Earnings Call Transcript - MRAI Q2 2023

Operator, Operator

Good day. And thank you for standing by. Welcome to the Marpai Second Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Simon Li, who is Vice President with Marpai. Please go ahead.

Simon Li, Vice President

Thanks, Operator. Welcome, everyone, to our second quarter 2023 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 statements on 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 thank you for joining us. It's a pleasure to be here to discuss the financial results of the second 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 as well as our strategy. Marpai is reinventing how employers around the country manage their spending on healthcare. This is important because healthcare costs are often the second largest expense for employers, second only to payroll. Our business revolves around our ability to predict and help modify risk in healthcare on behalf of our clients, who are employers that are self-insured. That is, they have chosen to pay for health expenses of their employees and their families as they consume healthcare services versus by buying traditional health insurance. We manage these employers' health plans from paying their employees' claims to providing access to the top national carriers like Aetna and Cigna, to caring for their employee populations via nurse-led management. We do all of this in support of our value proposition, delivering healthier outcomes as a mechanism to control healthcare costs. This activist approach to healthcare works. Being proactive with a member who has just been diagnosed with a chronic condition, for example, may prevent further complications in the months, quarters, and even years to come. This means higher health outcomes for members and lower costs for our employer clients. That's what we do. Now, our revenue was $10.5 million during the second quarter compared to $9.7 million during the first quarter. Our adjusted EBITDA was negative $5.5 million, but excluding severance and unused facilities, it was negative $4.1 million. We can compare this to our first quarter's adjusted EBITDA of negative $6.7 million and adjusted EBITDA, excluding severance and unused facilities of negative $5.9 million. Thus, EBITDA from our ongoing operations improved pretty dramatically by 31% as we continue to implement our integration plan of Maestro Health and aggressively cut costs. I would further note that we have managed to sublease the two large offices that we inherited from Maestro Health, so cash outlays related to these commitments will be subsidized by these multi-year subleases. We continue to report on adjusted EBITDA and an adjusted EBITDA, excluding severance payments and leases going forward, as I think it gives our shareholders a view into the effects of our consolidation activities and drive towards profitability. I want to remind you of our focus, which is simple. First, keep our expense budget and adjust fast if the top line is falling behind. I'm happy to report that we are 18% ahead of our revenue budget in Q2 and 12% ahead of our EBITDA budget. Second, sell to customers we already have. There's a great opportunity to upsell products we have to clients we already have. For example, many of our legacy Marpai clients do not yet have care management provided by us. But with the acquisition of Maestro, we now have an internal care management company. We also have MarpaiRX, our own pharmacy benefit manager. And of course, we continue to see great opportunity in Marpai Connect, which is our own value-based care network. We hope to see increased revenue from this from our existing base of clients in 2024. As a reminder, Marpai Connect brings together the best of the best digital providers, which have three common features. One, they have a great solution that is clinically validated and targeting a high-cost area for our employers, such as diabetes or musculoskeletal issues. Two, they have agreed to put their fees at risk against delivering health outcomes for our clients. And three, they have published a historical ROI, which our clients can lean into. Marpai Connect has been rolled out to our initial clients, and we expect further rollout and usage as clients go to open enrollment at the end of the year. We see this product as a vehicle for our clients to save money by directly attacking the high-cost areas within their plans. And of course, the wonderful outcomes for members is better health. This is one item that will increase our per employee per month revenue in the quarters to come as more and more members sign up for these solutions. I've mentioned our two levers to get our core business to break even in profitability. The mantra of 50x50, meaning $50 of net revenue, excluding pass-through items, on a per employee per month basis and 50,000 employee lives. At that level, our core business breaks even. We are already north of 40,000 employee lives, and in Q2, our per employee per month net revenue, excluding pass-through items, was $51. We're getting there. More products adopted get our per employee per month revenue up, and we're committed to selling more into the clients we already have. On the other lever, more employee lives to manage. I wanted to let you know about our new offering called Marpai Vitality. This is our self-insured health plan in a box, or a virtual box, specifically targeting smaller employers. Remember that the Affordable Care Act requires smaller businesses with 50 or more employees to provide health insurance. Now, what has happened in the last few years is that traditional insurance has become so expensive that smaller employers often cannot afford it. We are seeing a massive influx of smaller businesses, those with approximately 100 employees or less, coming to self-funding for the first time. Marpai Vitality makes it easy for these businesses to get self-insured. We have created template health plans to select and included all the ancillary services like access to the best networks, compliance, banking, telehealth, and we've also partnered with leading captives and carriers to provide stop-loss insurance all in one solution. For smaller businesses that may not have a full HR department, we can implement these in days. We expect thousands of new employee lives from this channel in the quarters to come. Now, let me turn it over to Yoram Bibring, our CFO, for a more detailed view of our financials in Q2. Yoram?

Yoram Bibring, CFO

Thank you, Edmundo, and good morning, everyone. This is the first quarter since we acquired Maestro in which we can truly compare consecutive quarters, as the impact of the Maestro acquisition, which closed on November 1, 2022, is 100% included in both the first and second quarter results. Our revenues for the second quarter of '23 were approximately $10 million, $200,000 higher than the high end of our guidance, which was $9.8 million and over $300,000 higher than our revenues for the first quarter of the year. As of June 30, our total number of employee lives was 40,793, down 778 lives compared to 41,571 at the end of the first quarter. Approximately half of the decline was due to net churn, and half was due to a decrease in employee lives within our customer base. Monthly revenues are a function of the number of lives that we serve and charge our customers for, and the average monthly revenue per employee life. Since the basic administration processing fees are extremely competitive, almost a commodity, one may say, our ability to increase the average monthly revenue per employee life depends to a large extent on the ancillary products and services that we're able to sell to our customer base. Currently, our two main ancillary services are care management and cost containment, but we also offer other uses like Affordable Care Act reporting, pharmacy benefit manager, and others, including the value-based care network and stop-loss insurance placement, which we believe will become more meaningful contributors to our future revenues. A good example of the importance of these ancillary services can be seen in the second quarter results. Our revenues increased by almost 4% despite a 2% decline in the employee lives and the related decline in administrative fees. The reason for that is that in the second quarter, we had substantial revenues from our Affordable Care Act reporting, or ACA reporting as we call it, which more than made up for the decline in the administrative fees. These ACA revenues are cyclical and peak in the second quarter, but our goal is to continue to sell more and more services into the base, thereby continuing to increase our average revenue per employee per month. Moving on to expenses, I will be comparing the second quarter '23 expenses to the first quarter '23 expenses. Cost of revenues historically included, cost of processing, and adjudicating claims, customer service costs, and the amounts charged by third-party vendors for their services that we resell to our customers. With the acquisition of Maestro, we're now also providing care management services that are delivered by our nurses and cost containment services that have a labor component, as well. And all these costs are now also included as our cost of revenues. Our cost of revenues for the second quarter, excluding depreciation and amortization, was approximately $6.4 million or 64% of revenues. Cost of revenues in the first quarter was also $6.4 million, but a higher 66% of revenues. Our second quarter gross profit was $3.6 million or 36% of revenues, compared to $3.3 million or 34% in the first 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 are more lumpy in nature. Our second quarter operating expenses, not including cost of revenues, depreciation and amortization, loss of disposal of assets, and stock-based compensation were $9.2 million, a decrease of approximately $800,000 compared to the first quarter when these expenses amounted to $10 million. Included in our second quarter expenses are approximately $1.4 million relating to severance and unused facility costs. This means that our ongoing operating costs, which do not include these costs, were $7.8 million, down $1.5 million compared to the first quarter. This reduction in ongoing costs is a result of the efficiencies derived from the integration of Maestro into Marpai, which we told you about on our first quarter call. In the second half of the year, we're expecting to see continued reductions in our ongoing operating expenses. During the second quarter, we invested approximately $1.1 million in our value-based care platform compared to $1.5 million in the first quarter. The operating loss in the second quarter was $7.3 million compared to an $8.5 million operating loss for the first quarter. Excluding the cost of unused facilities and severance costs and our discretionary investment in the value-based care platform, our operating loss was approximately $4.5 million, an improvement of $1.7 million compared to the $6.2 million first-quarter loss. In the second quarter, we recorded $388,000 of non-cash 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. A net loss for the second quarter was approximately $7.6 million, a $1.11 per share, compared to a net loss of $8.5 million, and a $1.64 per share for the first quarter. These figures reflect the 1:4 reverse stock split that we completed on June 29. Excluding net interest expense of $336,000, stock-based compensation expenses of $367,000, and depreciation and amortization, and asset write-off expenses of approximately $1.3 million, adjusted EBITDA for the second quarter was a negative of approximately $5.5 million compared to a negative $6.7 million for the first quarter. As discussed, the $5.5 million included approximately $1.4 million related to severance and annual facilities cost approximately $1.1 million invested in the value-based care platform. Moving on to guidance, we're increasing our '23 annual revenue guidance from its previous guidance of between $34 million to $35 million to a new guidance of between $35 million and $36 million, and we expect third quarter '23 revenues to be in the range of $8 million-$8.5 million. And with that, we will open the call for questions.

Operator, Operator

Thank you very much. We will now begin the question-and-answer session. Today's first question comes from Allen Klee with Maxim Group. Please go ahead.

Allen Klee, Analyst

Good morning. Congratulations on beating my top and bottom line and raising guidance. Your company seems to do more related to tackling key issues in healthcare than any other company I know, so I'm impressed. My first question just relates to Maestro, in terms of just how you feel about where you are in the integration, it sounds like most of the heavy lifting was done by integrating the products. Just comment on how you feel about where you are today.

Edmundo Gonzalez, CEO

Yes. Thank you, Allen. Good morning. So, look, the heavy lifting and maybe the difficult aspect of M&A is really behind us. This is a lot, obviously, on cost-cutting. Now, the more enjoyable part begins, which is really selling all of these great products, especially as customers go into their natural buying cycle, which, as you know, is around open enrollment and the new year. We are set up and have set off, obviously, to very aggressively cross-sell these. We are operating as one company. It's one management team. The management team, by the way, is a mixed team with legacy Marpai and legacy Maestro senior executives and line managers, as well. So, it is one company. And we're ready. We're ready to go. More than that, even the Maestro brand and everything will continue to fade and disappear by the end of the year as everything is integrated.

Allen Klee, Analyst

Thank you. You mentioned that the quarter included $1.7 million in integration costs related to the disposal of assets and severance. I am trying to understand if that $1.7 million also accounts for the costs of the offices you subleased. If so, when did you sublease them and what impact did that have on the quarter in terms of costs that will be eliminated? Thank you.

Yoram Bibring, CFO

Hi, Allen. It's Yoram. We actually signed one, which is signed. The other one is in the process. And we are receiving a couple of free months. You won't see it on the P&L until probably early next year. But yes, all that is included in that number. It's actually $1.4 million plus a $300,000 loss asset write-off that we did because we got rid of the offices. That's why you see that $300,000 write-off. So, the total is $1.7 million, but on a cash basis it's $1.4 million. However, you won't see it actually coming down much this year just because of the way these contracts are structured.

Allen Klee, Analyst

I heard you say that you expect your expenses to decrease.

Yoram Bibring, CFO

The ongoing situation is indeed considered.

Allen Klee, Analyst

Go ahead.

Yoram Bibring, CFO

So, yes, the cost-cutting that Edmundo mentioned that most of the heavy lifting is behind us. It's true, but it's behind us today, and we're already in August. So, the impact of this you will see, some of it you're going to see in Q3 and then you will see the full impact in Q4. So, there's still a little bit more, but most of it is done. But again, you won't see it in the numbers. That's the way this translates into the figures.

Allen Klee, Analyst

Thank you. Regarding value-based care, you've partnered with some impressive organizations and are actively working on expanding this initiative. Can you share what steps you are currently taking? How confident are you in your customer acquisition strategy? Also, what is your perspective on the potential number of customers you can onboard and the savings you can deliver to employers? I realize that's a lot to cover.

Edmundo Gonzalez, CEO

It's alright. Everything is interconnected, right? Our focus is on how to commercialize Marpai Connect, which is our value-based care network. To start, we have mapped out our 200 clients and compiled all their data into an easy-to-read, interpretive dashboard. This dashboard utilizes technology to show the trend lines of costs associated with different disease states. For instance, if a company has a thousand employees and 120 of them are dealing with type 2 diabetes, we can accurately identify their current costs and project where those costs will be at the end of this year and into 2024. We present this information in clear, concise charts online, and we also include the potential financial impact if part of the population chooses to partner with Virta for their type 2 diabetes management. This includes not only the cost of those claims, as we must compensate Virta, but also the ROI that has been documented from their work with other large clients, given that Virta has the longest ongoing trial for diabetes. We've successfully implemented this for some clients, and while others have opted to launch it during open enrollment, I am optimistic that a significant portion of our customer base will adopt it. This is beneficial because it directly addresses controllable costs for employers. Ultimately, our work helps manage part of the employer's P&L while promoting healthier outcomes for employees, allowing them to lead lives free from potential suffering. We have conducted extensive due diligence with the systems we use, and we are confident that those we partner with are among the best in terms of scientific rigor and clinical validation. Importantly, they are willing to risk their fees, which is a strong indicator of the program's efficacy. In summary, I want this solution available to all our clients. While I do not expect complete adoption, it is encouraging that some of our larger clients with significant member populations are the first to embrace this initiative.

Allen Klee, Analyst

In terms of costs, the real expense lies in acquiring customers. You handle some of the marketing, but once a customer joins the program, you essentially achieve a margin of nearly 100% on the savings. The key question is how you view the cost of acquiring a customer and how successful that has been.

Edmundo Gonzalez, CEO

Yes, just to be clear for other members of the audience, that may not be clear. The virtual - rather, the value-based care network is a network. So, like Aetna and Cigna are networks. Obviously, they're much bigger than this, but they have a list of providers with negotiated rates. Think of our Marpai Connect as that, as a network. So, we actually do not charge upfront fees to our clients. Our clients are the self-insured employers. Once a member of - say, an employee or their family opts into one of these programs, then the fees related to that are charged as a medical claim because these are all provider groups. So, just like you would pay a claim for visiting a doctor. And based on that, we make money off that. We take a portion of that. So, clients also like it because there's no fixed fee, meaning you're paying on consumption. You're not paying just to have it. That's a very important distinction here. And it's very easy for us to sign up the clients we already have. Moreover, any new client, this is wrapped into our standard contract. So, we want to make sure our clients are really benefiting from this. Now, I think what you're getting at is more the cost of acquisition of a member. Now, the member is part of a client we already have, right? So yes, there is some cost in texting, e-mailing, potentially a call from a nurse. But those are really minimal costs. The biggest, I guess, advantage we have is the 200 clients, comprised of around 70 to 80,000 member lives. We already have these. We've already acquired them. That is our base. So, our cost of acquiring a member within that base is pretty low and getting lower, obviously with technology. Although I will tell you, the most effective method of getting a member to join one of these programs is a call from a nurse or a clinician.

Allen Klee, Analyst

That's interesting. Could you explain how you use AI or any new or significant ways you've been implementing it?

Edmundo Gonzalez, CEO

Yes, the most pervasive and impactful way here is, and the latest one, is just as I described. So, clients just see this as a dashboard, but all of the projection tools that we have to project the cost trend next quarter or even next year are based on disciplines of AI and advanced analytics. So this is a very tangible way that we have harnessed the power of AI with our own data, our own clients' data, and given them back basically a little sneak peek of the future of cost. Now, the rest, telling them how much they may save, that's not really AI, that's based on just analytics on published results from our vendors. But getting into the data, seeing who is on what journey, understanding those costs, and then projecting those costs based on how we see other claims and progressing or other claimants progressing, that's a very tangible use of AI. That's just one example, obviously. But the other items that we'll use a lot more here in the future are really about automating how we can contact and engage members to sign up to get them to be more involved with these programs. As I mentioned, right now, we do everything. We do text, we do phone calls. What is working? It is mixed, but obviously, a call from a clinician who is part of our plan, part of our company, seems to be the most effective way right now, at least.

Allen Klee, Analyst

Thank you. Okay, I wanted to move on to something else. I heard you guys say that to get to profitability, it'll happen, hopefully, when you hit $50 per revenue per employer live, excluding pass-throughs and 50,000 lives. But then, did I hear you say after that, that you're currently at $51 revenue per live? And then, I have some follow-ups on that.

Edmundo Gonzalez, CEO

Yes, let me explain and also call in Yoram, as well, here. So, if you just did the math on our revenue, it's actually a much higher number. So internally, we look at our revenue excluding pass-through items, for example, network fees. So, we call it RevX inside. It's revenue excluding pass-throughs. That's the $50—that's basically what we keep. What we really keep. That's not a reported number, by the way; you won't find it on the P&L. And I think just our revenue on a per employee per month basis is in the 80s. So, we look at actually what do we keep? That’s the $50. Now, that number, yes, it's already in the safe range. We still need more lives. Now, as you know, Allen, these are two levers. So, if you take that number to 55, okay, so you need less lives. But these are the two levers that all of the management team is very aware of. And all of what we're doing when we're releasing a new product is talking in per employee per month language, because we want to make sure internally that everyone is understanding the economics, the fundamental economics that drive our business. And in ours, it's pretty simple: it's price and volume, as in most businesses are. Our volume here is based on employee lives because that's how the industry prices, and then the net amount we make from everything, from admin fees, from value-based care, from our share of revenue from other ancillary products, this is what builds up our $50. But, yes, we're doing well on the RevX point of view, and we need more lives, which is exactly what we're focusing on now.

Yoram Bibring, CFO

Yes, just one other thing, in Q2, we had a high RevX number. It's going to be lower in Q3 because this is a little lumpy, right, because we have some products that have higher margins and some have lower margins. So, when we say $50 by 50,000, we're talking average for the year, not just in specific months or specific quarters. And also, we're talking about the TPA, right? We're talking about the TPA as a profitable entity. So, it doesn't apply to the company as a whole. If we invest in value-based care, a lot of money, that's not covered by this 50,000. But then, we need more than 50,000 lives, 50,000 lives to bring our TPA to break even.

Allen Klee, Analyst

And then, I think this was maybe one of the most important things I heard you said that this new product that you have, Marpai Vitality, that's focused on small employers, that that could potentially add thousands of employee lives in quarters to come. So, that could get you in the direction that you're hoping to get. How do you sell that or where does that stand? It's a pretty new product, obviously. Does this get sold differently than through brokers? Just more about it, because it sounds like it's very important for you in terms of getting to your goals. Thank you.

Edmundo Gonzalez, CEO

Yes, thank you for that. It is very important for us. It's a new product. It's a new packaging of everything we have. And what we've done here is make it very easy for small businesses to sign up with us. Self-funding, Allen, is—there's a statement in the industry that if you've seen one self-funded group, you've seen one self-funded group, because everyone is slightly different. And that's the point here. Bigger companies that were traditionally self-funded could customize their plan every single way. We believe that that's not appropriate for many small businesses who want simplicity, ease, and at the end of the day, they want to control their costs. That's the bottom line. They may not also have the HR infrastructure to start creating different plans that are very bespoke. They want something that's great, that's off the shelf, and that looks and feels like a traditional insurance program, full insurance program. That's what we've created in Marpai Vitality. We basically put everything from the plan design to wrapping our own PBM from MarpaiRX, and access to the networks. Everything is just built in where they can basically select. They can pick and choose from established plans and go. So, that's the big difference here. The way we are selling it is twofold. Yes, we can sell it through our traditional broker channels who are asking for this because they also have a lot of demand from these smaller businesses and not necessarily a lot of solutions other than shopping among the fully insured carriers. So, that's one. Two is that we have various partnerships with established insurance captives and those are channels for us. So, in many of those cases, we don't have a cost of sales. They are coming to those channels that have essentially built the health plans for smaller businesses, but we're powering everything in the background.

Allen Klee, Analyst

I'm sorry, when you say you have a partnership with an insurance captive, could you describe to define what an insurance captive is? Sorry to interrupt.

Edmundo Gonzalez, CEO

No, no, no, this is totally fine. So, there are multiple entities that we work with as sales channels, but they are focused on the stop-loss part of what we do in self-funding. You'll remember, Allen, from our conversations that everyone in this space, even though we call it self-insured, it's self-insured to a point. In other words, if you have a very sick member and you're a small business, if that member is going to cost a million dollars, you may go bankrupt. Well, that never happens. Why? Because we add a layer of stop-loss insurance to say, 'Look, if your plan costs above X dollars,' let's say, $300,000, you're trading that risk away to an insurance company like Swiss Re, like Berkshire Hathaway, etc. Now, there are entities that are called captives, and they basically manage that part of the business. Now, some of them have also created their own health plan and they sell it. They distribute it. What they don't do is all the core work, meaning processing claims, providing all of the ancillary services, like care management, like the pharmacy benefit management, etc. So, we've partnered with several of these and basically do all that. So, we see them as the client, and then they may have dozens and dozens of businesses signed up underneath them, but we don't have cost of acquisition there. We've already acquired the channel. It's just a channel partner for us, basically.

Allen Klee, Analyst

Got it. Thank you. That's it for my questions. Thank you very much.

Edmundo Gonzalez, CEO

Sure. Thank you so much for attending.

Operator, Operator

This concludes our question-and-answer session. I would now like to hand the call back to Simon Li for closing remarks.

Edmundo Gonzalez, CEO

Okay, I'll take it, actually. This is Edmundo. But I'd like to thank everyone for participating. Those of you listening or reading the transcript, also, thank you for your interest and you can always find more information at marpaihealth.com. Thank you so much.

Operator, Operator

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.