Greetings, and welcome to the DarioHealth Fourth Quarter 2022 Results Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Glenn Garmont. Please go ahead, sir.

Thank you, operator, and good morning, everybody. Thank you for joining us today for a discussion of DarioHealth's Fourth Quarter and Full Year 2022 Financial Results. Leading the call today will be Erez Raphael, Chief Executive Officer of DarioHealth. He'll be joined by Rick Anderson, President. After the prepared remarks, we'll open the call for Q&A. An audio recording and webcast replay for today's call will also be available online as detailed in the press release invite for this call. For the benefit of those who may be listening to the replay or archived webcast, this call is being held on March 9, 2023. This morning, we issued a press release announcing our financial results for the fourth quarter and full year 2022. 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 2022 annual report on Form 10-K filed this morning. 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. And with that, I'd like to introduce Erez Raphael, Chief Executive Officer of DarioHealth. Erez?

Thank you, Glenn, and thanks to all of you for joining this morning's call. For the last three years, we have implemented a multiyear strategy, and when exploring our 2022 financial results and specifically the last two quarters of the year, it is hard not to see the success of our strategy as it's being reflected in our numbers. Before we deep dive into actual results, I would like to reemphasize our strategy. First, our multi-chronic condition strategy where we managed five different conditions on one integrated platform. This strategy is not only aligned but ahead of the macro digital health market trend of consolidation and consumer-centricity. In fact, our current model is better suited to the financial macro environment we are facing today. The consolidation of conditions into one integrated platform enables fewer vendors and more conditions, especially in a market that looks to save money and be more efficient while better caring for its patients. Employers and buyers are looking for best of suite solutions backed by clinical evidence. Also, our clinical outcomes data suggest that an integrated model is better than a separated single point solution. Second is our transformation from direct-to-consumer to B2B. This change has resulted in a significant improvement in the financial profile of the company because of the significant reduction in the cost per acquisition, the ability to scale and a more efficient economic model per member that is getting on the platform. Overall, our multidimensional strategy of multiple conditions and moving to a B2B model increases revenue stability while establishing a dependency that is difficult to break. In other words, it will take several vendors to replace our integrated solution. The overall impact is more runway to execute on our strategic plan with a significant reduction in the financial risk profile of the company. Let's take a deep dive into the financial results. Q4 shows continuation in the improvement of the financial profile of the company and continues the trend we demonstrated in Q3, representing real evidence that shows that our model is working and creating long-term shareholder value. Let's start by looking into the revenues and its components. Full year of 2022 revenues is $27.6 million, increased 34.8% over $20.5 million in 2021 as the pivot to a B2B model more than offset the managed wind-down of B2C. More interestingly, full year 2022 B2B revenues is greater than 59% of the total revenue versus just 4% for the full year of 2021. Overall, B2B growth year-over-year is 1,800%. Another important metric is gross margin. This is where results are even more exciting as we are showing a true software-driven business with SaaS, Software as a Service-oriented characteristics. Pro forma gross profit was 58.1% of revenues for the fourth quarter of 2022, up significantly from 22% of revenues for the fourth quarter of 2021. As mentioned in the last few calls, we are targeting an average of 60% gross margins for 2023 to reach our goal of 70% gross margins by 2024. Looking at the operating loss, we are seeing true operating leverage of the infrastructure that we have built and real economic advantage for the multiproduct approach. We demonstrated a 58.4% reduction in operating loss in the fourth quarter of 2022 compared to the fourth quarter of 2021. It is also a 38.2% reduction in operating loss compared to the third quarter of 2022. Notably, operating loss in the fourth quarter on a non-GAAP basis declined by more than 60% to only $6 million compared to $15 million in the fourth quarter of 2021. The underlying reasons for this economic advantage of multi-condition are the improvement of the following key parameters. We have more eligible populations for every account that we are signing on. We have higher ARPU, average revenue per user. Overall, we can generate between four to eight times more revenue per account compared to a single condition platform. Looking into our balance sheet, we ended the fourth quarter in a strong financial position with cash and equivalents of $49.3 million. We also continue to improve our financial profile of the company. Losses are declining, and we believe that this momentum will continue into 2023, which is something that will extend our overall run rate. Before handing over the call to Rick, a few highlights on the commercial side. We achieved our goal of 100 accounts by the end of 2022. We believe that we are positioned to accelerate growth in 2023 and 2024 as the overall foundation for client wins is improving with a larger sales team and meaningful partnerships that should give us significantly larger access to clients. In fact, we effectively multiplied our commercial capacity. We have made and continue to make substantial progress in building our relationship with Sanofi, which we believe can take us to the next level in terms of this relationship. Our relationship with Aetna is progressing, and we recognized revenue this quarter and anticipate accelerating revenues throughout 2023 and beyond. Additionally, we are working on at least one more strategic partnership that will help us expand our commercial outlook. With that, I want to hand over the call to Rick to elaborate on the commercial side.

Thanks, Erez. In the fourth quarter, we continued our revenue growth trend with increasing year-over-year and sequential quarterly growth. During the fourth quarter, we continued to manage down our B2C revenue to reduce our cost of customer acquisition, improve our gross margin and reduce our overall burn while maintaining the strategic advantages of our B2C business. We expect to maintain the B2C business at the current level throughout 2023. On the other hand, we saw strong growth in our B2B revenue in 2022 with 1,800% year-over-year growth, which more than offset the 42% decrease in B2C revenue. And the fourth quarter B2B revenue accounted for 70% of total revenue. This validates our strategic move to focus on the B2B market based on the explosive growth we have already seen in B2B revenues. We increased our B2B contracts in the fourth quarter to achieve our target of 100 B2B contracts in 2022, which represents 100% year-over-year growth. In addition, we have additional contracts that were not signed until after year-end that are expected to launch in the first quarter. Including these additional contracts, our signed contract value is approximately $65 million at year-end. As Erez noted earlier, the majority of these new contracts are multi-condition, which generate more revenue per customer than single condition contracts. We are seeing strong demand in the market for vendors that can provide several conditions, which reduces the cost and work of integrating and operating several vendors in this environment. Dario's platform is unique. Our platform covers more chronic conditions than almost all our competitors, and it covers those conditions in one integrated platform. It provides one journey, one experience, and one coach for a multitude of conditions. Alongside our B2C roots of our solution, we believe this yields better member engagement, which drives better clinical and financial outcomes. In fact, one of our recent studies demonstrated that people who manage both diabetes and hypertension on the Dario platform had better clinical outcomes than those who manage diabetes alone. This adds to the growing body of clinical studies that support the outcomes of the Dario platform overall and across multiple demographics, including members over 65. This is a demographic that has a higher prevalence of chronic conditions and we believe is attractive to Medicare Advantage health plans. In addition to customers seeking more conditions from fewer vendors, they are also looking to add new vendors and benefits through their existing partners. As such, distribution and strategic partners will be a pillar of our commercial strategy in 2023. We will continue to invest resources in the partnerships through which we have already acquired customers like Virgin Pulse, the largest wellness vendor in the country; Solera, which has multiple health plan customers; Vitality; and Alliant. Given the dozens of companies these partnerships give us access to, we believe we'll be able to accelerate revenue in a cost-efficient manner. In 2023, we will seek to expand our partnerships to a small number of important partners that we believe will expand our reach and accelerate our revenues. We added three health plans in 2022, one being Aetna. As we have previously discussed, we have been anticipating two additional risk-bearing health plans through two of our strategic partners. While these have been delayed past year-end, we continue to expect them in the relatively near term, with both expected to generate significant revenue in 2023. One is already integrated and ready for launch, and the other is in final contracting. As we previously discussed, Aetna is integrating our technology into their new behavioral health platforms. We recognized revenue in the second half of 2022 related to delivering the new platform to Aetna and anticipate accelerating revenue throughout 2023 as Aetna brings on more members to the platform. As we are paid for members that have access to the platform, we expect that this will contribute to growing revenue in 2023 and beyond. Just over a year ago, we entered into a five-year, $30 million strategic agreement with Sanofi, which we expect to make a significant contribution to revenue again in 2023. The agreement has three main parts: co-promotion of the Dario solution through their market access team, development of Sanofi-directed ideas on the Dario platform, and data in studies. The co-promotion immediately added five times the sales resources, selling to health plans and at-risk entities and substantial additional marketing dollars are being deployed to promote our solution. Our co-marketing efforts have played out in other partnerships as well, including our recent agreement with Dexcom. We completed the first year of development milestones, and we are well into year two milestones. We are progressing on what are expected to be some of the most robust studies in the industry. Studies of this quality should add considerable additional support for customers adopting the Dario solutions. We recently announced a new relationship with Dexcom, a leader in the continuous glucose monitoring or CGM industry, which will enable us to fully integrate their CGM device into the Dario platform. We expect that this will expand the services we can provide CGM users, increase the data available on our platform to inform our member personalization, and ultimately, to make our offering more valuable to payers and employers. In addition, this will enable our user-centric platform to enable value-based care for CGM at the patient level. Clinical and cost improvement data will be obtainable. We also believe that this can enable new opportunities to provide better care and innovative offerings with our partner, Sanofi. Overall, we believe we are well positioned as we move into 2023 for our significant growth trajectory as we have demonstrated that we can convert contracts into revenue by expanding the number of contracts that are multi-condition, achieving average enrollment rates of 30% or better, and average engagement between 70% and 80%. Over the last year, we have more than doubled the number of reference accounts, which, based on experience, forms the basis for accelerating growth of customers on the platform. Another immediate result of customer satisfaction is we are already seeing multiple customers who have seen initial results evaluate expanding conditions or populations on our platform. To leverage the proven business model and sales momentum we have seen, we have recently more than doubled our direct sales team and believe that we can expand our contract value in 2023 by tens of millions of dollars across self-insured employers and health plans, with a focus on increasing the average deal size through larger customers and continuing to increase the portion of our contracts that are multi-condition past the current 50% in our pipeline. In addition, we believe that we can double the number of strategic partners and more than double our large customers. I would also like to take a moment to address a question we frequently receive lately. To date, we have not seen any significant decrease in demand due to macroeconomic factors. In fact, surveys that have been recently conducted show that many companies continue to express a desire to expand and change their digital health benefits. As we focus on costly chronic conditions with a definitive ROI, companies can reduce their expenditures by implementing our solutions. In summary, we believe we will continue to see strong growth in both the number of customers and contract value in 2023 through our direct sales efforts and through our partners. With that, I would like to turn it back over to Erez.

Thank you, Rick. So to summarize the call, first, despite the macroeconomic factors and the possibility of recession, we don't see a slowdown in the digital health market. In fact, we continue to see a tailwind as payers and employers seek to better manage their patients and reduce health care costs. We believe that in this environment, employers are trying to find ways to save money and create efficiencies and will look to leverage a multi-condition platform that offers a better health profile and will see Dario as the most competitive solution. This will help us continue to win more clients and achieve significant market share. Further, our commercial capabilities grew considerably in the past year with a larger sales team and more strategic partnerships, which we expect to accelerate not just more contract wins but more meaningful contract wins such as the Aetna and other large accounts. We are seeing a trend of big traditional health care players in large pharma, such as Sanofi and big medical device companies, looking to tap into the digital health space by partnering with companies like Dario so they, too, can play a role in health care transformation. We expect to make larger and more strategic partnerships in 2023. We believe that by having each of these building blocks in place, we are in a position to build a truly differentiated digital health company with the potential to reach profitability with $60 million to $80 million in revenue. We anticipate accelerating growth in 2023 and 2024 that should increase shareholder value. Thank you all. And now I want to hand over the call to a Q&A session.

Our first question comes from Charles Rhyee with TD Cowen.

Congrats on the quarter. Hey, Erez, I want to talk about ending the year strong. And on top of that, we're now expecting onboarding Aetna at some point this year. But we also doubled the number of accounts from 50 to 100. I think, I assume a lot of those have January starts. So maybe you can talk about how the 1/1 starts have progressed so far. And would that suggest that we should still see sequential improvement in revenue in the first quarter over the fourth quarter? And then as we move and then potentially another step-up as the Aetna contract starts to ramp up as well?

Yes. Thanks for the question, Charles. So I think that we need to look into the revenues in three portions. One is the B2C that was kind of slowing down and is getting stabilized in Q4 and into next year, we think we're going to see more of the same rates. The other part is revenue that we are getting from strategic partners like Sanofi and also Aetna, because Aetna has a few portions. We have the development services, and we have also per user per month at some point this year. That's another portion. And the third portion is the accounts and the revenue that is coming from users that are on the platform. When it comes to the second one, as we stated in previous calls, there are some revenues that are being delivered according to milestones. So for Sanofi, for example, we have the data milestone. We have development milestones. So it's hard to look into this revenue as something that is growing sequentially quarter-over-quarter. However, on a yearly basis, this is something that is repeating every year. We do have multiple launches in Q1. And this is why we should expect growth that will go from Q4 of 2022 into Q1 of 2023. And moving forward, we're going to see more and more significant growth as we are getting to high volumes from big accounts, for example, Aetna and other accounts that we expect to launch later this year.

Okay. So then if we think about the strategic partnership bucket that is tied to milestone payments, can you remind us in the fourth quarter in the B2B revenue, how much was related to those kind of deliverables?

Yes. So overall, out of $6.8 million, we had like 59% that is the combination of strategic and pure ARR. Around 60% of that — 60% or 65% of that is coming from the strategic accounts.

Okay. So if we think of it that way, do you have any visibility here, now we're already in March, whether we've kind of hit some milestones to recognize some additional of those payments? Or do those tend to come sort of at the end of the quarter?

Yes. We do — we will recognize more milestones that are coming from strategic accounts such as Sanofi and Aetna in Q1. Definitely, yes. We know that it's happening. And we're going to see also an increase in the pure B2B revenue that is coming from accounts that we are enrolling on the platform. So the answer is yes, we're going to see both revenues in Q1.

And then in terms of the ARR portion of it, the 40%, is this one of those things where you have a 1/1 start, but you still have to wait for members to opt in and get started, so it takes a little bit of while to start to recognize revenue?

Yes, you're correct. So usually, as we stated before, the time that it takes for an account to reach its goal is somewhere between 10 to 15 weeks from the start time. So a lot of the accounts are not starting exactly 1/1. Sometimes it's waiting for the second month of the first quarter. So overall, you're going to see the ARR definitely going between Q4 to Q1. In the last five quarters, we have seen that they are growing quarter-over-quarter sequentially in a very consistent way. But if you are looking at this spike in terms of the growth, it's going to continue into Q2 and then Q3 based on the accounts that we are signing up.

A lot of the accounts are not starting exactly on January 1. Sometimes they begin in the second month of the first quarter. Overall, you will see the ARR definitely transition from Q4 to Q1. In the last five quarters, we have observed consistent quarter-over-quarter growth. However, if you are looking at this spike in growth, it is expected to continue into Q2 and then Q3 based on the accounts we are signing.

Yes, and not including the huge one, which is Aetna, which is a different story. And this is something that we expect to grow as we move forward along the year.

For Aetna, I believe you mentioned the start date is around midyear. Should we expect a significant increase in the third quarter due to the PMPM payment structure for members? It seems that's how the contract is structured, and I just wanted to confirm that.

Yes. Yes. I think that we should expect a significant step up. And not only due to that account. We have another few accounts of health plans that we believe that are going to launch also this quarter and gradually are going to grow. But to your point, Aetna, specifically, we're going to see a significant step up in Q3. But it doesn't mean that we are not generating revenue from Aetna. As we stated before, because we are part of the platform of Aetna and because there are elements that relate to customization and integration, Aetna already invested into this relationship. And Aetna invested a lot of money into the integration and the localization of the platform. We believe that we are recognizing revenue from this in Q4 and we believe we are recognizing it in Q1 and Q2 of 2023. So overall, this is something that gives us confidence that the company is going to grow in these quarters as well.

Our next question comes from Alex Nowak with Craig-Hallum Capital Group.

First, just on the DTC side, there's $2 million of DTC revenue in this quarter, does that take another step down in Q1, or is that going to basically normalize at this level?

We believe that we're going to normalize it at this level. For us, and I think that this is very important to note, B2C is part of our R&D. We need data. Data is what is educating our software, and we want to keep it in the most efficient way. At these levels, we are not losing money on the P&L of the B2C. More or less, we're going to stay at this level this year.

Okay. That makes sense. So I mean, continuing the last set of questions with regard to how to think about 2023. You got the DTC piece that's normalizing here. Although it has taken a step down throughout 2022, but it's going to be normalized for 2023. You've got a number of existing deals that are ramping, whether it be Aetna, Sanofi, you're having milestone payments come in, potentially some new health plans plus the rest of the, call it, the 100 contracts that you have already signed. So I mean, when you end 2023, Erez, when we're doing this call a year from now and talking about 2023, where do we want the growth rate to be? If we come up with 30% growth, are we happy? Are we disappointed? Help us out here.

Yes. So overall, I think that the way to look at it is in terms of the accounts that we have signed on, and Rick in presentation, he disclosed that we have like total accounts signed of $65 million. We were happy with the number of accounts that we have signed on. The way that we are designing the business is that eventually, we want to grow significantly in the ranges of like 70% over the next two years. This is more or less what we see. And this is with some margin of safety because if you're looking into the growth of the accounts, we were growing by 100%. We're growing the ARR from $35 million at the beginning of the year to $65 million as of today. Overall, if we are taking some kind of margin of safety, which we believe we should take in terms of implementation and delays, overall, over the next two years, we are looking into 70% plus growth for the full business and looking into the end of 2024.

Okay. Makes sense. That helps us get some guideposts here. Maybe just around the OpEx side. Obviously, OpEx came down pretty significantly this quarter in Q4. Maybe talk about kind of the puts and takes there. What drove the OpEx down? What's going to be maybe a one-time reduction in Q4? Will we see step-ups in 2023? And where is the OpEx coming out of? Any pieces of the business that would be hurt from this?

Thank you for your question. We made considerable progress in the past year, which should be viewed in the context of the broader digital health market. Most companies in this market are still private, with some generating between $30 million to $50 million in revenue. There has even been an acquisition in the public market for a company generating $400 million. However, many companies are struggling financially. When we considered the Dario business, we aimed to establish a foundation for achieving cash flow positivity with revenue ranging from $60 million to $80 million. To accomplish this, we need a comprehensive offering that provides us with six times the revenue per account, as well as an efficient operational infrastructure. Currently, Dario employs 250 individuals across India, Israel, and the United States. Our commercial team and regulatory functions are primarily based in the U.S., while most other operations are outside of it. To reduce our operating expenses, we focused on three main elements: first, emphasizing B2B over the slower B2C segment; second, consolidating the activities from the three acquisitions made in 2021 into a single organization with one R&D team and one product team, which has resulted in cost savings; and third, implementing an offshore structure that sets Dario apart from other digital health companies. This differentiation positions us to build a sustainable, profitable SaaS business. As a purely digital company, our patient-to-coach ratio is significantly driven by digital strategies, which contributes to our financial structure's potential for profitability—a characteristic not commonly found in the digital health sector. In Q4, our operating expenses decreased by about 40% compared to the previous year, and we expect this level to serve as a baseline as we carry it into 2023. We foresee a reduction in losses driven by rising revenue and an improvement in gross margins, which we anticipate will reach around 60% with a target of 70% next year. Our operating expenses are expected to stabilize, facilitating a reduction in losses as revenue grows and gross margins improve. I believe this operating expense level represents our new baseline, from which we are focused on increasing revenue and enhancing our bottom line efficiency, further decreasing losses in the coming year and extending our runway.

Okay. Extremely helpful. One last question. Just in the last couple of weeks or so, you're seeing a big uptake in the digital health side around weight loss, particularly those adding drug prescriptions like Ozempic, Wegovy onto it. I know you have a weight loss program. Is that a trend that you're seeing? Is that something you want to get more involved in?

So this is Rick. We are definitely seeing that this is having an impact.

Excuse me, ladies and gentlemen, it does sound like we're having some technical difficulties. We ask you to please hold while we reconnect our speakers.

You hear me, Alex?

Yes, Erez. Yes, I can hear you. This is Alex here.

Yes. I think that we lost Rick, sorry for that.

That's okay. He just started to talk about the trend that he's seeing. So I don't know if you want to pick up where he left off?

Yes. I'm going to continue, yes. I'll pick it from here, yes. So we see this overall evolution with the drug. This is where we feel that — and this is where we have discussions with pharma companies. The ones that we are working with and others, we see that overall, the digital part is going to be there as a foundation and as a connectivity to help manage the full chronic condition. When we think about weight loss as a standalone, this is where we are seeing some kind of support for chronic condition management. One of the things that we are running now is a study that is showing the relationship between weight loss and the overall management of the chronic condition. Overall, we see the comorbidity part between these two elements. This is a long way to say that we think that this kind of drugs are going to make a huge change in the market. We see these kinds of things as supportive to all the digital management that we are doing.

Your next question comes from Rahul Rakhit with LifeSci Capital.

Congrats on a solid quarter. I apologize if this has been asked before. I'm kind of jumping between calls, but we're just kind of wondering, given the level of off-cycle account growth we saw in the first half of 2022, is it reasonable to expect a similar cadence this year? Or do you anticipate heavier account growth coming in the back end of the year? Just trying to understand as you add these 100 accounts, what the breakdown might look like.

Yes. Thanks for the question. So in Q1 of last year, we started the relationship with Sanofi and because the revenue is divided into a few buckets, one of them is data, another one is service, and another one is market access, we have seen a big spike in terms of revenue in Q1 of last year. I don't expect the same kind of milestone and the same spike in Q1 of this year. To my point to Charles from Cowen, I think that we're going to see some kind of continuation of the growth that we have seen in Q4, but not something that even reminds us of what we have seen in Q1 of last year. Overall, when the business is growing, and we are getting more partners and more big accounts, the way that we want the business to grow is in a more stable way. We are trying to manage our overall accounts and activities in a way that we're going to see a more sustainable and less fluctuating kind of spikes in our revenues. Long story short, you're not going to see the same spike.

Got it. That's helpful. And then I think at the end of Q3, you said the contract value was around $60 million. By year-end, it jumped to $65 million. So I guess I was wondering if you can just kind of share any detail on the composition of accounts that are in the pipeline for 2023. It's going to help get you to 200 accounts in terms of size or type of accounts. And maybe help us understand what that total contract value might look like once you get to 200 accounts.

Yes. Thanks for the question, Rahul. I think it's very important to explain to investors how we look into accounts. When we started last year, we started to commercialize our multi-condition platform. As I stated, the multi-condition is like six times more revenue compared to a single account because of the overall privilege in the population. The way that we are looking into the growth this year is less being focused on the number of accounts that we are signing. We want to see other parameters that are going to improve. #1 is the size of the account, whether we're going to sign on an employer with 10,000 employees or 20,000 employees. I think that the total amount of accounts that were big this year were less than 20, I would say, out of the 50 that we have signed on. Moving forward, we want to see a bigger portion of big accounts that are above 10,000, 15,000 users. The other element is signing on multi-condition and not single condition. Here, we are very, very confident that with the market trends and what we have seen in the second half of the year, because in the second half of 2022, we have seen that 52% of the accounts that we have signed on are for more than one condition. That's something that we expect to move forward. At the moment, in the pipeline, more than 50% of what we have is for more than one condition, which gives us the confidence that we can get more multi-condition accounts or full suite accounts. The third parameter is diversification because at the moment, if you're looking into the $65 million value that we have, you have one account that is more than 40%, which is Aetna. This is something that we'll try to diversify the way that we are looking into the contracts. This is something that I think that investors should like about Dario, because the way that we are thinking about the business is very diversified in terms of the different clients that we have. We have both, employers and health plans, as well as the different conditions that we have. This gives us the ability to operate on a much more stable foundation for growth. This is how we're going to look into the growth moving forward. We need also to remember that until 2.5 years ago, Dario was a pure B2C company. So the brand, when it comes to benefit consultants, health plans, and employers, was not there. Now that we are out there and showing accounts that have been more than 1 year old on a full suite, we have very good results. We were doubling our reference clients. This is something that helps us win bigger accounts. This is how we're going to focus our commercial team in terms of the quality of the accounts and not just the number of accounts. That's the next stage of the growth of the company.

Your next question comes from Ben Haynor with Alliance Global Partners.

First off for me, on the B2C business at the current level throughout 2023, can you maybe talk a little bit about how much sales and marketing spend is required to maintain the present level?

You're talking about the B2C or you're talking about the full...

Just the B2C. I mean, it's not like that kind of offsets whatever gross margin you're making from those customers. But can you kind of give us a sense of what's required there on the operating expense side?

Yes. Looking at the overall operating expenses, our cash spend decreased from approximately $16.5 million in the fourth quarter of 2021 to just under $10 million in the fourth quarter of 2022. This represents a 39% reduction, focusing only on cash and excluding stock-based compensation and other factors. Moving into 2023, this will serve as our new baseline. It may increase slightly as we grow our revenues, but this will be the standard for the company. Specifically regarding your question, the sales and marketing expenses are around $3 million per quarter out of the total $10 million. We expect this to increase as we enhance our overall sales and marketing efforts. This growth is not due to B2C but from an increase in our investment in sales and marketing. Our team has expanded, and we were growing it in the fourth quarter. While we anticipate a slight increase in overall operating expenses, sales and marketing will continue to rise. In terms of research and development, we expect a slight reduction, as well as in general and administrative expenses.

I was just going to say one of the things is that we're relying more on the recurring business from our existing customers and the subscriptions that we have there and less on new acquisition. That's why we're able to lower the digital advertising spend in that area, the D2C area.

Okay. So I guess if I'm understanding right, the attrition rate on the existing customers is probably lower than it was, call it, a year ago.

Yes.

Can you discuss the impact of milestone payments on gross margin? I believe it may significantly enhance it, but I could be mistaken. Additionally, could you provide insights into the B2B patient-level or per patient per month gross margin, including its current performance and your expectations for future trends?

Yes. Generally, you're right, Ben. We have a portion in the strategic that this data, and data is very high in gross margins. That's true. At the same time, looking into the pure B2B2C business, the ARR, if we are looking into the numbers of Q3 and Q4, this is already hitting the target of 70%. This is where we feel confident that the core business, the pure ARR on the PMPM base or per engaged member per month base, this is something that is already targeting 70%. This is why we feel confident that in the overall merge between B2C and B2B in 2023, we can be at the 60% target. Looking into 2024, we can hit the target of 70%. We are already there for the core business.

Okay. Got it. That's helpful color. And then lastly for me on the Dexcom agreement, how does that work? I mean, is there any money that changes hands? Or is it mostly a technology integration? And then does the kind of higher resolution glucose rating capture, does that help you at all? And then also is something that's available to B2C customers or is that more B2B-focused?

So the real drivers of that from our perspective are a fewfold. One is that we do have members on our platform today that are using Dexcom devices. We know that, but we are not able to capture as much of the information that we would want. This is important for a few reasons. One is because we look to personalize the solution, and more data is better. In those cases, we're getting less data than we are from folks that are using our BGMs. We're driving that towards having better capture, improving personalization, which also drives, because we're on a per engaged member per month, better engagement and therefore, drives revenue from that perspective for us. The other component to this in part is just making that available. It will be available for B2C customers to use as well as B2B; however, we anticipate the primary impact of it will be on the B2B side. There's a big push from not just Dexcom but others in the CGM market to try and get into the type 2 diabetic population, which is a lot bigger than the type 1 population, which is separately penetrated by CGM. One of the ways that you can argue for the coverage of a CGM, which is much larger, is to demonstrate overall cost reduction, which also implies things like hypertension, which is heavily comorbid with type 2 diabetes. The ability to have that data at that level is important to our partners. This is also part of our overall strategic approaches with Sanofi as well. So it's a direct deal between Dexcom and Dario, but there are also considerations for our Sanofi relationship.

Okay. Got it. And then just one last thing that I forgot to ask. When is that integration ready?

Well, it's ongoing at the moment. We're anticipating that once we complete the development phase, we'll introduce it to the B2C market for a while. We'll gather that data and then transition it into the B2B sector, but this will happen in the first half of this year.

Your next question comes from David Grossman with Stifel.

Great. I think most of my questions have really been addressed already, but I just had a couple of quick follow-ups. One was going back to the contributions from Aetna and Sanofi. When you focus on the more development milestone-type payments, are those payments from Sanofi in '22 comparable to what you would expect in '23? Are you thinking it will be fairly consistent? Do you anticipate it being a revenue headwind or tailwind? Please provide some insight on how to characterize the milestone non-ARR payments and those revenue streams and how they may affect growth in '23.

Yes. Thanks for the question. Generally speaking, we are not a development services company. This is something that is very important to mention. That's number one. So it's not just development; it's market access, it's data. The way that we were designing the business a while ago is that eventually we're going to generate revenue from users that are operating on the platform and membership. On top of that, we knew that the data at some point would be monetized, and this is what we see now. The way that we are looking into the stream, and I'll call it the strategic stream and not the development stream, the strategic stream where we see revenue from a combination of development and data, this is something that at least should be flat or grow because if we're going to win more strategic accounts, and I think that we will win more strategic accounts, we're going to see additional need or additional opportunity to sell these capabilities that the company created over the years. I don't know how many companies have this kind of data that is coming from the consumer and is also now even more valuable as we are running multi-conditions under one integrated platform. To my note, the summary, and this is something that I was mentioning, we do see that digital health is starting to be more and more mainstream. In other words, the Sanofi interest in digital health is not just coming from Sanofi. It's coming from other big pharma companies that understand that eventually, you need to touch the users in a digital way. That's #1. And #2, health plans are going to play a pure value-based kind of healthcare. This is where models need to be adjusted, and getting there, you need to have a digital platform. So we expect that we're going to see more strategic partners like Sanofi and Aetna. This is why we think that, at a minimum, the revenue should be flat or even grow moving forward.

And just a quick follow-up to that. I think you mentioned $65 million of bookings and that included, I think, did you say 40% of that was Aetna? Is that right? I just want to make sure I got that right.

I said that 40% out of 60% of the total revenue is the ARR, and the rest is Sanofi and Aetna.

Okay. I thought it was about that. But when you think about that $65 million, how much of that is the ARR?

Almost all of it is ARR.

Okay. So you didn't include development milestones and things like that in that amount then.

I didn't.

Okay. Got it. The last point I wanted to touch on is regarding your comments about expenses. I believe you mentioned that cash operating expenses were at $10 million in the fourth quarter. If I understood correctly, are you suggesting that this should be viewed as a baseline and that, according to your current plan, these expenses will remain relatively stable into 2023? Is that how you would like us to consider cash expenses moving forward?

Yes, the way that I want you to think about it is that eventually, we did three major changes. One is the consolidation of the M&A. Two is some kind of offshoring. And #3 is the reduction of the B2C into a steady state. After doing all these activities, we created a new baseline, which is $10 million. From here, we're going to grow the revenue. We're going to grow more expenses into sales and marketing moving forward under this new baseline. This is why I think that moving forward, we're going to see a very small growth in the OpEx, and we're not going to see significant changes in terms of spending more. We're going to keep the spend very close to the baseline. We're going to grow by another 4%, 5%, 6% along the year on the OpEx. I think that in terms of the loss, we're going to see another significant reduction between 2022 to 2023 because of the gross margins that are going to be around 60% for the full year on average and because the revenues are going to go up. I feel very confident that we're going to see a continuation of the reduction in the operating loss in another big step into 2023.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to Erez Raphael for closing comments.

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

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.