60-day implementations unless we got started earlier, and they've got a January launch, consistent with the benefit cycle. But Erez, do you want to talk about --?

Yes. I just want to add on top of that, we were talking about this (inaudible) for a while and some of them have been delayed. The big national one is something that we also expected and it's changing the -- it changed the whole trajectory of the revenues for the company. At the same time, I think that some revenue that we wanted to appear in 2021 will not be there from the health plan. It's going to go only into the first quarter of next year. So probably this one will have more significant growth in the B2B revenue because of all the accounts that we are going to launch in Q1 of next year.

I mean the whole organization is on fire because we have a significant amount of wins that all of them -- a lot of them are going to be launched in Q1. At the same time, Q4, we also expect a nice growth from Q3 to Q4 because of a few other implementations that we have because we still have users on the platform from the B2C because usually in Q4, there is a seasonality of the B2C. So I still see a ramp-up from Q3 to Q4 and then more significant impact of all the accounts that we signed in a kind of a hockey stick in Q1 and Q2 of next year if I can kind of like paint how this chart should look like.

That's really helpful. And last one for me here. Erez, you talked about competitive RFPs and winning against your larger competitors here. For those accounts, though, did they already have something in place and they were looking for replacement or are these sort of -- or are these mostly clients that didn't have a solution in place and were looking for the first time?

Yes. No, thanks for that question. I think it's important as we look forward. And let me expand on that a little bit in terms of -- I would say, probably 70% to 80% of the accounts that we're looking at have at least some portion of what they're -- some of the conditions that they're looking at that are new to them. In some cases, they would already have a diabetes solution or some other solution, and now they're going to multi-condition. We're seeing that. The rest are, what I would call, sort of replacement. And a lot of contracts that are going to be coming up over the next year as well for folks that had signed on a couple of years ago. And we think that we'll probably see the number of folks that are looking for replacement, but replacement and expansion at the same time in terms of multi-condition happening as we go through the rest of 2021 and then really as a trend in 2022. We're seeing strong demand for multiple conditions from a smaller number of vendors. And as I mentioned in my comments, the integrated solution is really resonating also in the marketplace.

Our next question comes from the line of David Grossman with Stifel.

So Erez, you mentioned in your prepared remarks about new partners, including pharma, med-tech -- some large pharma and med-tech companies. First of all, did I hear that right? And if I did, perhaps you could elaborate a little bit more on the type of relationships and just what those may look like down the road.

Yes. So number one, yes, you heard correctly what I said. And I was talking generally about the health care market that is becoming more digital. And when I'm saying digital, I'm talking about digital therapeutics and digital health, I'm not talking about telemedicine. Practically, those that are selling into the chronic condition market, whether it's medication and pharma companies or medical devices companies or the combination of the 2 are looking to get into the space. The space is evolving over time. More and more money is getting into BC. And the category is literally created and it's out there. They want to be part of this future. They want to get digital access to their patients on both cases, if they are pharma companies or medical devices companies because they think that the future is about managing the daily routine of the user. And this is something that creates for them a lot of opportunities to provide a better personalized treatment to patients.

And under this kind of thought, they are thinking strategically 5 years forward, and they want to be part of the category, and this is where we started to get a lot of inbound calls, and we are in touch with a few of them, and we are trying to figure out what's the best way to partner. There are multiple ways to partner. For example, it might be licensing the platform for a specific territory. One of the things that I want to remind all our investors is that Dario -- as opposed to all the other platforms in the market, Dario is a digital therapeutics platform that is multi-region, multi-language, cleared by multiple regulation bodies and can go global. So it might be licensing on other territories. It might be licensing in the US territory and help us push the solution into the market. Obviously, if a big player want to be out of the category, they are also thinking in terms of how they can take it more strategically. And they have in mind in the very -- in the future, also equity thinking and stuff like that. It's still early to talk about the equity part. But in terms of strategic partnership, this is something that is definitely in discussions.

Got it. The other thing I wanted to ask is you referenced that, and I think mentioned before that the national health plan has different potential phases to it. Can you give us any more specifics on what are the milestones required of Dario versus those that are the milestones just that are internal to that client that are the gating factors to move from Phase I to II to III or whatever kind of the progression could be?

Sure. So the first 2 phases are really kind of tied together. The health plan wanted to go faster than their internal capabilities would really sort of allow them to push. And so they split the first piece into essentially 2 groups with the first one so that they can meet some of the commitments that they wanted to have coming into the beginning of this year. In the second phase, basically immediately started thereafter. So there's not milestones that are needed.

There'll be, as I mentioned in -- during the call, there's going to be some additional sort of integration and branding work that we're going to do, none of which is terribly significant and also then doing a little bit more of the back end kind of work that health plans like to do in terms of understanding the structure of the technology and things of that nature that will happen. But there's not like a specific milestone. So as we complete those pieces, which are already underway, then we would anticipate that the second phase would start.

The third phase is the one that I also mentioned where we're already in discussions on the potential to expand this relationship into a different segment of that same health plan, which is as big or bigger opportunity than the first 2 phases that we're talking about. And then I believe that land and expand is -- tends to be the way that health plans work. So I think that there are opportunities beyond those 3, but those are the ones where there are substance discussions going on. (inaudible)

And is it still kind of at least your expectation that you would go from Phase I to Phase II sometime by the end of the second quarter of next year? Is that the rough timing?

Yes. I mean that would be our current level of expectations.

Got it. And I know I think this question came up before, but I just wanted to see if there's any incremental context you can provide for us in terms of -- based on the backlog that you have for -- you've had a great 6 months of new contract wins and customer wins. And just curious, can you give us any sense of what the run rate revenue looks like when those clients are fully implemented?

Yes. It's a tough question, David, because if we think about the health plans, as I said, it's -- on a full implementation, it's double -- it's tens of millions of dollars. This is for the health plan. For the rest of the accounts, as Rick stated, the accounts are somewhere between -- all of them are in the ranges of like 6 digit. So you can make the calculation. One of the things that we don't know, as you can understand, is how quickly we can get all of them to be on a full run rate. But on a full run rate, the numbers that we see as a consensus by the analyst is something that we can achieve. That's even an understatement on a full run rate. Now we need to see how quickly we can implement them and how quickly we can go between the few phases. The health plan is like on a few phases, there's tens of millions of dollars, but we need together. To go to Phase III, we need to go first through the Phase I and II. That's the most accurate assumption that I can give you.

I got it. And just one other thing on that then, just excluding the large health plan, is most of the lack of visibility related to just kind of client activity? Or do you feel like you've got adequate capacity onboard all this new business with the uncertainty being more client driven? Or are there other factors that come into play?

Yes. This is a very important point. The company was operating as a B2C for a while. Actually, today, we are managing more. We are managing approximately 208,000 users on the platform. We already implemented accounts on both provider sides and on the employer side. So we know how to -- in all users, we know how to retain users. I think that we do have the ability, we do have the capacity and we do have -- more important, and we do have all the pieces in place in terms of the headcount, the management, Rick and his team and also the rest of the team, the R&D team, we feel that we are very, very prepared to go into a wider implementation.

So I don't think that this is a risk from our perspective. Yes, we took a few conditions together, and we are integrating them together as we speak. We just launched the first one. The second one will be launched in the next few weeks, talking about the behavioral health, and all of it together will have to be launched in January 1. This is a piece that has an integrated offering. We are going to launch at the beginning of next year. Overall, I think that we are ready from a capacity perspective, from an experience perspective and from a headcount perspective. The only unknown is how quickly we can realize the potential of the revenue for the 47 accounts. This is something that is still early to say if it's going to take us like 2 months or 5 months, that's the big unknown that we have at the moment. And this is why it's very hard for us to guide the market specifically how each quarter is going to look like.

Right. I got it.

Our next question comes from the line of Nathan Weinstein with Aegis Capital.

Congrats on the progress so far, a really nice quarter. I guess, starting with the pipeline. For the 20% that is not described as multi-condition, generally, is there a reason why the client would want a more limited set of conditions or a point solution? And then how do you think about that in terms of future upsell potential?

I think that's a good question. There are customers that are just looking for a specific solution because that's what fits with their strategy. So as they go through and say, hey, here's the pieces that are most relevant to our current offerings. So maybe they have some pieces in place or they're looking at the spend that they have in their claims data and saying, hey, our real issue is in this area. For example, diabetes, we do have some opportunities that are in the pipeline where, just by the nature of the business that they're running and where they're geographically located, they're going to have an outsized challenge with diabetes from a cost perspective. And so they may decide that this is where we want to focus first. I do think that that creates an opportunity for integrated solutions.

And whether that be another 1 or 2 conditions to that because if you have diabetes, it's a significant issue in your plan, you likely have some behavioral health that's underlying that. And then, of course, you also are going to have weight management and MSK challenges within that as well. So those are supplemental things. We definitely will work towards expanding that with customers that we land. And we really look at it as sell the customer what they want to buy and then make sure that they're super happy because then they'll look at more expanded solution, and we can create the economic and member experience arguments for them. But many -- I mean, 2/3 of the pipeline is looking at more than 1 solution. So I think that that speaks to the fact that there's more recognition of the broader base, but there's definitely always going to be customers that want to look at one condition.

Okay. Great. And then just one follow-up from me on the mental health side. What's the feedback so far? What's the covered labs understanding of how they access the solution? And then also, if you could just opine on what the mental health practitioner awareness is an appreciation for digital therapeutics as a usable tour.

Sure. So we're seeing roughly about 20% of a population is screening. And then, as you may recall, our solution is really what I would call, fills the hole between -- that almost everybody has, which is between nothing or EAP solutions and the provider network, and it focuses on screening people and presenting them with options generally into 3 buckets: one being digital self-help with CBT modules. And that can be -- that category of folks can include very low levels of behavioral health up to moderate levels of behavioral health. And then you have the middle category, which is really coaches plus those digital therapeutic tools and modules that they can utilize and then the third bucket is referring people to a provider network.

And we don't provide ourselves the provider network solution, which makes us a little bit unique in terms of the industry, but we can connect into anybody's network, whether that be brick-and-mortar or telehealth or however they want to deliver that, and we can bring partners to the table, and we do, in some cases, where they want that -- they want us to provide that capability, but we're really looking at it from that perspective. So most providers, at least as it relates to our solution, are going to see it as an inbound referral essentially. And because of the fact that just -- it's the nature of the mental health industry, there's often wait times going into these other networks. And so this allows us to coach on the back of that.

We're seeing about roughly 10% of the people that are going through the screening process are being referred out to a provider. So it's an attractive opportunity for a customer because they can get more services to more people at a lower average price point that is based on what the member actually needs. And there's also an experience point here because somebody has a low level -- I mean, relatively on a clinical scale. It may not feel that an individual, but they have a relatively low acuity anxiety problem, for example, may be best served by just coaching and not go to a provider.

And as a matter of fact, if you refer them to a provider, which would normally be what their option is, they're not going to go. So they'll get nothing. So it's a much better solution from that perspective. I think to the more generalized industry question that you asked, I think there's a greater and greater awareness, especially coming out of the pandemic with a lot of the telehealth-based solutions for behavioral health. I think there's a greater and greater understanding in the mental health community around digital tools and how those digital tools can get used. But I think that they have the same challenge that you see on the medical side, a lot of the pieces that are out there, a lot of the well-known pieces even that are out there are not very clinical in nature.

And there are some tools that are clinical in nature, and there are some tools that are more navigation based. And I think that those are the ones that the professionals are really looking to utilize. But it's still a highly, highly fragmented industry from that perspective without a lot of consolidation and use of, for example, electronic medical records, but that's changing.

Our next question comes from the line of Ben Haynor with Alliance Global Partners.

I am just looking to kind of understand the mechanics of the backlog a little bit better. I know on a net basis, you added, I think, $100 million, you went from $900 million to $1 billion during the quarter. Now, is the right way to think about that $100 million increase, let's say, you were to land all of that tomorrow, would the right way to think about that be, okay, there's a $100 million opportunity. Now we're going to -- we just need to enroll these patients. So -- but we're not going to get them all. So multiply the 100 by the 35% or 40% or whatever you expect for the enrollment rate.

So you're talking about the pipeline that we have that we're selling into, which is we're trying to give people visibility to the demand for the product and where we're competing. So those are not won deals. So we would expect over the next year to be more like 10% of the pipeline would come out in terms of contracts. Of that, we would expect -- I mean what we use internally is it depends on whether it's a single condition or a multi condition in terms of what the prevalence rate is that would be eligible. So if you're talking about diabetes, you're talking about 8% to 12% of the population would be eligible. If you're talking about full suite, you're probably closer to 40%. So [what the] deal is, we would look at that as being the eligible, and then we'd multiply that by the 35% that we use as our standard enrollment rate. And then we've put a couple of other factors in there. But basically, that's how we're building up the -- both the pipeline and then that's how we look at the revenue coming out of it.

But we always made this calculation. Yes, just to clarify, you don't need to take the $100 million and multiply it because the 35% enrollment rate and eligibility members for full condition, for full suite, 40%. So only diabetes 8%. Everything is already factored into the pipeline. So it's a pure potential revenue.

Okay. So in actuality, let's just say that everyone had something wrong with them and the opportunities that you had, we would multiply that by 6 or something like that just because -- and they all enrolled just because if you're 40% for full suite of the addressable patients, you'd multiply it by 2.5. So that would be like $2.5 billion, if everyone had something wrong with them, is that correct?

No. So I wasn't very clear. So the way that we build the pipeline number, so the $1 billion is basically the size of the population, multiplied by the prevalence rate within that population for the conditions that we're talking about with that customer. So that would be, say, it's 20% of the population would have a condition. It'd be what the total opportunity for that customer is times the 20%, then we multiply it by the overall enrollment rate of 35% and then by whatever the pricing is to get the amount that's actually in the pipeline. So the pipeline represents what we would anticipate the customer actually could provide. And then from that, we would expect that we will get some amount of that going forward. And typically, what we're looking at is 10%. So you don't need to -- you just need to say, okay, this is the portion that's going to come out of the pipeline. You don't need to multiply a bunch of other things.

Just like a win rate. So okay, we win 10% of these this year. That's the -- we've got $100 million potential, so to speak.

Yes.

Okay. Got it. That's helpful. And then when you're signing these B2B contracts and you're announcing, are you guys asking the firms whether you can use their name in the press release and they're saying no? Or is it something where, just for competitive reasons, you're not giving the name of the customer?

Generally speaking, customers will not allow us to use their name because they don't want to be seen as really pushing for -- their lawyers don't want them to be seen as advocating for a particular solution. In some cases, they'll allow us to, for a variety of reasons. In some cases, they'll probably allow us to in the future, do so. But that's why we don't. We almost always ask or put it in the contract and they take it out. But that's a pretty standard practice, the way that that happens.

Okay. Fair enough. And then lastly for me, just looking at the kind of category sales rankings that you see for the blood glucose monitor on Amazon. It seems to me like you're attracting a pretty significant number of users from that channel, maybe even 10,000, 15,000 over the course of the quarter. Does that sound like that's in the ballpark?

Yes. Actually, I mean, the B2C is still operating. I don't know to tell you what is the portion between Amazon to other marketplaces. But we do generate -- we still generate revenue from the B2C side. And Amazon is a very important channel. And we are getting a lot of consumer interest on our application and medical devices through this channel.

Okay. Sorry, one more. Is there -- can you -- is there a chance you can give us a sense of what you're kind of spending on digital marketing on a monthly or quarterly basis?

Yes. So it's in the ranges of a few hundreds of thousands of dollars every quarter.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Erez Raphael for closing remarks.

Thanks, everyone, for joining us this morning. And looking forward to seeing you as we keep building this business in the digital therapeutic space, looking forward seeing you in the next quarter. Thanks, everyone.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.