Newtopia Inc.

Greetings. Welcome to Newtopia Inc. Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I would now like to turn the conference over to Kimberly Estrican, Investor Relations. Thank you. You may begin.

Good evening, and welcome to Newtopia's second quarter 2022 earnings conference call. Joining me today are Jeff Ruby, founder and chief executive officer, Colin Swenson, chief financial officer, and Laura Dodo, chief growth and operating officer. Please note that today's call is being broadcast live over the internet and will also be archived for both telephone and online listening upon completion of the call. Details on how to access the replays are available in the company's second quarter press release issued this afternoon and can be found on the investor section of Newtopia's website at www.newtopia.com. Before we begin, let me remind you that certain matters discussed on today's call or answers that may be provided to questions asked during the Q&A portion of the call could constitute forward-looking statements, which are subject to certain risks and uncertainties relating to Newtopia's future financial and business performance. Actual results could therefore differ materially from those anticipated in such forward-looking statements. Newtopia is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance upon those statements. The risk factors that may affect results are detailed in Newtopia's Periodical Results and Registration Statements, which you can access via the CDAR database at www.cdar.com. Also, please note that all figures stated on today's call are in Canadian dollars unless otherwise noted. I would now like to turn the call over to Jeff Ruby, founder and CEO of Newtopia. Please go ahead, Jeff.

Thank you, Kimberly, and thanks to everyone for joining us today on our second quarter 2022 earnings conference call. I'll begin today's call with an overview of our financial performance and strategic and operational highlights for the quarter. I'll then turn the call over to Colin Swenson, our Chief Financial Officer for a more detailed discussion of the second quarter results. Lara Dodo, our Chief Growth and Operating Officer, will conclude today's discussion with commentary on our progress against each of our core growth drivers. Q2 was a solid quarter for Nutopia and one where we made notable progress with both current and prospective clients. Today, we have a very strong pipeline of new health insurer business opportunities in front of us, that are tangibly moving toward contracts. And we are as excited about the future of Newtopia as we have ever been. Newtopia generated second quarter revenues totaling 2.5 million, consistent with the second quarter of 2021. For the first six months of 2022, revenues of 5.4 million were up 5% from 5.1 million in the first half of 2021. Gross profit margin improved to 47% for the quarter, up from 42% in the prior year period. We also continued to see momentum in our industry-leading participant engagement, with the total number of engagements reaching 38,000 participants for the second quarter in a row and 76,000 for the first half of the year, a new company record. The record levels of engagement during the first half of 2022 bode very well for the back half of the year and particularly looking into 2023. Our strong engagement level continues to be driven by low churn rates and high participant stickiness, which surpasses that of any other health tech company focused on behavior change. After 12 months as part of the Nootopia platform, 70% of our participants remained engaged. Take that even further, after 24 months, 58% of our participants remain engaged. When we incorporate innovative behavioral economics design into the offering, the stats are even more impressive, at 86% engaged after 12 months and 83% engaged after 24 months. Employee and member engagement is the most important ingredient to building and stacking durable habits in order to prevent slow and reverse chronic disease. We believe we will be able to further enhance those figures going forward by leveraging our new platform. Subsequent to the end of the quarter, in July, we launched a new and improved platform that includes a state-of-the-art participant's experience for habit change and enhanced participant communications and nudges, which help create and enable the personalized programs that are core to Newtopia. Along with improving participants' experience and stickiness, the platform should also have a positive impact on our financials. Our new engagement platform will drive operational and technological efficiencies, so that we can enhance our tech-enabled service ratios that will ultimately result in expanded gross margins. Colin Swenson, our CFO, will discuss that topic in more detail. Newtopia is sitting at an inflection point. We have a new set of client health plans on the horizon and an opportunity to enhance execution with our new and existing clients using our upgraded technology, which will improve participants' experiences, increase the degree of digital engagement, and yield even greater operational efficiencies. Importantly, we are seeing encouraging signals that our current employer client base has returned to organic growth. Our employer clients are seeing the value of Newtopia's habit change platform and looking to roll out Newtopia as a benefit across greater portions of their employee base. This motivation is in part driven by the quick rise in health insurance costs. According to a study from the Centers for Medicare and Medicaid Services, National health spending in the United States is expected to grow 4.9% annually through 2024, and then 5.3% per year from 2025 to 2030. The biggest jump in healthcare expenses, the study found, would be in private insurance, followed by Medicare and Medicaid. Utopia is a proven resource to both private and public health insurers, and as companies and other entities look to mitigate rising healthcare costs, our personalized programs to prevent slow and reverse chronic disease have become one of the key answers to their troubles. Nothing in the macro environment suggests that self-insured employers are holding back when it comes to continuing to offer their employees benefits, such as Newtopia, that will result in significant cost savings, particularly when inflationary concerns are top of mind. In addition to cost savings, Newtopia has the potential to be a revenue driver for emerging health plan clients, as we leverage the trusted relationships formed between inspirators and participants to fill gaps in care and positively impact the quality metrics health plans, and in particular Medicare Advantage, so deeply rely upon for ongoing funding of their operations. Laura will speak to this theme further on in today's call. Along with increasing penetration into existing clients, we continue to expand the suite of products that make up Newtopia. As we spoke to on our last call, in June, we rolled out an expanded partnership with a brand name apparel company and global leader in jeanswear to provide support to its employees who are self-identifying as struggling with mental health. Thus far, the rollout has gone as anticipated, and we look forward to continuing to share more details as we have a more robust data set to analyze. Our continued current client expansion also includes our partnership with one of our long-standing Fortune 50 clients, who we are excited to begin servicing in new geographic markets at the end of Q3. Turning back to our new business pipeline, which as I mentioned is very strong, we remain in negotiations and are making great traction with six leading Medicare Advantage and U.S. health plans. While the contracting cycle continues to be longer than initially anticipated throughout the industry, we expect new health plan clients will have a positive impact on our top line moving forward, particularly into 2023. Overall, when assessing Neutopia's results, it is important to remember that we do not necessarily run our business, nor expect growth, on a traditional quarterly basis. Instead, we are tied to implementation and benefit cycles that take place seasonally throughout the year, ideally on a timeline when employees and members are learning about their health risks and proactively making decisions about how to avoid chronic disease and live their best lives. As such, we look at our results and consider our company's progress annually rather than quarterly. We believe this view on the business provides a more accurate view of our progress than neat 90-day report cards. From a financial reporting perspective, we've had a solid first half of the year. However, we've also made great progress behind the scenes when it comes to business development. We look forward to our new business generation efforts showing up in our financials over the next two quarters and especially as we enter 2023. With that, I'll turn the call over to our CFO, Colin Swenson, to speak to our second quarter results, as well as to provide some context on our outlook for the remainder of 2022. Colin, over to you.

Thanks, Jeff. It's great to speak with everyone again today. Our results for the second quarter were in line with our expectations. As Jeff noted, revenue for the quarter totaled $2.5 million, consistent with the prior year period. On a year-to-date basis, revenue for the first six months of 2022 increased 5% compared to the prior year period. The year-over-year growth in revenue was driven by strong participant enrollments during the first three months of 2022 and the ensuing growth in recurring engagement revenue from the buildup of our participant base. Enrollment fee revenue, or revenue related to lower margin welcome kits, was approximately 13% of total consolidated revenue for the second quarter, as compared to 20% in the prior year period. With regards to welcome kits, it's also noteworthy that during Q2, amendment contracts were accepted by existing clients to pass along increased costs for items such as activity trackers. Retention and engagement were also strong, with participant engagements totaling 76,000 for the first half of 2022, up 20% year-over-year for the same period. Gross profit totaled $1.2 million for the second quarter of 2022, an increase of 11% from the prior year period. As a percentage of revenue, gross profit was 47% compared to 42% in Q2 2021. Improvement in our gross profit margin was a result of a higher proportion of enrollments during the quarter. Beyond increased enrollments, we also anticipate that the launch of our new technology platform and app will help improve our gross margin over time. One of the key reasons behind investing in a new platform was to improve our service ratios of Inspirator to Participant while still providing high-quality service. At present, that ratio is roughly one inspirator to just over 200 participants, which drives about 60 basis points of margin in our monthly recurring subscription revenues. We are looking to lean in on this new technology to move from one inspirator per 200 participants to one inspirator per 350 or more participants over time, which would move our gross margins from a 60 basis point contribution to subscription revenue to a low to mid-70s basis point margin contribution to subscription revenue. In other words, by flexing our operational efficiencies, we should see a corresponding impact on margin over time. From an expense standpoint, selling general and administrative expenses totaled $2.2 million for the second quarter, which included roughly $866,000 in sales and marketing expenses and another $1.4 million in G&A. a decrease of 6% and an increase of 25% year-over-year, respectively. Part of the 25% year-over-year increase in general and administrative expense was higher employee compensation costs, with the addition of senior level resources in finance and operations, together with higher advisory and consulting fees. We continue to refine our sales and marketing expenses year-over-year in response to market conditions. Despite the declining spend, Our sales and marketing efforts are yielding a higher activity return per dollar spent than ever before. We do, however, expect these expenses will grow over time as we build upon our new business pipeline and generate additional revenue opportunities that will likely carry certain startup costs. Technology and development expenses totaled roughly $843,000 for the second quarter, as compared to about $982,000 in the prior year period. This 14% decrease is the result of reductions to the product development team and research costs as we approach completion of the previously mentioned Utopia 2.0 engagement platform. Adjusted operating expenses, which exclude share-based compensation, increased by 3% to total $3.1 million for the quarter, compared to $3.0 million in the prior year period. Capital expenditures totaled $0.4 million for the quarter and were primarily made on the aforementioned engagement platform. As a reminder, as development expenditures are capitalized, they will be amortized over their lifetime, though any increase in expenses in the future will be more modest than our growth in revenue. As we move towards the implementation phase of our platform, we anticipate that costs will diminish to a monthly maintenance fee. Net loss was $2.2 million for the quarter, or a loss of $0.02 per diluted share, compared to a net loss of $2.5 million, again a loss of $0.02 per diluted share in the prior year period. Turning to our balance sheet, cash as of June 30, 2022, was approximately $0.7 million. We also have access to an additional $3.5 million in equity raised via private placement at the end of April. in addition to a $7.5 million revolving credit facility, of which we have $2.9 million undrawn. We're confident in our current cash resources to continue funding our ongoing expenses and growth initiatives, and we remain committed to our goal of exiting the year cash flow positive from operations. I'd now like to provide an update on our outlook for 2022. As noted in our earnings press release issued this afternoon, We continue to anticipate achieving full-year revenue growth for 2022 over 2021. Based on our year-to-date results, growth in our top line will be more heavily weighted toward the second half of the year. With expanded business development efforts and a more efficient tech-enabled platform, we anticipate onboarding a new set of health plan clients, in addition to continuing to grow organically with our current customer base of self-insured employers to drive increased top line growth. Thanks again for your time. I'll now turn the call over to Laura to speak further about these growth opportunities.

Thanks, Colin. As you heard from both Jeff and Colin, we are very pleased with momentum in our core business and even more excited about the new business opportunities ahead. Today, I will provide you an update on the three main drivers of our growth plan, which include, one, adding new distribution with employers, health plans, and alternate risk-bearing entities. two, growing our existing employer clients, and three, increasing product density. Employer sales season began in April, and the second quarter delivered strong momentum and an increased willingness for employers to consider the purchase of additional benefit options, notably with a focus on diabetes, musculoskeletal, and mental health, all categories that Neutopia has a proven history of either directly or indirectly improving. Q2 post-COVID back-in-person sales season has been all about the value of niche pay-per-play events and the precision of senior relationships. Sales season 2022 was a reminder that relationships and influence, they matter, as evidenced by our Q2 pipeline growth. The team is now actively working to convert Q2-sourced opportunities into signed deals. We'll keep you posted. Health plans have shown similar behaviors and are responding at a higher rate to niche events and targeted influencer introductions. This was especially evident during the American Health Insurance Plan's annual conference, which took place in Las Vegas in June. This was the first time the conference was back in person since the beginning of COVID. Neutopia presented on how behavior genetics impact engagement and outcomes. a discussion that was supported by an abstract that we published and was published by the American Society of Human Genetics. In this publication, Neutopia demonstrated that simply by taking our genetic test, a participant will lose 25% more weight or have 1.3 times higher odds of achieving the 5% clinically significant weight loss target. Another topic that is resonating with our prospective health plan clients specifically Medicare Advantage, is how Utopia could positively impact metrics that are used towards a planned star rating. Metrics such as quality measures, satisfaction surveys, and quality improvement activity, known as QIA. As a basic introduction, in the U.S., the Centers for Medicare and Medicaid Services, the CMS, rate health plans on a five-star quality system. As a health plan's star rating increases, so too does the amount of government funding available to the plan. Without getting into too much detail, one star represents poor outcomes and performance, and five represent excellent outcomes and performance. Star ratings are released on an annual basis and reflect the experiences of the health plan's membership. An increase of just half a star can equate to millions of dollars worth of additional funding to a specific plan. So as a practical example, Neutopia's inspirators form trusted relationships with members. Inspirators can leverage care gap reporting and encourage members to receive necessary screenings and go to the annual physician wellness visits and other such activities. Utopia is well positioned to reduce cost of care and increase revenues through increased health plan utilization and improved member experience. Digging into our second growth driver, organic growth from existing clients, Jeff spoke to the ongoing strength in our monthly participant engagement. Now, an interesting insight into engagement has been the impact of behavioral economics. which has yielded engagement rates as high as 88% across the first year, versus non-incentivized participants with engagement rates that average between 70 and 76% in year one. Another insight has been the growth of engagement revenues from tenured participants, which has been driven from program innovation. Our innovation team has been at work helping to deliver fresh programming for participants 24 months and older. including offering things such as specialized group coaching on nutrition, exercise, and mental well-being. These sessions have enabled us to pilot with real-world audiences a blend of individual and group sessions. It has demonstrated re-engagement of tenured participants and with corresponding improved health outcomes. We will continue to explore the optimal blend of one-on-one coaching and group sessions as a lever towards the 1 to 350 goals of inspirator to participant ratio. Our third growth driver is increasing product density, which we continue to evolve in the second quarter through our mental health client launch and an upcoming anniversary of a diabetes reversal pilot. This reversal pilot has generated engagement levels above our book of business at 83% across the year, and outcomes above our book of business average, specifically with A1C as the marker of diabetes severity, dropping a full 1.1 point for the most severe. This is a big deal from a data impact, and we look forward to working on expansion of our reversal programming. As part of Q2 product upgrades, we recently debuted and launched a new brand nudge and corporate website. Our new website is illustrated of the expanded product offerings we provide our self-insured employers, health plans, and individual clients. Looking at self-insured employers, for example, we offer the employees six unique program verticals, which are aimed at preventing, slowing, and reversing chronic diseases, including diabetes, mental health ailments, hypertension, weight management, metabolic disease, and musculoskeletal disorders. These verticals have proven financial and medical results, which are well documented on our website and by the studies we've published. Let's turn to technology. A new engagement platform and app will improve the quality of the communication experience between participants and our inspirators by enabling increased touch points. Participants will take part in regular emotional check-ins, interactive group coaching sessions, and can easily self-schedule future appointments on the app. To ensure participants are staying on track, we've created omnichannel nudges to remind them on all their different devices to check back in with the Inspirator. Participants also now have access to Neutopia's proprietary habit change index, which they can manage to see their progress and recognize their achievements. Imagine not having to wait to see the scale change, which can be quite demotivating. Now, They can see their improved habit change score somewhat real-time around nutrition, exercise, and well-being. We know that downstream and improved HCI should correspond to improve health outcomes. The platform will also be generating real-time data analytics for Newtopia, which we will leverage to continuously improve how Newtopia delivers personalized experiences. 2022 has been a year of heads-down hard work to build momentum and a foundation for continued growth. The momentum we are starting to see over Q2 is encouraging. We're shaping up for a very busy back half of the year with additional conferences and many business development opportunities in the pipeline. With that, I'll turn it back to Jeff to close out the call.

Thanks, Lara, and thank you all for joining us today on our second quarter 2022 earnings conference call. We are confident that the business is well positioned to capitalize on the current opportunity and are excited to share more of our successes along the way. Before opening the call to your questions, I want to thank our entire team at Newtopia for your strong efforts during the first half of the year. Our new platform launch was a long but fruitful endeavor, and we could not have done it without each and every one of you. With that, we'll now open up the call to your questions. Operator?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Prasath Pandurangan with Bloomberg. And please proceed.

Hi, good evening. Thanks for taking my questions. Firstly, you've talked about a targeted low 70-bit gross margin on subscription revenues with the new platform. What would this mean for overall gross margins? Would they be north of 60% or would that be a little too optimistic?

Hi, Prasad. Thank you for the question. I'll start and then I'll pass it over to Colin. We're, first of all, really excited about the opportunity with the launch of our new platform to be able to begin flexing that operational efficiency. As a reminder, we've been focused on quality and have been delivering it both on the engagement and outcome side, but now with the technology capability in hand, really begin to see the opportunity to begin flexing up that efficiency. And I would say the movement from 60 points of margin on the individual basis to the low 70s is something in sight. With that, I'll maybe hand it over to Colin just to specifically answer your question about what that does to the overall cost structure.

Yeah, thank you, Prasath. We historically have been in the 40s to the low 50s on gross margin, and certainly we do feel that there's a path to achieve 60% gross margin. We are weighted down, of course, by the mix of our welcome kits, which are significantly lower margin. And with our new wins from the pipeline, there will be potentially a higher mix of welcome kits for new participants, but we're certainly very excited about the potential of the platform and do feel that we have a path to achieve significant improvement in our gross margins.

So, what's the timeline that you're looking at to improve this inspirator participant ratio to where the gross margin should be impacted?

Thanks again for the question. Yeah, I'd say while we're excited, we also, we don't want to rush, you know, just in light of the fact that we've just announced completion, we're now moving into the implementation phase of the new platform with our existing clients. And certainly that's something that we are going to do with full, you know, full communications to our clients and making sure that as smooth a transition process as possible. And then, you know, I would say, you know, we should likely start to see some improvements, you know, potentially toward the, you know, latter part of this year and then in earnest through 2023. But, you know, keeping in mind that because we are a value-based partner and because we do go at risk for both our engagement fees and our outcome fees, We do want to make sure that as we're pushing the operational efficiency, we're also not decreasing the quality of engagement, which is industry leading today, nor the quality of our outcomes, because that would harm us on our success fees. And so I would say, Prasath, this is going to be an exercise in slow and steady, but also really determined to fully leverage the capabilities of the technology and push those margins forward. you know, as quickly as we can without sacrificing quality.

That sounds good. And my next question is about the outlook. The outlook mentions full year revenue growth and also the company being at an inflection point. It would be great if you could quantify these a little bit more in terms of what would be a broad range that you envisage for the second half of this year and for 2023. Thanks.

Yeah, thanks again, Prasad. Maybe Colin, I'll just hand that one over to you.

Yeah, we're certainly, although Q2 was in line with our expectations, we've known all along through the year that the back half is where we're going to see dividends on a lot of the investments and activities behind the scenes that we've been working on. You know, we don't give future guidance specifically But I certainly will continue our messaging that we'll see revenues in 2022 above and beyond 2020 and 2021. And again, message that 2023 is really where we see a lot of the proof of concepts that are in the pipeline evolving to commercialization. And certainly we're most excited looking to fiscal year 2023.

Great. Thank you.

We have reached the end of our question and answer session. I would like to turn the conference back over to Jeff Ruby for closing comments.

Thank you again for joining us on our first quarter earnings conference call and for your continued support of Newtopia. We look forward to speaking to you on our Q3 call in November and wish you a fantastic day and evening. Good night.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.