Earnings Call Transcript - MRAI Q1 2023

Operator, Operator

Good day, everyone. Thank you for standing by. Welcome to the Marpai First Quarter 2023 Earnings Conference Call. All participants are currently in a listen-only mode. Please also note, today’s event is being recorded. At this time, I’d like to hand the floor over to Simon Li, Vice President of Marpai. Please go ahead.

Simon Li, Vice President

Thanks, operator. Welcome, everyone, to our first quarter 2023 earnings call. With me on the call today are Marpai’s Chief Executive Officer, Edmundo Gonzalez, and Chief Financial Officer, Yoram Bibring. Before turning the call over to Edmundo, please note that we’ll be discussing certain non-GAAP financial measures that we believe are important when evaluating Marpai’s performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and the reconciliations thereof can be found in the press release that is posted on our website. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause the actual results for Marpai to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available at marpaihealth.com. And with that, I will turn the call over to Marpai’s CEO, Edmundo Gonzalez. Edmundo?

Edmundo Gonzalez, CEO

Thanks, Simon. Good morning, everyone, and thanks for joining us. It’s a pleasure to be here to discuss the financial results of the first quarter of 2023. As I’ve done in the past, let me just take one minute for some of you that are joining for the first time to review who we are and our strategy. Marpai is a technology company that is reinventing how employers around the country provide health benefits to their employees. We work with self-insured employers that elect not to buy traditional health insurance for their employees, but rather they self-insure. We create and manage the health plans for our clients. Almost 100,000 people carry a Marpai card in their wallet or often a digital card on the Marpai app, which they present at doctor’s offices, pharmacies, or hospitals around the country, just as one would with health plans from a large insurance company. Now we make money from management fees related to administering our clients’ health plans, which include managing all the health care claims of their employees, reviewing these, and eventually paying them on behalf of our clients. We also have a portfolio of ancillary services that contribute to our revenue. The ancillary services include care navigation and care management for members of our plans. We refer to employees of our clients and their families as members, and these services often make a difference in their health care journeys. For almost 200 clients across the country, Marpai’s value proposition is clear. We save them money by engaging our members proactively in a manner that improves their health, and as I’ve said before, healthier employee populations cost our clients less. That’s what we do. We reached $9.7 million in revenue during the first quarter of 2023. Our EBITDA was negative $6.7 million, but excluding severance and unused facilities, it was negative $5.9 million. We’ll report on this metric going forward as it gives our shareholders a view into the effects of our consolidation activities and our drive towards profitability. During the first quarter, we continued to execute our integration plan for Marpai health – for Maestro Health, forgive me, an acquisition we completed in Q4 of 2022. We have eliminated duplicate positions, consolidated contracts, eliminated most contractors, and outsourced certain functions. All of this has been in pursuit of greater efficiency given our new scale of over 40,000 employee lives. We are executing as per our plan and per our budget. Given the cost of severances and other breakup costs, public investors will begin to see the effects of this consolidation in Q2 and even into Q3. Our goal is to reach the scale required to achieve a profitable EBITDA level of operations within 2024. How are we doing this? Well, our focus is simple: first, maintain our expense budget and adjust quickly if the top line is falling behind. Mind you, our revenue is quite visible given the nature of our contracts. Second, sell to customers we already have. There’s a great opportunity to upsell products to clients we already have. For example, many of our legacy Marpai clients before the acquisition currently do not have care management provided by us. But with the acquisition of Maestro, we now have an internal care management company. We also have MarpaiRx, our own pharmacy benefit manager. There’s plenty of product for us to meet or even exceed our goal of having at least $50 per employee per month for every life we manage. Some investors have asked me what they should be looking for in terms of key metrics. I would look at three things. First, as I mentioned, our adjusted EBITDA loss, excluding these discontinued operations. This will show you our journey towards profitability. Supporting metrics, of course, are employee lives we manage, which we report, and the net revenue per employee per month that we earn. In closing, let me say a word about the future. During our last call, I described how we’re leveraging AI and other technology to build a unique ecosystem of value-based care vendors. These are the best clinical vendors out there. They represent evidence-based solutions that make a difference in our members’ lives. These members may have chronic conditions like diabetes. We have gathered these specific solutions to provide a marketplace for our members. What’s our role in all this? As I’ve mentioned, think of a mini Amazon in health care. We point you to the right evidence-based solution that will deliver results, such as lower A1c, for example, for you as a member. But for our clients, the self-insured employers, it means lower overall costs of health care, as healthier populations of employees and their families, of course, cost less. And these vendors are also value-based, meaning they have put their fees at risk against the success of these programs. We are deploying this ecosystem throughout our joint customer base during 2023. I invite you to watch this space. And now let me turn it over to Yoram Bibring, our CFO, for a more detailed view of our financials in Q1. Yoram?

Yoram Bibring, CFO

Thank you, Edmundo, and good morning, everyone. Our revenues for the first quarter of 2023 were approximately $9.7 million, $400,000 higher than the high end of our guidance, which was $9.3 million, and $2.1 million higher than our revenues for the fourth quarter of 2022. The main reason for the increase in revenues from the fourth quarter was that Maestro’s revenues were included for two months in the fourth quarter versus three months in the first quarter of 2023. As of March 31, our total number of employee lives was 41,571 compared to 42,107 at the end of 2022. During the first quarter, we added new customers representing approximately 3,300 employee lives and lost customers with approximately 3,300 employee lives, and our existing customer base reduced its workforce by about 500 employee lives. When any service provider is acquired, some customers view this as a reason to test the market. Indeed, most of the churn was within the Maestro legacy customer base. The transaction also impacted our ability to close new deals because many potential customers would shy away from signing up with a company that is in the midst of an integration project. Overall, we are happy that we were able to keep our customer base relatively stable, and we believe that by the end of 2023, where the next major round of renewals and new sales occur, all the concerns of the existing customers and the potential new customers will no longer be relevant as the integration would be over. Moving on to expenses. I will be comparing first quarter 2023 expenses to the fourth quarter 2022 expenses. Cost of revenues historically included cost of processing and adjudicating claims, customer service costs, and amounts charged by third-party vendors for their services that we resell to our customers. With the acquisition of Maestro, we are now also providing care management services delivered by our nurses and cost containment services that have a labor component as well, and all these costs are now included in our cost of revenues. Our cost of revenues for the first quarter, excluding depreciation and amortization, were approximately $6.4 million or 66% of revenues versus $4.8 million or 63% of revenues in the fourth quarter. Our gross profit was $3.3 million or 34% of revenues in the first quarter compared to $2.8 million or 37% of revenues in the fourth quarter. We expect to have some volatility in the gross margin from quarter to quarter as not all our revenue streams have the same gross margin, and some of them, like cost containment, for example, are more inconsistent in nature. Our first quarter operating expenses, not including cost of revenues, depreciation and amortization, and stock-based compensation, were $10 million, an increase of approximately $200,000 compared to the fourth quarter when these expenses amounted to $9.8 million. Included in our first quarter expenses are approximately $800,000 related to severance and unused facility costs, which Edmundo mentioned. Since Maestro expenses were included for two months in the fourth quarter and three months in the first quarter, it is hard to compare the two quarters. Starting in the second quarter, the figures will become much more comparable on a sequential basis. We’re expecting to see a reduction in our ongoing operating expenses, which should exclude the segment’s costs and the cost of unused facilities starting in Q2 and continuing throughout the year. Operating loss for the first quarter was $8.5 million compared to an $8.9 million operating loss for the fourth quarter. We believe that operating loss, excluding the severance costs and costs of unused facilities will improve sequentially every quarter going forward. In the first quarter, we recorded $388,000 of noncash interest expense. This relates to the amount we owe for the acquisition of Maestro, which we booked based on the present value of the purchase price. We will continue to accrue this noncash interest quarterly until the purchase price amount is fully paid off. Our net loss for the first quarter was approximately $8.9 million or $0.42 per share compared to a net loss of $8.5 million or $0.41 per share in the fourth quarter. Excluding net interest expense of $401,000, stock-based compensation of $702,000, and depreciation, amortization, and asset write-off expenses of approximately $1 million, adjusted EBITDA for the first quarter was a negative of approximately $6.7 million compared to a negative of $7 million for the fourth quarter. As Edmundo mentioned, the $6.7 million included approximately $800,000 relating to severance and unused facility costs, as well as approximately $1.5 million invested in the value-based care platform. Moving on to guidance. We’re not changing our 2023 full-year revenue guidance at this point and expect second quarter revenues to be in the range of $9.5 million to $9.8 million. Before I turn the call back to the operator, I just want to recap the secondary that we completed in April. We issued 7.4 million shares at a price of $1 per share. Net proceeds were approximately $6.4 million after expenses and as per our Maestro purchase agreement, 35% of the net proceeds will be used to reduce the debt to the seller, and the balance will stay with the company. And with that, we will open the call for questions.

Operator, Operator

Our first question today comes from Allen Klee from Maxim Group. Please go ahead with your question.

Allen Klee, Analyst

Hello, good morning. I heard you say that potential new customers were waiting until your integration project was complete. To follow up on that, could you discuss your strategy with third-party insurance brokers to try to grow new business? And maybe are you planning a broker conference this year? And what type of feedback do you get from the brokers about what they’re looking for to consider recommending you to a new customer? Thank you.

Edmundo Gonzalez, CEO

Thank you for the question, Allen. It’s Edmundo. Look, in all acquisitions, especially at this scale, people tend to wait a bit. Thankfully, I think this is behind us. This is really related to January 1 of 2023. We continue our outreach with our sales force. The channels are, obviously, very much active. At the end of the day, people want two things. I think, first, a unique solution, something that they can discuss, which we certainly have. I’ll remind everyone that with the acquisition of Maestro also came a lot of wonderful products that have, of course, increased the value proposition to clients from the broker channel. Obviously, it also increases their potential to make a commission and revenue from these clients, all in one package. So I do believe the solution itself is what drives the sale. We are working very hard not only with our current clients but with new clients to communicate that and we continue to work with some of the largest brokers out there and essentially working towards a January 1 renewal deadline. Additionally, there is a tremendous amount of interest in business here from smaller clients. Why is that? As you know, the ACA mandates that small businesses above 50 employees have insurance. The issue is that a lot of businesses that traditionally had 75 or 100 employees have been fully funded, meaning they buy traditional health insurance. Due to the rising cost of these products that are great, by the way, I’ve been a consumer of these in the past, and because of the rising costs, many small businesses just can’t afford them anymore. So you’re seeing a massive wave of customers turning to self-insurance or self-funding for the first time. That’s certainly a trend we are leaning into. Many of the new lives we’ve received in the last few quarters have fit that profile, which is very exciting. First, because of the volume, yes, an individual client may be smaller, but they are numerous, and their decisions are not necessarily a year out or three quarters out; they happen more like 30 days out. So it’s very exciting. The industry is being shaken a bit by this trend.

Allen Klee, Analyst

That’s great. Thank you. I was also trying to think about your new programs that you’re offering regarding chronic diseases. I’m trying to gauge how much revenue you can generate from these initiatives and if any of that is reflected in your 2023 numbers. I did some rough calculations in my mind, but I’d rather hear how you think about it. Generally, if you’re saving customers money and they’re offering something for that, some of the savings gets allocated to you, which mostly would drop to the bottom line. Is there a way to think about when that might scale up?

Edmundo Gonzalez, CEO

Yes, yes. And Allen, just for others, I think what you’re describing is the revenue related to ancillary products and very specifically to our value-based care initiatives. First and foremost, I believe value-based care is the future. It’s only just scratching the surface right now in commercial health care, meaning commercial insurance, or what companies buy. This is the standard in the Medicare world, with Medicare Advantage. But we’re really at the forefront in terms of bringing these solutions to the commercial world. Now what does this mean for us? First and foremost, we have to deliver this value in a very meaningful way to our members and by extension to our clients. Our members must experience value in terms of health care, meaning did my A1c go down? Did my back pain improve? We’re measuring real human outcomes. Now what that translates to for the client is fewer claims or less costly claims. Our partners, like Virta, for example, have extensive data on effectiveness, meaning how they deprescribe specialty medications because patients are getting better, thereby eliminating the need for these medications that cost the programs or the plan a lot. These are very exciting times, as the cost improvements here are certainly not achieved by simply providing cheap health care or less health care; the reduction in costs is because human health outcomes are improving. So that’s very exciting. Now how we make money through this is we act as a matchmaker. Essentially, we receive a fee from the vendor as we connect them with our members. Why? Because we’re essentially eliminating their customer acquisition costs. Our members are ours, and we’re very protective of that information. So if we find a member that may benefit from one of these programs, we’ll facilitate the connection, monitor it, and hold the vendor accountable for performance because they’re value-based. They have a vested interest in achieving success because they put their fees at risk. I don’t expect this to contribute significantly to revenue within 2023; we are close to $40 million of revenue as it stands. However, I do anticipate that we will establish the groundwork this year to see a more substantial amount of high-margin revenue in 2024. Lastly, I want to note that we have publicly announced two of these exceptional value-based vendors. We are collaborating with our client base of around 200 clients to implement these solutions as needed, as customer needs vary. Thus, the more vendors and disease states we cover, the more members' needs we fulfill, and that, obviously, leads to increased revenue for us.

Allen Klee, Analyst

That’s great. Thank you. I’m sorry. When you referenced the severance costs or one-time costs related to Marpai in the quarter, could you just repeat what that was? Thank you.

Edmundo Gonzalez, CEO

Yes. What I was referring to were a few items. Based on our integration plan, we have eliminated duplicate positions. We have made all of the necessary efforts to create one company from two. The severance costs, other breakup costs, and leases that are not being utilized amounted to approximately $800,000 in Q1. We will continue to report on these particular items, specifically on non-ongoing costs in the quarters to come. Yoram, would you like to add any thoughts on this item?

Yoram Bibring, CFO

No. I think you covered it. Basically, we're defining these costs as not connected to our ongoing operations, as Edmundo mentioned. We have unused facilities that we inherited as well as severance costs. That is pretty much it.

Edmundo Gonzalez, CEO

The point is, we want to separate that and outline it for our public shareholders because it is an indication of our cost structure going forward. Even if you see these costs in this particular quarter, those costs are separate from our ongoing business and hopefully will disappear in the coming quarters. That was the objective, Allen.

Allen Klee, Analyst

Thank you. So you mentioned in the last earnings call that if you reach 50,000 lives and get paid $50 per life, that gets you to break even. Do you see a path to achieving that organically, or is that more likely to happen through another acquisition?

Edmundo Gonzalez, CEO

Yes. Look, it’s certainly both. We’re exploring various avenues, but there's limited information I can share at this time. The organic channel is definitely in motion, and demand is evident. Internally, we remain focused on retaining our existing customers, ensuring they derive maximum value from our offerings because a retained customer is invaluable. I believe that we can reach that point organically. However, as you may know, there are also numerous opportunities in smaller assets available. We are exploring everything, and both channels, organic growth, and potential acquisitions, are being pursued. That’s what I can say for now.

Allen Klee, Analyst

This is a smaller question, but you broke out your revenue into two segments, one of which is very small, but it’s captive insurance. What revenue does that relate to?

Edmundo Gonzalez, CEO

Yes, Yoram, would you like to explain the accounting? I can discuss the strategy.

Yoram Bibring, CFO

Yes. For us today, the captive insurance is an ancillary product or TPA. So a small number of our employee lives are sold this, which effectively means we’re participating in the stop-loss insurance in a way. The revenue we are recognizing is premium revenue. It's small and is considered an ancillary product, and because this is an insurance-type product, we have to report it separately.

Allen Klee, Analyst

Okay. Great. And then regarding your use of AI for identifying potential big health care events before they happen; is there any update on its usage and any improvements?

Edmundo Gonzalez, CEO

Yes. Let me speak a bit about the future. There’s a lot happening in the AI realm, especially regarding large language models, I’m sure you’ve seen in the press. We are actively engaging in leveraging AI in connection with value-based care and deploying our technology. This includes ensuring we can appropriately match our solutions to members based on their journey. The deployment of our technology revolves around that. Additionally, we’re excited about the capacity to predict costs that may be somewhat hidden and unknown within subpopulations for our clients. For instance, you may have a group that is slightly above the average in terms of cost. Yet based on our data analysis and historical records, we can identify subpopulations that may incur higher costs or remain more manageable. This information is crucial not only for the financial planning of our clients but also is highly significant for stop-loss underwriting. Remember that 100% of my clients are self-insured, meaning they’re responsible for the claims that arise, but they have stop-loss insurance, meaning they’ve transferred some of the risk to large reinsurers, and they must comprehensively understand potential costs. Therefore, we foresee multiple use cases for these models in the coming quarters and years as they enhance. But fundamentally, it’s about understanding risk; predicting risk is vital, but altering risk is even more crucial. I’ll leave it there.

Allen Klee, Analyst

Thank you. That concludes my questions. Thank you very much, and congratulations on the positive developments you’re making.

Edmundo Gonzalez, CEO

Thank you so much, Allen. I appreciate your questions.

Operator, Operator

Ladies and gentlemen, at this time there are no additional questions. I’d like to turn the floor back over to Edmundo Gonzalez for any closing remarks.

Edmundo Gonzalez, CEO

No. Just thank you, operator, and thank you, everyone, for participating in our first quarter earnings call. I appreciate your time this morning. Have a good day and look forward to hearing from you and seeing you on the next quarterly release. Thank you so much, everyone.

Operator, Operator

Ladies and gentlemen, with that, we’ll conclude today’s conference call and presentation. We thank you for joining. You may now disconnect your lines.