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 second quarter 2022 financial results conference call. The results are for the period ending June 30th, 2022. 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 will hear a tone acknowledging your request. To withdraw your question, please press star, then 2. Should you need any 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, Tuesday, August 16, 2022, at 8 a.m., and will be posted to the Skylight Health's website within 24 hours of the conclusion of the call. I would now like to turn the meeting over to Skylight Health's Chief Executive Officer, Mr. Pradyam Shekhar. Please go ahead.

Thank you, Ariel. And a good morning to everyone, and thank you for joining us today for our second quarter conference call for the period ending June 30, 2022. With me this morning, I would like to introduce our new Interim Chief Financial Officer, Farouk Akhter. I've worked with Farouk for over four years at Skylight. I can say since his appointment, we've seen a dramatic improvement to the way finance integrates with operations. And the direct result of that has been a strong quarter where we have realized a number of cost-saving initiatives while maintaining revenue growth. We are glad to have Farouk in this role. I'll pass the baton on to him in a few minutes to review our financials in more detail. 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 care health 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 one-night solution to small and independent primary care practices looking to consolidate within a highly fragmented market And second, we aim to realign the reimbursement models within these practices to value-based care from traditional fee-for-services only. Under these models, focusing on populations including Medicare, it allows us 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. I am more than pleased with our performance in the second quarter. and proud of what our team has been able to accomplish year to date. This is no doubt a market with significant headwinds. In light of this, our teams have been able to focus heads down on operations, and as a result, we have made significant improvements to our cost basis, which will continue to reflect an improved adjusted EBITDA performance over the next two quarters. We continue committed to our goal of adjusted EBITDA breakeven by exit 2022. We have already been able to reduce our annual cost basis by over $10 million and expect further operational efficiencies to realize our path to break even over the next two quarters. With the acquisition of NeighborMD and our partnership with CHS, we've been able to accelerate our path to value-based care by three years. This is a massive step forward for the company. Moving ahead, we see the opportunity for growth in Medicare and Medicare Advantage. As part of this, we are now including a new reporting line called Capitation Revenue. This is a business where we as a provider group receive a global capitated fee per member paid on a monthly basis. Currently, that is about $1,000 U.S. on average per member per month or $12,000 U.S. per member per year. From this, we include medical expenses of all areas of healthcare, including hospital visits, emergency rooms, clinical and pharmacy prescriptions. These are typically included in the cost of sales, which is why the gross margins are lower in capitation than fee for service. Given that this is going to be a significant area of growth for us, I'd like to take a few minutes here to use the slides presented to be able to explain a little bit more about the Medicare opportunity, and more specifically, the economics behind Medicare and Medicare Advantage. So switching to the slides, for those on the call, I'll do my best to narrate through the slides but of course this is being recorded for later access. So just a quick definition of what Medicare is. Medicare is a federally funded healthcare program that is designed to provide care to seniors aged 65 years and older. When you turn 65 in the US, you become eligible for Medicare through either one of two streams, traditional Medicare directly with the federal government program or Medicare Advantage, which is effectively the program similar to traditional Medicare but administered through one of the private health payers. Medicare is usually divided into three parts, Part A, Part B, and Part D. Each of these represent a cost across Medicare for each member. Part A covers hospital expenses, Part B covers clinical expenses, and Part D covers pharmacy drugs and prescriptions. Every Medicare patient in the US is required to sign up on an annual basis and re-enroll on an annual basis into a Medicare program. We call this the annual enrollment period, which typically happens over an eight-week period between October and December. The Medicare member can elect to join a traditional Medicare program or can elect to join one or change an existing Medicare Advantage program with a healthcare payer. Using some of the terminology you're going to see during the course of this presentation and moving forward, we're going to cover some quick glossary of terms. Capitation. Capitation in our presentation refers to a fixed fee paid on a per-member basis to cover the cost of healthcare. In a global capitated fee, the capitation fee we receive generally includes the cost that will be falling within all three parts of Medicare. We'll define capitation either as a per-member per month, a PMPM, or a per-member per year, or a PMPY. In fee-for-service, we're talking about traditional Medicare payments where providers are, I'm not sure if the slides are passing through, but just in case you're not, I'm going to narrate through it either way. Fee-for-service, again, as we talk about, is traditional fee-for-service where each encounter is paid for on a per-visit basis. We're also going to use two definitions called the medical loss ratio and the Medicare risk adjustment. The medical loss ratio, MLR, represents the proportion of gross revenues spent on medical care for a patient. In this case, medical expenses will include all three parts of Medicare, hospital, clinical, and pharmacy drugs and prescriptions. The Medicare risk adjusted score refers to the payment methodology that is used to adjust a payment on a per member, per month, or per member, per year basis. The MRA is dictated by the diagnosis of the patient. The higher an MRA, typically the higher the per member per year, which then increases the funding we receive to provide care for that member. We'll spend a couple of minutes here talking about the Medicare Advantage economics, as I think it's relevant to those to explain, especially as we put context about how we're now setting a new benchmark for our gross profit margins. As we look on the left, you'll see a Medicare Advantage capitation model. On the right, you'll see a fee-for-service model. In revenue in Medicare Advantage, as I mentioned earlier, we receive the global capitation revenue, which amounts on average to roughly $12,000 U.S. per year. Compared to fee-for-service on a per-visit basis, we typically see an annual value of a Medicare patient at $400 per year. So we are already talking about values that are roughly 30 times greater in Medicare Advantage compared to fee-for-service. The cost of sales, as I've described, includes medical expenses across all three parts, which is typically not included in the cost of sales for fee-for-service. Cost of sales and fee-for-service is usually just a four-wall economics of a practice. Hence, you'll see a larger cost of sales attached to Medicare Advantage, 85 to 90% versus 50% for fee-for-service. The gross profit thus reflects that change at about 10 to 15% in a Medicare Advantage capitation plan versus 50% in fee-for-service. The 10 to 15% falls well within industry benchmarks. This difference, however, is in the dollar amount, as you can see in the bottom, in the gross profit contribution. Although you're recognizing a lower gross profit in Medicare Advantage, the 10 to 15% on 12,000 a year generates roughly $1,200 to gross profit contribution per member per year. As opposed to fee-for-service, we're at 50% on $400 a year you're generating $200 to the gross profit margin. This significant increase to gross profit allows us as an organization to look at better investments in healthcare for the patient, but also accelerates the bottom line as a result of the increased contribution to both revenue and gross profit. So as we present the slides further, you'll start to, and as Farouk reviews his financial performance, again, we believe our performance performed here is in line with our peers, and that we have opportunities to grow this margin with improvements in the way that we manage and coordinate care for our members. Adjusted EBITDA improved to $5.4 million loss compared to a $6.8 million loss in Q1. As part of the acquisition, there were several readjustments made and the transition of contracting from neighbor and B to Skylight, where neighbor and B recognized a historically larger EBITDA loss in the quarter. Excluding this, the adjusted EBITDA loss for Skylight would have been $4.9 million. This improvement is consistent with what we have previously communicated as part of our efforts to drive towards adjusted EBITDA break even this year. As consistent with our efforts to focus on where value is being placed today, we made the difficult yet conscious decision to delist Skylight shares in the NASDAQ. We uplifted on the NASDAQ a little over one year ago with the hope and expectation of a very different market than what we have today. While we delivered on M&A and growth, we unfortunately were not met with the expectations we had The market we entered is not the market that exists today across the board. Reward versus cost does not justify the continued listing for a company of our size at this time. Annual costs required to be a NASDAQ company can exceed $2 million annually. While not large for some companies, we believe that it's very relevant for us. Further, the value we see is not what we believe is required for future growth. As we expect to get to cash flow positivity in the coming quarters, our need for external capital decreases, allowing us to use our own cash flow for growth and M&A. We believe the cost savings we realize are better spent on growing the business. We see this as a positive step forward for the company, and ultimately one that will result in stronger fundamentals to drive valuation and shareholder value. So with that, I'll turn it over to Farouk to review the financials in more detail, and I'll be back with what's ahead for the rest of 2022 and upcoming 2023.

Thanks, Brad, and good morning, everyone. I'm glad to be here in this role with the company, working alongside the two co-founders. As Brad mentioned, we are very pleased with the company's achievements during the quarter. I will start off with a review of the income statement. Please note that my comparisons will mainly be with the prior quarter of Q1 2022. Revenue for the quarter came in at just over $16 million, which is more than double compared to $7.7 million for the previous quarter. Before explaining the entries, I would like to explain the alignment of companies' financial statement presentation of revenue with Crabb's earlier presentation on fee-for-service and capitated revenue. Until last quarter, the company reported the revenue in three line items. Clinic revenue, which was fee-for-service revenue and the primary source of revenue at that time, and two smaller revenue streams of contract research solutions and software. During the current quarter, these revenue streams have been consolidated and reported under one line item fee-for-service, and other revenue. During the current quarter, the company's revenue sources have been diversified with the acquisition of NMT. The acquisition not only brought more volume to our fee-for-service revenue, but also added a new source of revenue called capitated revenue. Capitated revenue includes capitation at risk and capitation not at risk. As explained by Pratt earlier, revenue rates and cost of services associated with capitation at risk are significantly higher as compared to the fee-for-service model. Capitated revenue is the second line item of revenue in the income statement. With the revenue line items explained, let me explain the increase. Fee-for-service and other revenue during the quarter was $8.7 million, compared to $7.7 million in the last quarter, an increase of 13%. out of which 4% is due to organic growth. Capitated revenue during the quarter was $7.4 million, which is solely contributed by the acquisition of NMD in May 2022, incorporating two months of revenue during the quarter. It is pertinent to mention here that we are investing significant efforts to increase capitated revenue. A majority of future growth will be achieved in this segment. Our teams are working diligently to increase memberships from both Medicare and Medicaid Advantage programs. Prad would explain these growth opportunities in more detail in his presentation. The cost of sales and related gross profit margin percentage for the quarter was $12.1 million and 25% respectively, compared to $4.3 million and 44% respectively in the last quarter. Again, leveraging the explanations already provided by Prad, I would build some context here. Cost of sales for fee-for-service and other revenue mainly comprises of service fees. paid to doctors and nurse practitioners, medical billing costs, and medical supplies consumed at the time of service. While the cost of sales of capitated revenue comprises of all the costs associated to the medical care of the members, irrespective of who provided the service. Therefore, services provided to the members by external parties outside of Skylight clinics are also recognized as cost of sales. Due to this, the cost of capitated services are significantly higher compared to the fee for service and other revenues. The margins in Q2 2022 were lower due to the introduction of capitated revenue. The company believes the gross profit margins are in line with the industry standards and will establish a new baseline as the capitated revenue segment is expected to contribute significantly to growth in the future. Although the gross profit margin percentage is lower, but the gross margin dollar contribution is significantly greater in capitation. To further improve the margins, the company has identified three major cost control areas where the company can achieve cost savings and reduce the medical loss ratio, the MLR. First being hospital admissions, then medical utilization of services, and high-cost pharmacy subscriptions. The company also expects to see further improvements in its cross-profit margin through increased marketing efforts to increase members and also or accurate medical coding for its life at risk to improve the MRA, hence pulling all three major levers to further improve the results. Moving on to net loss. Net loss from continuing operations during the quarter was $5.2 million, compared to $8.3 million for the last quarter. The significant improvement in Q2 2022 was primarily due to cost rationalization initiatives of the company, further discussed with adjusted EBITDA analysis, which is next. Adjusted EBITDA was a loss of $5.4 million compared to a loss of $6.7 million for the prior quarter, an improvement of 19%. Normalizing the Q2 adjusted EBITDA by taking out the impact of NMD acquisition, loss for the quarter was $4.4 million, an improvement of 33%. All of this was achieved due to extensive cost rationalization efforts across the company, which will be fully realized by the end of Q3. When we acquired NMT, we identified significant opportunities to rationalize the cost and take advantage of synergies. These opportunities are being actively tapped. However, these initiatives take around 90 days to fully materialize, and these will be fully realized in Q3. We anticipate our operating costs to decrease in the coming quarters, considering the cost rationalization initiatives being implemented and expected improvements to revenue organically through MA contracting and other efforts. The company continues working towards adjusted EBITDA profitability by the end of 2022. Moving on to the balance sheet and cash flow now. We closed the quarter with a cash balance of $2.3 million compared to $11.7 million last year. Main changes were $10 million cash was used in operations during the first half of the year. Cash used in operations for only quarter two is $3.5 million, which is a significant improvement in operating cash flow compared to prior quarters. Operating cash was also used in the quarter to pay for work-down costs and one-off charges related to cost rationalization initiatives. The revenue collections also improved significantly during the quarter due to revenue cycle improvement initiatives. $9.9 million cash was used in investing activities primarily on the acquisition of NMT. $11.6 million net was drawn from the LLC debt facility slightly offset by $1.5 million paid for the principal and interest on lease and dividends paid on preference shares. The company is in the process of raising financing by issuance of convertible debentures to improve the short-term cash provision. At the same time, cash conservation is a top priority. With that, I will turn it back to Prad.