Marpai, Inc.

Q1 2023 Earnings Conference Call

5/11/2023

spk01: Good day, everyone. Thank you for standing by. Welcome to the MARPE first quarter 2023 earnings conference call. All participants are currently in a listen-only mode. If you should need operator assistance, you may press star and zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to hand the floor over to Simon Lee, Vice President of Marpay. Please go ahead.
spk02: Thanks, Operator. Welcome, everyone, to our first quarter 2023 earnings call. With me on the call today are Marpay's Chief Executive Officer, Emundo Gonzalez, and Chief Financial Officer, Yoram Bibrink. Before turning the call over to Emundo, please note that we'll be discussing certain non-GAAP financial measures that we believe are important when evaluating MARPE's performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and the reconciliations thereof can be found in the press release that is posted on our website. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risk uncertainties and other factors that could cause the actual results for Marpe to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available at marpehealth.com. And with that, I will turn the call over to Marpe's CEO, Emundo Gonzalez. Emundo?
spk03: Thanks, Simon. Good morning, everyone, and thanks for joining us. It's a pleasure to be here to discuss the financial results of the first quarter of 2023. As I've done in the past, let me just take one minute for some of you that are joining for the first time to review who we are and our strategy. Marpay is a technology company which is reinventing how employers around the country provide health benefits to their employees. We work with self-insured employers that elect not to buy traditional health insurance for their employees, but rather they self-insure. We create and manage the health plans for our clients. Almost 100,000 people carry a Marpay card in their wallet, or often a digital card on the Marpay app, which they present to doctors' offices, pharmacies, or hospitals around the country, just as one would with health plans from a large insurance company. Now, we make money from management fees related to administering our clients' health plans. which include managing all the healthcare claims of their employees, reviewing these, and eventually paying them on behalf of our clients. We also have a portfolio of ancillary services that add to our revenue. The ancillary services include care navigation and care management for members of our plans. We call employees of our clients and their families members. And these services often make a difference in their healthcare journeys. For almost 200 clients across the country, Marpe's value proposition is clear. We save them money by engaging our members proactively in a manner that improves their health. And as I've said before, yes, healthier employee populations cost our clients less. That's what we do. We reached $9.7 million of revenue during the first quarter of 2023. Our EBITDA was negative $6.7 million. but excluding severance and unused facilities, it was negative 5.9 million. We'll report on this metric going forward as it gives our shareholders a view into the effects of our consolidation activities and our drive towards profitability. During the first quarter, we continued to execute our integration plan for Maestro Health, an acquisition which we completed in Q4 of 2022. We have eliminated duplicate positions, consolidated contracts, eliminated most contractors, and outsourced certain functions. All this has been in search of greater efficiency given our new scale of over 40,000 employee lives. We are executing per our plan and per our budget. Given the cost of severances and other breakup costs, public investors will begin to see the effects of this consolidation in Q2 and even into Q3. Our goal is to reach the scale required to achieve a profitable EBITDA level of operations within 2024. How are we doing this? Well, our focus is simple. First, keep to our expense budget and adjust fast if the top line is falling behind. Mind you, our revenue is pretty visible given the nature of our contracts. Second, sell to customers we already have. There's a great opportunity to upsell products which we have to clients we already have. For example, many of our legacy Marpay clients before the acquisition do not yet have care management provided by us. But with the acquisition of Maestro, we now have an internal care management company. We also have MarpayRx, our own pharmacy benefit manager. There's plenty of product for us to meet or even beat our goal of having at least $50 per employee per month in every life we manage. Some investors ask me what they should be looking for in terms of key metrics. I would look at three things. First, as I mentioned, our adjusted EBITDA loss excluding these discontinued operations. This will show you our journey towards profitability. Supporting metrics, of course, are employee lives we manage, which we report, and the net revenue per employee per month that we earn. In closing, let me say a word about the future. During our last call, I described how we're deploying AI and other technology to build a unique ecosystem of value-based care vendors. These are the best of the best clinical vendors out there. They represent evidence-based solutions that make a difference in our members' lives. These members may have chronic conditions like diabetes. We have gathered these specific solutions to provide a marketplace for our members. What's our role in all this? As I've mentioned, think of a mini Amazon in healthcare. We point you to the right solution that's evidence-based that will deliver results, such as lower A1C, for example, for you as a member. But for our clients, the self-insured employers, it means lower overall cost of healthcare, as healthier populations of employees and their families, of course, cost less. And these vendors are also value-based, meaning they have put their fees at risk against the success of these programs. We are deploying this ecosystem throughout our joint customer base during 2023. I invite you to watch this space. And now let me turn it over to Yoram Bibring, our CFO, for a more detailed view of our financials in Q1. Yoram?
spk05: Thank you, Edmondo, and good morning, everyone. Our revenues for the first quarter of 23 were approximately $9.7 million, $400,000 higher than the high end of our guidance, which was $9.3 million, and $2.1 million higher than our revenues for the fourth quarter of 22. The main reason for the increase in revenues from the fourth quarter was that Maestro's revenues were included for two months in the fourth quarter versus three months in the first quarter of 2023. As of March 31st, our total number of employee lives was 41,571 compared to 42,107 at the end of 22. During the first quarter, we added new customers representing approximately 3,300 employee lives and lost customers with approximately 3,300 employee lives. And our existing customer base reduced its workforce by about 500 employee lives. When any service provider is acquired, some customers view this as a reason to test the market, find a cheaper deal, if you will. And indeed, most of the trend was with the Maestro Legacy customer base. The transaction also impacted our ability to close new deals because many potential customers would shy away from signing up with a company that is in the midst of an integration project. Overall, we are happy that we were able to keep our customer base relatively stable, and we believe that by the end of 23, when the next major round of renewals and new sales occur, all the concerns of the existing customers and the potential new customers will no longer be relevant as the integration would be over. Moving on to expenses, I will be comparing first quarter 23 expenses to the fourth quarter 22 expenses. Cost of revenues historically included cost of processing and adjudicating claims, customer service costs, and amounts charged by third-party vendors for their services that we resell to our customers. With the acquisition of Maestro, we are now also providing care management services that are delivered by our nurses and cost containment services that have a labor component as well, and all these costs are now included in our cost of revenues. Our cost of revenues for the first quarter, excluding depreciation and amortization, were approximately 6.4 million, or 66% of revenues, versus 4.8 million, or 63% of revenues, in the fourth quarter. Our gross profit was $3.3 million, or 34% of revenues, in the first quarter, compared to 2.8 million, or 37% of revenues, in the fourth quarter. We expect to have some volatility in the gross margin from quarter to quarter, as not all our revenue streams have the same gross margin, and some of them, like cost containment, for example, are more lumpy in nature. Our first quarter operating expenses, not including cost of revenues, depreciation and amortization, and stock-based compensation, were $10 million, an increase of approximately $200,000 compared to the fourth quarter when these expenses amounted to $9.8 million. Included in our first quarter expenses are approximately $800,000 related to severance and unused facility costs, which Edmondo mentioned. Since maestro expenses were included for two months in the fourth quarter and three months in the first quarter, it is hard to compare the two quarters. Starting in the second quarter, the figure will become much more comparable on a sequential basis. We're expecting to see a reduction in our ongoing operating expenses. which exclude the severance costs and the cost of unused facilities starting in Q2 and continuing throughout the year. Operating loss for the first quarter was $8.5 million compared to $8.9 million operating loss for the fourth quarter. We believe that operating loss excluding the severance costs and cost of unused facilities will improve sequentially every quarter going forward. In the first quarter, we recorded $388,000 of non-cash interest expense This relates to the amount that we owe for the acquisition of Maestro, which we booked based on the present value of the purchase price. We will continue to accrue this non-cash interest quarterly until the purchase price amount will be fully paid off. A net loss for the first quarter was approximately $8.9 million, or $0.42 per share, compared to a net loss of $8.5 million, or $0.41 per share in the fourth quarter. Excluding net interest expense of $401,000, stock-based compensation of $702,000, and depreciation and amortization and asset write-off expenses of approximately $1 million. Adjusted EBITDA for the first quarter was a negative of approximately $6.7 million compared to a negative of $7 million for the fourth quarter. As Edmondo mentioned, the $6.7 million included approximately $800,000 relating to the severance and unused facility costs, as well as approximately $1.5 million invested in the value-based care platform. Moving on to guidance, we're not changing our 23 full-year revenue guidance at this point and expect second quarter revenues to be in the range of $9.5 to $9.8 million. Before I transfer the call back to the operator, I just want to recap the secondary that we completed in April. We issued 7.4 million shares at a price of $1 per share, Net proceeds were approximately $6.4 million after expenses. And as per our maestro purchase agreement, 35% of the net proceeds will be used to reduce the debt to the seller, and the balance will stay with the company. The balance of the cash will stay with the company. And with that, we will open the call for questions. Operator?
spk01: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one on your touchtone telephones. You are using a speaker phone. We do ask that you please pick up your handsets prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Again, that is star and then one to join the question queue. Our first question today comes from Alan Klee from Maxim Group. Please go ahead with your question.
spk04: Hello, good morning. I heard you say that... Potential new customers were waiting until, because you're doing a big deal, they might want to wait. To follow up on that, could you discuss your strategy with third-party insurance brokers to try to grow new business? And maybe are you planning a broker conference this year? And what type of feedback do you get from the brokers of... what they're looking for to consider recommending yourselves to a new customer. Thank you.
spk03: Thank you for the question, Alan. So, look, I think in all acquisitions, especially at this scale, you know, people kind of wait a bit. Thankfully, I think this is behind us. This is really related to 1.1 of 23, if you will. We continue our outreach with our sales force. The channels obviously are very much live. Look, at the end of the day, people want two things, I think. First, a unique solution, something that they can talk about, which we certainly have. I'll remind everyone that with the acquisition of Maestro also came a lot of wonderful products that, of course, increase the value proposition to clients from the broker channel. Obviously, it also increases their potential to make commission and to make revenue from these clients, right? All in one package. So I do believe the solution itself is what drives the sale. We are... working very hard not only with our current clients but with new clients to communicate that. And we continue to work with some of the largest brokers out there and essentially work towards a 1-1 renewal deadline. I don't mean renewal for our group but renewal in general. I will also mention, Alan, a new kind of maybe a new segment. There is a tremendous amount of interest in business here from smaller clients. And why is that? Well, as you know, the ACA mandates, you know, small businesses, about 50 employees have insurance. The issue is that a lot of businesses that say had 75 or 100 employees traditionally have been fully funded, meaning they buy traditional health insurance. Because of the rising cost of those products, that are great, by the way. I've been a consumer of these, you know, in the past. And because of the rising cost, a lot of businesses at the smaller scale just can't afford them anymore. So you're seeing a massive wave of customers that are coming to self-insurance or self-funding for the first time ever. And that's certainly a way that we are leaning into. A lot of the new lives we received in the last few quarters have been in that profile. And that's very exciting. First of all, because of volume. Yes, an individual client may be smaller. It may be not 500 lives, it may be 80 lives. but there's so many of them, so many of them. And the decisions there are not necessarily a year out or three quarters out, but more 30 days out. So it's very, very exciting. The industry is being shaken a bit by this kind of trend and wave.
spk04: That's great. Thank you. I was also trying to think about... So you've said you have these new programs, but for the partnerships for chronic diseases that you offer some now when you're planning a bunch more of these, I'm trying to think of the revenue that you can generate from it, and if any of that is in 23 numbers. I did a back-of-the-envelope math, but I'd rather, I could tell you it, but I'd rather hear how you think about it. But in general, if you're saving the customer's money and then they're offering something for that, some of the savings, and then you get a cut of that, which mostly drops to the bottom line, is there a way to think about if that could be meaningful or when that might scale up? Thanks.
spk03: Yeah, yeah. And, Alan, just for others, I think what you're describing is the revenue gap related to ancillary products and maybe very specifically to our value-based care initiatives. Look, first and foremost, I do believe value-based care is the future. It's only just scratching the surface right now in commercial healthcare, meaning commercial insurance or what companies buy. This is obviously the standard in the Medicare world, right, with Medicare Advantage. But we're really at the tip of the spear here in terms of bringing these solutions to the commercial world. Now, what does it mean for us? First and foremost, we have to deliver this value in a very meaningful way to our members and by extension to our clients. So members must get the value, and there the value is in terms of healthcare. right? Did my A1C go down? Did my back pain go down? We're measuring real human outcomes. Now what that translates to for the client is less claims or less costly claims. Our partners like Virta, for example, have mountains of data on efficacy, meaning how do they deprescribe specialty medications because patients are getting better, meaning they don't need to be on these medications that cost the programs or the plans so much. These are very exciting times, meaning the cost improvements here are certainly not provided by providing, you know, cheap health care or less health care. The lowering of costs is because human outcomes, health outcomes, are going up, right? And cost... or behave inversely to human outcomes going up or health outcomes going up. So that's very exciting. Now, how we make money on this is we're the matchmaker. So we essentially have a fee from the vendor as we matchmake. Why? Because we're essentially eliminating their cost of acquisition, right? They cannot access our members. Our members are our own. We're very protective about that. So if we find a member that may benefit, again, in human health terms from one of these programs, we're going to matchmake. We're going to make that introduction. We're going to monitor it. And then we're going to hold the vendor accountable for performance because they're value-based. They put their fees at risk, right? That's what we do. And for that, they give us a chunk of their revenue. I don't expect within 23 this to be a very meaningful, you know, look, we're close to 40 million of revenue here. So I don't expect VBC to be that huge. What I do expect is for all of the groundwork to be laid. So in 24, you do have a quite material chunk of very high margin revenue that is being created. Last point on that, Alan, you know we have announced publicly two of these phenomenal value-based vendors. We are working with our client base, you know, 200 clients or so, to implement these, again, as needed, right? Meaning customer needs vary. You may not have a big population of people living with diabetes, or you may, right? So it's really bespoke. But I do... expect that ecosystem to expand a lot within the next quarters. So, obviously, the more there, the more disease states you're covering, the more members' needs you're covering, and that obviously leads to more revenue share for us.
spk00: That's great. Thank you.
spk04: I'm sorry, I just missed something from the call. When you were talking about the severance costs or kind of one-time costs related to MARPE in the quarter, could you just repeat what that was? Thank you.
spk03: Yes, what I was referring to, a few items here. So based on our integration plan, we have eliminated duplicate positions. we have made basically all of the efforts that needed to be made to create one company from two, right? The reference to that is that we had severance costs, other breakup costs. There's leases that are not being used. That was approximately $800,000 in Q1. We'll be reporting on this particular item, meaning non-ongoing costs. in the quarters to come. And the reference there was exactly that. I don't know if Yoram has additional thoughts on this particular item. Yoram?
spk05: No, I think you covered it. Basically, we're defining these are the costs that are not connected to our ongoing operations, as Monzo said. So we have unused facilities that we inherited, and also we have severance costs. So that's pretty much it.
spk03: And the point is I think we want to separate that and outline that for our public shareholders because it is obviously an indication of our cost structure going forward. So even if you may see the cost in this particular quarter, those costs are separate from our ongoing business or hopefully going away in the quarters to come. That was the whole point.
spk04: Thank you. So you said on the last earnings call that roughly if you get to 50,000 lives and you get paid $50 per life, that gets you to break even, I believe. And my question is, do you see a path to getting there organically? or is that more likely going to happen with, you know, hopefully another acquisition?
spk03: Yeah, look, it's certainly both. We're obviously exploring other fronts. There's limits to what I can say about that. But one, the organic channel definitely is alive, well, and the demand is is coming. Internally, we're obviously very focused on keeping what we have, meaning making sure that our customers are deriving maximum value and they know it because a customer kept is obviously worth everything. So that is a huge initiative. I do believe that We can get there organically, but as you may know, there's a lot of other opportunities even with smaller assets out there. So we're exploring everything, and definitely the two levers, both inorganic, picking up some customer bases from smaller TPAs, and the organic are live.
spk00: So that's what I can say at the moment.
spk04: Okay, this is a small question, but you broke out your revenue in two segments, and one of them, it's very small, but it's captive insurance. What revenue is that? What does that relate to?
spk03: Yes, would you like to explain the accounting? I can talk about the strategy, but please.
spk05: Yeah, I mean, I guess for us today, this is captive. It's an ancillary product or TPA. So a small number of... employee lives, we sell this, which is effectively we're participating in the stop-loss insurance in a way. And the revenue we are recognizing is premium, premium revenue. It's small. It's very, very small. It's pretty much an ancillary product because it's an insurance-type product and you have to report it separately.
spk00: Okay, great.
spk04: And then in terms of your use of AI for identifying potential big healthcare events before they happen, and I know it's always improving, any update on how it's getting used and any other new ways or improving?
spk03: Yeah, let me talk a little bit about the future. And look, obviously there's a lot happening in the realm of AI, especially with large language models I'm sure you've seen in the press. So we are really leaning in here with respect to value-based care and deploying not only our AI but other technologies to making sure we can match make appropriately, making sure we understand who that member is and what their journey is. So the deployment of our technology is really around that, and that's what the future looks like as well. In addition to that, we're very, very excited about being able to really predict the cost that may be a little bit hidden and unknown within subpopulations for our clients. So, for example, you may have a group that is pretty much maybe a little bit above the average in terms of cost, but based on our analysis of data, based on these models, we can tell, and obviously based on huge, huge amount of history, we can tell that this subpopulation will potentially cost more or not. This is critical information not only for the planning, the financial planning of our clients, but it's also very, very critical for stop-loss underwriting. Remember that 100% of my clients, yes, of course, they're self-insured, meaning they're paying for those claims as they come, But they do have stop loss, meaning at some point they have traded that risk to a large reinsurer. That reinsurer charges substantial premiums, obviously, for taking that risk. And they have to really understand what those potential costs are. So we see multiple audiences for these models you know, again, in the quarters and years to come as they get better. But it really is about understanding risk. Predicting is one thing, a very important thing, but modifying risk is perhaps even more important.
spk00: I'll leave it there. Thank you. Thank you. Okay, I think that's it for my question.
spk04: Thank you very much, and congrats on the good stuff you're doing.
spk03: Thank you so much. Thank you for your questions.
spk00: Once again, if you would like to ask a question, please press star and 1.
spk01: Ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the floor back over to Edmundo Gonzalez for any closing remarks.
spk03: No, just thank you, Operator, and thank you, everyone, for participating in our first quarter earnings call. I appreciate your time this morning. Have a good day and look forward to hearing from you and seeing you on the next quarterly release. Thank you so much, everyone.
spk01: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Disclaimer

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