Skylight Health Group Inc.

Thank you everyone for standing by. This is the conference operator. We would like to welcome you to the Skylight Health third quarter 2021 financial results conference call. The results are for the period ending September 30th, 2021. As a reminder, all participants are in listen-only mode. After today's speakers conclude the presentation portion of the call, should time permit, they will move to a question and answer period. If you wish to ask a question, you may queue at any time by pressing star, then 1 on your telephone keypad. You'll hear a tone acknowledging your request. To withdraw your question, please press star, then 2. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. As always, I would like to remind you that listeners are cautioned that today's call and the responses to any questions may contain forward-looking statements. including certain statements which concern long-term earnings objectives. These should be considered in conjunction with the cautionary statement contained in the Skylight Health earnings release and in the company's MD&A and other filings. Forward-looking statements are subject to risks and uncertainties and assumptions. Accordingly, actual performance could differ materially, and undue reliance should not be placed on such statements. Skylight Health does not undertake to update any forward-looking statements except as required. All currencies discussed on this call will be in Canadian dollars unless otherwise stated. This conference call is being recorded today, November 16th, 2021 at 8 a.m. and will be posted to the Skylight Health's website within 24 hours after the conclusion of the call. I would now like to turn the meeting over to Skylight Health's Chief Executive Officer, Mr. Pratty M. Shaker. Please go ahead.

Thank you, Ariel. And a good morning to everyone. Thank you for joining us today for our third quarter conference call for the period ending September 30th, 2021. With me today is our Chief Financial Officer, Andrew Olinsky. He'll be on in a bit to provide you with a detailed overview of our financial performance. I'll go over some overall performance initially and then come back after with a bit of an outlook. Skylight Health is a primary care-focused organization that is committed to changing how healthcare works in the U.S., We operate a multi-state primary healthcare network comprised of practices providing a range of services from primary care, subspecialty, allied health, and laboratory diagnostic testing. Our business model is focused on solving two major issues in U.S. healthcare. First, providing a white knight solution to small and independent primary care practices looking to consolidate within a highly fragmented market and where providers and practices are eagerly looking for qualified and supportive buyers. Through a national platform, we aim to bring scale, efficiency, and improved revenues to these practices. Second, we aim to realign the reimbursement model within these practices to outcome-based care, or more commonly known as value-based care contracting. Our focus with specific patient populations today, such as Medicare, is to shift from a traditional fee-for-service model, generating on average $100 to $200 per visit or $200 to $400 per year per patient. to a value-based care contract where some full-risk total cost of care program can remunerate the provider group over $10,000 a year per patient, paid by the payers and not the patient. This model enables the practice to receive the full healthcare dollar, putting the patient first and allocating expenses accordingly. Value-based care models are designed to manage the growing cost of care while improving on patient health outcomes. We are all extremely proud of our results this quarter. Revenue was up 269% year-over-year and 16% sequentially. We saw both top-line revenue growth from acquisitions made during the first, second, and third quarters in 2021 and from those in Q4 2020, as well as organic growth. We continue to grow at the operational level, with each new acquisition being accretive to our growth. Over the quarter, we saw organic growth from Q3 up approximately 8%, resulting from improvements to provider and patient access, revenue cycle management, and leadership to the clinical level. We closed on Aspire Health during the quarter in September, which continues to support our model for growth, both building density in existing markets as well as opportunities in new markets. Aspire Health expands our reach into Pennsylvania and access to a share of the primary care market in Harrisburg. Further, it strengthens our financial performance, contributing over $2.5 million U.S., in annualized revenues with positive EBITDA. With Aspire Health now in network, we are in a strengthened position to advance payer conversation on enabling value-based care plans within the group, growing our patient base by over 10,000 per year, including over 2,000 Medicare and Medicare Advantage lives and increasing our national footprint. As of the end of the third quarter, patient lives grew to 99,000 from 88,000 the previous quarter. Medicare and Medicare equivalent lives continue to represent 15% of that population. With the continued growth by acquisition and plan de novo, we expect to see additional growth to our patient and Medicare count going forward. Our teams were largely focused during the quarter on the integration of Rocky Mountain and Doctor Center, both practices that were acquired during the quarter. Efforts were largely on improvements to workflows, provider access, and shared services. Combined with previous acquisitions, we have seen a second straight quarter of organic growth of 8%. We are confident that as we continue to generate economies of scale, revenue, and cost synergies, that we will be able to further contribute to this growth. With the recent addition of Greg Simon as SVP Marketing Communications, the company will be looking to bolster marketing efforts to drive new patients, both commercial and Medicare, into existing practices and for future de novo sites. Year to date, our annual value per patient has seen significant improvement within the current fee-for-service model. This represents an improvement to the economic growth of our existing practices before any progression into value-based care relationships. Additionally, the improvement was seen mainly in the primary and urgent care service lines. Focus for the teams moving forward will be on generating additional access within the current utilization as we look to marketing efforts on new patient acquisition and the prevention and screening for the existing roster. As it stands today, the Skylight Network represents a little under 28 locations across the US, with nearly two-thirds of that in Colorado and Florida. From a provider panel, we are more evenly divided into physicians and advanced practice providers. Our focus will be on the development of care teams for our patients. Within a value-based care environment, care teams look after a population of patients rather than the traditional one provider to one patient approach. This gives the network far more accessibility, support, and a collaborative model of care. Our clinical care teams have also begun laying the foundation for our value and performance framework, which goes into effect for 22. Once implemented, the program will align providers with the key metrics that drive our performance with payers, helping in winning savings and demonstrating progressive value-based care capabilities. We have executed a participation provider contract with a leading national healthcare organization who is a recipient of a direct contracting entity license. With Skylight Health's participation beginning in 2022, the agreement to join the DCE is a major upgrade from the previously announced Accountable Care Organization and is expected to result in improved care and benefits for traditional Medicare patients. The DCE contracts directly with the Centers for Medicare and Medicaid Services, and provides multiple enhanced pathways for risk sharing agreements. We also recently announced the execution of a definitive agreement to divest the legacy portion of our services arm, which was focused primarily on the qualification and certification for patients seeking medical cannabis for state regulated medical purposes. With this transaction expected to close by the end of November, we will be able to put 100% of our focus and efforts on the primary care growth. Andrew will discuss details of the transactions further on the call. While it's unfortunate that the expected divestiture will see the departure of long-term employees and providers, we know this shift is important, not only to the growth of that business, but to allow us to dedicate our resources in full to our model. This transaction cements our full commitment towards setting aside medical cannabis and focusing on primary care and value-based care as we continue to acquire primary, urgent, and specialty practices in the U.S., I want to especially thank our entire team here at skylight all our practices providers and employees, without whom our vision for changing our healthcare works in the US would not be possible. So with that I would like to turn the call over to Andrew who will review our financial results in more detail, and then I will be back to discuss what we are excited for in the coming quarters.

Thanks, Brad.

And thank you again to all our attendees for joining us today, as per usual, during a busy time of the year. As Brad mentioned, we are very pleased with the company's performance as we approach the end of the year. The third quarter financial results reflected the impact of the acquisitions that we've been talking about and making for the last 12 months, as we've reported record quarterly revenue and gross profit. This is in addition to the investments we're making in the business development as we continue with our plan of these acquisitions and integrations. But as to say, as Brad mentioned, we are very, very pleased with the quarter. I'll start with revenue on the discussion bit and just mention that this came in at $12.2 million for the quarter. As Prad mentioned, this was a sizable increase compared to the $3.3 million in the same period last year. But when compared to the second quarter of 2021, this was a reflection of a 16% increase quarter over quarter. These significant increases were primarily a result of the acquisitions of the clinics that we acquired during the last year, obviously for the growth, but quarter on quarter, Our revenues grew not just from acquisitions, but as Brad touched on, we also saw quarter-over-quarter organic growth of just over 8%. And I'd just like to mention, this measures the clinics that we acquired up until early Q2 2021, so they had effectively a full quarter of operations in Q2 for me to compare the third quarter to. And so effectively, what that does is that cuts it off at the larger Rocky Mountain acquisition that we closed on April 5th of 2021. With regards to the revenue guidance, we're going to leave that as the previously provided $41 million for the full fiscal 2021, and we're just leaving that in place for now until we get a firm closing date on the divestiture of our legacy business, which Brad touched upon. As always, this projection of $41 million accounts for closed acquisitions, but does not include any potential future transactions, which we currently have otherwise in place for, as well as any planned contributions from value-based care contracts, which Brad mentioned earlier. And touching on the divestiture of the legacy business, we did announce a couple of weeks ago that we did enter into a binding agreement, which was for proceeds of approximately $8.6 million U.S. And this was a major event for us, as Prad mentioned, but it also should allow us to remain focused on our growth in our primary care business. The initial proceeds of $4 million U.S. will be received upon closing the deal that we planned for the end of the month, and we intend to quickly redeploy this capital for acquisitions. The remaining balance will be received in three installments paid over the next two years, and we will continue to reinvest that additional cash into the business. Moving on to gross profit, our margin came in at 62% for the third quarter, compared to 71% in the third quarter of last year, and 64% in Q2. This is within our historical margin range of approximately 60% to 70%, but with the continued focus on acquiring primary care businesses, we would expect our margin to decrease gradually, as this line of business has a slightly lower margin than our legacy business. However, we also expect to counter this reduction in gross profit margin with our progressive transition to value-based care, as well as improving our utilization rates and other improved performances at our clinics. Moving on to adjusted EBITDA, the loss was the result of the continued investments in corporate activities that Prad talked about. These increased costs primarily related to salaries and wages, office and administration, and professional fees, all of which are reflective of the current growth stage of our company and the eight clinical acquisitions we have made in the last 12 months. As a result of these acquisitions, the increase in our practice-related employees has driven the overall headcount increase, which we saw was more than 360%. Before adding the balance sheet, I'll do a quick run-through of the outlook of these three categories. Salary costs did increase as expected in Q3, and while we expect that these costs would increase with any further acquisitions and additional heads, we would also expect to see this rate of organic growth start to taper off in Q4, as we have made significant investments in human capital in the past three quarters. We now have a strong leadership team and the expertise that we believe will ensure our growth aligns with the value we expect to earn from future contracts. Increases in office and administration primarily relate to directors and officers' liability insurance, the data conversion projects that we're working on, as well as an increase in other insurances such as health, which is due to increased employee headcount. Professional fees decreased from the previous quarter as the second quarter contained several one-time items such as our exchange listing on the NASDAQ, as well as a large acquisition made early in the quarter. And as such, we remove them from our EBITDA as a result of their one-time nature. In Q3, the professional fees are reflective of the larger size of our company, as well as our U.S. listing, as well as the continued small acquisition of the Aspire and diligence that we continue to deploy while evaluating other potential future transactions. As these fees are driven by acquisitions, we would expect these costs to be reflective of this volume of work. And we would also expect them to improve going forward as we continue to refine our acquisition activities. Finally, with regards to our marketing and development costs, These costs decreased in the third quarter as expected and as provided, and they should be at a normalized rate going forward. Moving on to our balance sheet before I hand it back to Brad, we ended the quarter with $5.6 million in total cash compared to a cash balance of just under $12 million at the end of the second quarter. Reduction in cash from the quarter was primarily due to purchase consideration paid in the quarter of just under $3 million, as well as working capital adjustments and the net loss. And we continued up a working capital surplus of just over $3.7 million. The remaining large increases in our assets and liabilities on the balance sheet are purely a result of the acquisitions that we have made in the last 12 months. And so the rest would just be noise there. So with that, I'll turn it back to Brad to take you through the rest of the outlook.

Thanks, Andrew. The primary care market remains an attractive market to be growing within. The need for improved primary care practice models in the U.S. has never been greater than it is today. high fragmentation, increased administrative costs, competition from larger networks, and a lack of new owners and qualified buyers is driving practices to consolidate. Further, the shift to value-based principles for contracting is met with practices limited in their capacity to transition, making it difficult for payers and regulators to implement systems to control the rising cost of care and the lower quality patient outcomes. Moving forward, what we're most excited for and seeing growth is four key focus areas, growth from new acquisitions, organic and same practice growth, progression towards value-based care contracting, and de novo practice opportunities. Our pipeline remains robust as we explore further opportunities to build density in existing and potential new markets. Our focus for growth is on practices that present healthy revenues, EBITDA, and a patient panel mix that contributes to our total patient and Medicare equivalent count. In the coming years, this growing metrics allows us to recognize a higher annual per patient value transitioning to additional benefits to our patients. Our focus continues to remain on small to independent practices. This addressable market represents long-term opportunity without the need to see valuation compression that we typically see from larger transactions in the space. Our focus on our existing practices will be both by way of revenue and cost synergies. We continue to evolve our shared services models aimed to assist our practices generate economies of scale while creating negotiating leverage with contractors and third-party organizations for services rendered. In addition, our shared services alleviate the administrative burdens at a local practice level, freeing up the capacity to focus on patient care. This transforms directly to the ability to increase service lines, access levels, and more importantly, impacts top-line revenue growth opportunities. As we expect to begin value-based care contracting through the DCE in 2022, we are excited for further announcements with payers on other value-based care programs that can benefit our Medicare Advantage patients, commercialized and Medicaid populations. As we expect to transition to full risk in the coming years, we expect that each year we should be able to demonstrate increased value generated in these contracts as we expand further services and programs to support higher patient quality outcomes and improved cost of care. And finally, our focus on introducing de novo as a model to complement acquisition is a plan we expect to roll out in the coming months. De novo enables us to utilize existing markets, infrastructure, and teams to build on the Skylife platform regionally and fill the gaps in access and care to patients in communities where primary care is either underserved or where value-based care principles can benefit local populations. Moving forward, we are confident that through these four initiatives, we will expect to drive strong quarter-over-quarter growth. Our goal as management is to continue to work to drive value to our business, stakeholders, and shareholders alike. We are absolutely excited and excited to drive this company forward and into 2021 and beyond. So with that, I think it's time to open up the call to any questions. Ariel, please go ahead.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question comes from Frank Takanan of Lake Street Capital Markets. Please go ahead.

Hey, Brad. Hey, Andrew. Thanks for taking my questions, and congrats on all the progress in the quarter. I wanted to start with the DCE-related. Can you just walk through what a patient on that Contracted through the DCE could look like fee-for-service premium, PMPM, shared savings, kind of run through the whole gamut there to give us a little better feel what a patient on that could look like.

Yeah. Hey, Frank. This is Brad. Thanks for the question. So the DCE will shift over time in terms of contribution per patient value. So the first year is effectively what we're expecting to see with what we announced previously with the ACO, which is a single-sided risk model. So we're not going to be responsible for downside risk in year one. However, unlike the ACO, which would be 100% on shared savings, the DCE allows for a combination of a PNPM capitation for care coordination, as well as a few other sort of initiatives that allow us to sort of recoup or at least receive ahead of time what would be a part of that expected shared savings model. So From a patient who was previously a traditional Medicare patient to a patient who now falls in under the first year of the DCE participation, it's nearly effectively double what their annual revenue contribution would have been from a combination of both the PMPM as well as the expected shared savings at the end of the year.

Got it. That's helpful. And then I saw your comment about the 15% of total lives of the 99,000 are potential managed care lives. Do you feel that's a reasonable first year, or do you feel like it's going to probably be a smaller number than that, and then you can grow into a larger number of actual patients on the VBC contract in year one?

Yeah, so the Medicare equivalent lies. The reason we kind of spell it that way is because, you know, Medicare has two different sort of value-based care contracting arrangements. One's traditional Medicare, which Patients would fall under an ACO or a DCE. And then there's Medicare Advantage patients that would fall under a commercial health plan payer arrangement. And so when we talk about Medicare and Medicare equivalent, it's a combination of traditional Medicare, Medicare Advantage applicable patients or eligible patients, and then other value-based care arrangements to which we kind of have a way to calculate what a ratio would be. So for example, Medicaid or commercialized, for example, and what that would look like from a Medicare equivalent contract. So the way we have it today is we have a certain population of those patients, which is a smaller subset of that 15%, which are attributed to traditional Medicare patients, which would qualify into the DCE. And then over the course of the year, you're able to attribute more patients, provided that those patients are within the existing network of practices that are already qualified to participate in year one. And then for us, 15%, you know, a relatively low number in general. And keep in mind, we're acquiring these practices that have this patient population to begin with. So we fully intend to, you know, both simultaneously attribute more of that 15% into qualified programs today, but also at the same time grow that 15%, not just by acquisition, but by de novo. And that's where sort of bolstering our team, especially on the marketing side, where Greg, who's joined us, has had many years of experience working specifically with populations like Medicare in the recruitment of Medicare and Medicare equivalent patients into programs that were more traditionally like Medicare Advantage. So again, that is something that we see to increase significantly. 15% is really kind of where we're starting from the acquisitions we've made so far.

Perfect. Helpful. One last one from me, applaud the legacy business divestiture, like the refinement of focus here. Can you level set us on what the legacy business was contributing in relation to the Canadian dollar 41 million guidance for this year, as well as how many expenses you feel or how much operating expense you feel you can take out of the model with that divestiture? Just give us a top to bottom look into what the legacy business impact will be to the base business.

Yeah, Frank, it's Andrew here. So top line legacy business on an annualized basis for 21, we had planned just about $11 million Canadian contribution to the top line with a gross profit margin of about 75% to 76%. And so obviously that's a contributor there, and that's why I continue to talk about gross profits declining with the legacy business being carved out of that number and the primary care business being a lower margin business.

Okay, and then any opportunity to get rid of some operating expense with the divestiture too?

Yeah, most certainly. There will be a number of employees that obviously transfer over there. It allows us to rationalize a number of sites. So there are some small components there for us to do, and it just allows us to, you know, the biggest component here is with regards to our focus. And then I do anticipate to be able to achieve some savings with the removal of anything that were mentioned, cannabis with regards to banking and insurance and the like, but with the rising price environment on products such as insurance, I'm not expecting to see any long-term savings there compared to what we're incurring now, but I'm just trying to avoid future increases.

Perfect. Helpful. I'll stop there. Thanks for taking my questions. Thanks, Frank.

Our next question comes from Rob Jeff of Echelon. Please go ahead.

Good morning, guys, and congrats on the progress within the quarter. My first question would be to ask if you could talk to the expected run rate for the primary care business at the end of the year and then perhaps layer onto that your outlook for organic growth associated with that business.

Yeah, Rob, thanks for the question. Nice talking to you. I'll answer the first bit, and then I'll pass over the organic bit to Prad for his outlook on that. But effectively, what we're looking at, the primary care business for the legacy business, you know, I would expect to see it a run rate effectively at the end of this year of just over 40 million, you know, just under 41 million, roughly. So, you know, ballpark, that's what I'm expecting our run rate to be at the end of this year. And that's barring, obviously, any other planned acquisitions that we plan to make, you know, with the proceeds, you know, from the sale of the legacy business. That's just the existing clinic groups that we currently own as of today.

Hey, Rob. It's Prad here. So, just touching your question on the organic part of it. So, you know, I think the focus for us with many of these practices is, you know, one, recognizing That, you know, there's sometimes an assumption made that based on the price of these practices that there's, you know, a lot of improvement to be made. I think one component is these are independent practices that run, you know, relatively well to begin with. And our contribution post is where we can bring sort of synergies at a national level. So we do expect moving forward to continue to see organic growth, probably more similar to the rate at which we've been generating, although that organic growth will shift in two factors. So one, immediate contributions that we see from the practices that we can make. So typically we'll see areas like utilization rate improvements, access levels, savings from shared services, and those are impacts that we can control post-acquisition. And then what we'll see in terms of future organic growth is the transformation of that revenue on a per patient annual basis within populations that will qualify under Medicare or Medicare equivalent programs with payers. So moving forward, the answer is yes, organic growth is something we expect to continue to see from existing and new acquisitions. The rate will change based on sort of where new acquisitions are compared to those that have been in our network for some time, but then also as we expand on these contracts, what that contribution looks like as well.

Very good. Thanks. And if I may follow up, could you talk to your acquisition pipeline in terms of The depth of the pipeline, the target size of acquisitions, the prioritization of density versus regional expansion.

Yeah, so I mean, our focus is, of course, you know, within building density now in markets that we're in. So Florida, Colorado, as I mentioned, are two large markets for us. Pennsylvania is a very attractive market for us. Texas. And so we are continuing to seek out opportunities in these markets. We are starting to now consider, you know, de novo as well with acquisition because we are able to move into markets a little bit differently through the de novo strategy. But more on that in the coming months as we expand on that plan. In terms of the pipeline itself, you know, it's important to remember. So our sweet spots really in that small to independent size physician practice group, we're dealing with an addressable market that represents nearly 40% or more of the primary care market out there today. And if we look at the problem we're trying to solve for payers, which is effectively helping them get providers into value-based care, you know, they're stuck right now because the majority of patients are tied up in these independent practices, independent practices, they're struggling to make the transition. So the consolidation of these independent practices, both allows us to build scale through volume of acquisitions, but also solving a major problem for the payer market today, which is how do you get these small practices to get the capacity to shift to value? And so again, We know that our strategy both gives us leverage in terms of focusing on deals that are not typically in the purview of many of our peers, and so therefore we don't see a lot of valuation compression here. Because we're building density, it allows us to pick up smaller practices without the need to have to worry too much about integration risk. And then we're also knowing that we're solving a major problem for the payers, which aligns us very well with their goals of trying to say, we need more groups focused on helping these smaller practices transition. I think going forward, you're going to see sort of more consistency in our pipeline of deal flow. In terms of volume, the pipeline still remains quite robust. We still continue to take more inbounds at this point, which shows that there's strong demand for what we're trying to do, and that this density over time will really accumulate and allow us to sort of build market presence, but also relationships with those payers moving forward. Thank you very much. Sure. Thanks, Rob.

Our next question comes from Carl Burns of Northland Capital Markets. Please go ahead.

Great. Thanks for the question and congratulations on the progress. In turning back to gross profit margin, can you talk a little bit about what the GPM would look like on a pro forma basis for the acquisitions that you've completed and also, again, pro forma for the divestiture legacy business? and your expectations in terms of gross profit margin, how that might transition in 2022 considering VBC and the potential for Genova startups. And then I have a follow-up as well. Thanks.

Thanks, Carl. I'll touch on that question initially, and I'll flip it back to Andrew for more of the specifics. He's better at specifics than I am on these calls. But let me kind of touch on the broad concept of the gross profit margin. So, What we see within acquisitions that we've made, Carl, is that familiarity with traditional access panels is something that largely can be improved on. We know that there's a fair amount of work to do here when it comes to utilization of patient access within the existing panel. Our metric we use there typically is patient-facing hours, but then also number of patient visits per patient-facing hour. Now, that's not to say that you're overloading a patient-facing hour with patient visits because, again, in a value-based care model, you do need to allocate enough time for each patient visit to appropriately address and manage that patient care. But there is definitely room for improvement there. And since gross profit margin is largely driven by provider salaries, improvements to utilization rate will have a direct improvement to the gross profit margin. And so that is something that we are actively focused on now that we've sort of taken the last several months to build that infrastructure, shared services, and now able to start deploy that at the practice level. And we started to already see that perhaps in some markets as we're now starting to create improved access for our patients. So that's just a little bit on sort of the overall concept of the utilization effect on gross profit margins. I'll turn it over to Andrew for a little bit more specifically.

Yeah, Carl, I guess where I would step to is obviously the discussion we've had, you know, with that mid-70s contribution coming from the legacy business. You know, you can back into some of the math there accordingly as to, you know, what that impact is going to be. However, you know, what we're looking at here is a margin for the primary care, you know, anywhere from, you know, kind of 57% to 62%. And what we're going to be doing from a guidance perspective is, you know, once we close on the legacy disposal, You know, we'll firm up as to what we're looking at in terms of guidance for 2022. And we will look to provide, you know, we're contained to provide guidance on revenue, and we will look to provide an indication of what we consider our gross profit margin to be over the 2022 period. It's not going to be a straight line necessarily, you know, due to a number of factors, as Brad was mentioning, with regards to, you know, efficiencies and utilization and clinical performance, as well as any benefits from a contract. So, you know, we will provide, you know, clear guidance on that, but obviously, you know, you will see a reduction from the current, you know, 62 to 64% that we've been reporting in the last few quarters. And it's just a matter of, you know, the full-on impact of what we can do to counter that within 2022.

Got it. Thanks. That's very helpful. And then also, I think in the MD&A comments in the file link, It was referenced that COVID was not a factor in the third quarter. I think it was attributable to telemedicine and other initiatives. But I think my question here is, what were the other factors that helped you abate COVID access issues? And what did you see with respect to your practices where COVID was simply not a factor other than telemedicine? Thanks.

Yeah, Carl, I mean, I'll let Brad kind of, you know, talk about the operations, but I mean, you know, the impact of COVID in some ways, you know, we're not impacted negatively, which, you know, it's what we're trying to say in the MD&A. You know, COVID, you know, if we do see a ramp up in people getting, looking for tests, you know, we do see an impact of that from a positive perspective because our urgent care visits do increase. And so we can see a positive impact from that. It's just a matter of, you know, that volume. And I do believe we did see a slight impact in the third quarter, particularly in August and September with regards to urgent care visits at, you know, one of our sites in Colorado. But from a negative, you know, from a negative perspective and, you know, juggling COVID, you know, we try to highlight that there is no impact from that perspective. I'll let Brad maybe touch on ways that we get around that. Up to you, Brad.

Yeah, thanks, Andrew. Carl, I mean, we, you know, first of all, I think we acquired most of these practices in a post-COVID impact environment. So, you know, what we saw typically in sort of the first and second, the second, really the second and third quarter of 2020 resulted in most of these practices establishing policies and practices in place to handle things like remote access for patients. And as most of them have survived through that period of time, but also we've seen them rebound in terms of patient volumes and numbers again. I think both is demonstrated one that in a, in a post normalized COVID environment, patients are reverting back to in-person visits compared to telemedicine. We've seen that downtrend in telemedicine only visits. Um, but also the same time, the infrastructure does exist within these practices and skylights network to be able to handle remote visits. If we start to see a sudden increase where, um, people are deciding to stay back at home and want to have visits done remotely. And that also plays into sort of the programs and services we're looking at developing as part of an ongoing patient care initiative that doesn't require just in-person visits, but supports remote patient monitoring as well as in clinic. So overall, I don't think, you know, we expect that, you know, that has impacted us in any way. But moving forward as well, I think the other benefit, not necessarily benefit, but the other opportunity for Skylight is that practices that have been impacted by COVID and may continue to still be impacted by COVID that haven't been able to transition to a post-COVID treatment plan model allows us an opportunity to potentially see more acquisitions in the pipeline as well.

Great, thanks again. Thanks, Carol.

Our next question comes from Raoul Sargasser of Raymond James. Please go ahead.

Morning, Prad, Andrew. Thanks so much for taking my question. So quickly, just coming back to the divestment of the legacy business, how should we be thinking about the use of proceeds and what portion of that should we be thinking about as inorganic acquisition of new clinics and new clinic revenue?

Thanks for the question, Raul. Nice to talk to you. Look, it's similar to use of proceeds we did in the last capital raise and what you'll see in our next capital raise for the preferred. You know, the majority of these proceeds are going towards acquisitions. They obviously, you know, we do see a portion going to the investments that we're making and the ongoing costs, you know, being a corporate entity, as well as the investments in the overarching support for, you know, centralized support. But, you know, the majority, i.e. three quarters of the proceeds are going to go into acquisitions. And what we look from that perspective, you know, we continue to look at, you know, similar similar revenue multiples that we've seen in the past, you know, kind of anywhere from 0.8 to 1.2 times. You know, so our goal is to effectively, you know, deploy that 4 million U.S. and, you know, target a replacement of, you know, at least 0.8 times, if not, you know, one times revenue for that.

Great. Thanks. That's helpful. And then the company just recently announced a prep stock offering. Can you give us a little bit more color in terms of the strategy behind that?

Yeah, no problem. So obviously the strategy there is, you know, we're looking to minimize dilution currently. That's no different than the divestiture of the legacy business. So we're looking to maximize non-dilutive ways of raising capital at the moment. That's not to say, you know, we always know that we're going to have a continued need for capital for these acquisitions as long as we are in acquisition mode. And so, yeah, we're just looking to minimize dilution as a result of that. We do feel there's an appetite there. You know, in a market, it is a retail market, but we do feel there's appetite there for, you know, folks that are interested in the yield. And it's actually, you know, a very competitive rate in terms of cost of capital to us. So, you know, that cost of capital combined with the anti-dilutive nature or the non-dilutive nature, not anti, non-dilutive nature was the appeal to us there.

Perfect. And if you don't mind just indulging one last quick question. Coming back to the divestment and recognizing that that was a relatively high margin business and that the, you know, pushing further into primary care clinics, which are generally lower margin, how should we be thinking about the blended margin profile, you know, kind of going forward?

Yeah. Hey, Rahul. So I think as Andrew mentioned, I mean, and as we now comment, we also commonly know primary care in general has a slightly lower margin than the legacy business, which was largely a cash-based business, and obviously revenue models were different there. But I think it's important to sort of know two sort of trends that sort of for us make this a more streamlined operation post-divesture. One, obviously on the divesture piece itself, the legacy business, you know, we do see a market in the future where price competition can and potentially does impact that margin. And as we've seen in some mature markets where that business is operated in, Two, the revenue contribution as we go forward, organic growth of that business is largely capped as the services rendered are essentially what it is. And so you don't necessarily see an opportunity to increase service lines within that business compared to the primary care model where what we're essentially able to flip the capital from the divestiture into allows us to move into primary care where we see a significant opportunity to increase the annual value per patient by having an opportunity to play in the total cost of care model. So I think long term and in the near term, you'll see, you know, a drop in terms of what that gross profit margin would be, you know, more commonly to our primary care business. But long term, you'll see an opportunity for both the top line remedy to increase significantly and improvements to utilization rates and other aspects of the care teams allow us to see an improved gross profit margin as well.

Great. Thanks, Brett and Andrew. Appreciate you taking my questions. I'll get back in the queue.

Thanks, Rahul. Our next question comes from Gabriel Leung of Bacon Securities. Please go ahead.

Hi, good morning, and thanks for taking my questions. Just a couple of things. First, maybe for Andrew, seeing your MD&A that Aspire looks like their contribution in the quarter is about $300,000. I believe it would have been for two weeks in the quarter. Can you just confirm that for me?

Sorry, yeah, no, we did see a... you know, a larger than anticipated contribution from Aspire in less than a month, so it's about a half a month. But yes, you know, we did see that contribution in the quarter from Aspire of that amount.

But you're saying that we shouldn't take that as a run rate?

No, not at the moment. Sorry. Yeah, no, there is some timely incentive payments that Aspire are entitled to. which we did see some of the benefits. So it is not an annualized run rate by any means. It was just the nature of the run rate plus some one-time items.

Gotcha. That's helpful. Thank you. Second, just from a cost perspective and from a CapEx perspective, I'm just curious of where you guys are at now in terms of building out the platform to get you ready for value-based. How much How much incremental cost should we see in terms of cash operating expenses and perhaps on the capex side as well as we go into the beginning of next year?

Yeah, so from that perspective, Gabe, I mean, really the largest cost, you know, we're seeing an impact already. And this is, you know, this is what we talk about the investments being made, you know, in that. And that is really, you know, primarily heads as well as, you know, some smaller additional costs with regards to investment costs. in particular, you know, Athena is the main component. But again, that is really more around the heads in terms of infrastructure that we're investing in. And so that's kind of why I keep coming back to, you know, discussing about, you know, salaries and ops and admin costs and kind of, you know, that reflection of that. One of the largest components is, you know, is the performance management team, you know, for the clinical sites. Pratt can kind of comment on that a little bit further. or it would be good to have Dr. Brekus, our chief medical officer, kind of take you through his team on that. But basically, that is what is happening there with regards to investment capital, in addition to the one-off projects that we're working on with regards to Athena implementation, as well as the NetSuite implementation from an EPR perspective. But again, from an incremental perspective, we really shouldn't see a large increment on top of what we were already incurring.

Gotcha. That's helpful. Maybe one last question. So with the pending divestiture of the legacy business, barring some material increase in organic growth, it's going to put you in a higher even a loss position. So I'm curious how you guys are thinking about how that will sort of reverse or resolve itself over the course of next calendar year as we move in the VBC You know, how quickly do you see those losses, you know, reversing or perhaps getting back to a more EBITDA neutral position?

Yeah, so thanks, Gabe. I mean, and so I think this blends to your last question, which is sort of where is our current cost structure from a primary care management perspective? So I think as Andrew mentioned, I don't want to rehash that again. He said it quite eloquently, but the idea that for us, investments made into the existing shared service model and where we expect to be from a participation in any value-based care arrangements for next year has largely been met pending a few areas here and there. Where we look at it now is our cost of operations plus our cost of being a public company plus our cost of making investments. How do you turn that around to a point where on a consolidated basis, you can seek profitability and We're fairly confident that – so we have to recognize two things. One, yes, the divestiture of the business does see a loss to gross profit margins, which will ultimately translate to EBITDA. And for us to be able to replace that will be a replacement of capital back into new acquisitions. So apart from organic growth alone, we do have a pipeline of deals that we expect to be able to act against with the capital coming in from the acquisition divestiture – or from the divestiture, sorry – And that allows us to contribute to the bottom line and those positive cash flows generated from those organizations will help us to eat into some of that even the loss that we would expect to see. The second part is from the operations itself. And so, you know, we do know that there are there continue to be areas in the organization where we can seek more cost and revenue synergies. We haven't really emphasized much in terms of patient acquisition growth as we've been focusing on integration. And so when you combine new patient acquisition combined with existing cost synergies from our centralized workflows that we're now putting into place, we do see the opportunity over the next 12 months to be able to bring that consolidated EBITDA line back into focus again and where we'd like it to be, even with the divestiture of the legacy business. For us, the legacy business never impacted our ability or urgency to have to do that on a consolidated basis from the primary care business either way.

That's really helpful feedback. That's for me. Thanks a lot. Thanks, Gabe.

Our next question comes from Yuma of Research Capital Corporation. Please go ahead.

Hi. Good morning, Brad and Andrew. Thanks for taking my question. Just to follow up on the prior question on the preferred stock offering, can you please talk about the potential size and indicative price? And you also talk about the rationale of using this preferred stock offering versus other non-dilutive financing instruments, such as convertible debt or loan or credit facility. Thank you.

Yeah. Thanks, Toby. So obviously the consideration for the perpetual preferred is based on a number of factors. As Andrew mentioned, the overall cost of capital for us in terms of other forms of capital, whether it be sort of more venture-based debt or convertible debt, is quite a bit higher and also comes with a lot more rigor around the contract of those deals that for us at this point in time was really important to make sure that the business was allowed to really build and transform itself without the need to have a lot of those restrictions or call it covenants in place. So the perpetual preferred for us is sort of the next best in terms of looking at non-diluted forms of capital. You know, obviously for us, keeping a clean cap table is really important. Not having any sort of structure built around these things as much as we can avoid it is really our priority. And again, the professional preferred gave us that opportunity to do so. In terms of sort of size and structure of the offering, I think some of that is still to be finalized and communicated through. But, you know, it is sort of within the low double digits in terms of capital looking to be raised in U.S. currency. But we're fairly confident that what we expect to do through the perpetual preferred and combined with the expected cash from the divestiture of the legacy business will put us in a fairly strong position to be able to continue to enact against the pipeline that we have here. And there are several LOIs that are in place today that we're working through and expecting to look at closing post the diligence period along with this capital plan.

And Toby, I'll just jump in quickly. I mean, I believe I heard you correctly. Sorry, you cut it a little bit. Well, I think you're asking about other avenues with regards for working capital, you know, with the divestment of the legacy business, you know, and the increased size in the primary care business. You know, my goal within 22 is to feel the market as best as possible to make sure once we reach a, you know, a critical mass level in terms of revenue for the primary care business, I can access other capital sources to offset some of the working capital needs that we may have. So I'll continue to explore that. But we're just not at the level, I don't think, from a debt perspective to be accessing debt or other instruments with regards to acquisition capital. Working capital is definitely an avenue for us, but not for any sizable acquisitions at the moment.

Okay. Thank you for that. Thanks, Toby.

This concludes the question and answer session. I would like to turn the conference back over to Mr. Shaker for any closing remarks.

Thanks, Ariel. I just want to thank everybody for participating in today's call. As usual, we hope that we've been able to convey what's been happening within Skylight over the last quarter, but also what we're most excited for moving forward. As always, a resource for us and for you is our website, skylighthealthgroup.com. where you can find more information about the company, contact details, should you wish to reach out to us. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.