Earnings Call Transcript - MRAI Q1 2022

Operator, Operator

Good morning and welcome to Marpai's First Quarter 2022 Financial Results Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Marpai's CFO, Yoram Bibring. Please go ahead.

Yoram Bibring, CFO

Thanks, operator. Welcome everyone to our First Quarter of 2022 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 for the most comparable GAAP measures and the reconciliation there can be found on 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 of Marpai to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statements 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

Thank you, Simon. Good morning, everyone. And thank you for joining us. It's a pleasure to be here to review our Q1 2022 results. Let me spend a minute summarizing our strategy as I know this is the first call for some of you. Marpai is a technology company. We are using the power of technology to fundamentally change the health plan offered by employers to their employees. Our clients are self-insured employers across the country. These are the companies and local government agencies that have chosen not to buy traditional health insurance for their employees, but rather to self-insure their healthcare expenses. We manage all the healthcare plans on their behalf. Our mission is to help the self-insured employers get value out of their healthcare dollars and, of course, get control over these ever-rising costs. We focus on members, the employees of our clients, and on getting them the best care possible as early as possible. We do this by predicting costly events before they happen, and we then reach out to members to get them the very best care. On our last call, I shared with you that we had recently hired Lutz Finger, who was leading a large product group at Google. Lutz is our president in charge of products and technology. I'm glad to report that Lutz is proving not only to be the force of five people but also in setting up a product strategy for the next few years. This strategy centers on the member and making sure that our tech is pushing forward our mission in two critical ways. First, we want to make sure we can identify what works empirically for our members' benefit. Second, we want to further understand our members that we can best match them to quality care early. I would remind you that the majority of a healthcare plan's costs are often driven by less than 20% of members. We strive to know not only who these members are, but who they will be in the future and to understand what programs best work for those willing to engage. This is why we chose to become a healthcare payer. We believe we are uniquely positioned to drive change in controlling costs while providing access to high-quality healthcare, which improves lives. In addition to products that Lutz and his team are designing for the future, I'm glad to report that we will soon be launching the Marpai AI app. This is our pharmacy benefit manager which shall be powered by a leader in the space. Our goal here is to bring additional value to our members and to our employer groups. What does this mean for Marpai? It means that we can expand our share of wallet by also providing the drug benefit to our employer groups. This not only means additional fees, which are per employee per month like our core admin fees, but it also opens the opportunity to share in the savings that we bring. Roughly speaking, drugs accounted for approximately 20% of healthcare spending. Often, there is no transparency on the real cost of drugs due to rebates from big pharmaceuticals. We strive to be fully transparent in terms of showing our employer groups the rebates and sharing some of them, in some cases, all of them with them. We also see tremendous opportunities to bring more access to high-quality treatments to our members through patient assistance programs and importation programs, which could dramatically lower the cost of drugs for members who share these costs, and of course, for our clients, self-insured employers. Lastly, and perhaps most importantly, there are many insights that can be mined in drug data, which we intend to use for the benefit of our members. We continue our journey of transforming how a healthcare payer does the basics: that is reviewing, adjudicating, and paying medical claims. I shared with you in the past, and during the last quarters of 2021, we were able to cut our own cost of administering a claim by more than half. This is what technology looks like when deployed correctly. We're continuing on this path, and my aim continues to be significantly beating the industry's average cost. Moving on to sales and marketing, we have invested time and money this last year in building relationships with the largest healthcare brokers in America. We strive to be in the flow in terms of receiving RFPs and other requests for proposals. I will share with you that our RFP level is now approximately two-thirds of what we did in all of 2021. I will remind you that self-insured groups tend to switch plans on September 1, October 1, and January 1, with January 1 being the biggest date for commercial plans. The sales cycle begins in earnest in July and extends into the fall. Our second annual broker retreat next month will bring together top producers and senior executives from the largest healthcare brokers in America. We believe the investments we've made and continue to make have set us up for a productive and hopefully very fruitful 2022 selling season. Moving on to the quarter and the latest developments, I will let you provide me with the details. But in Q1, we grew 5.5% versus Q4 of 2021. Our revenue reached $6.2 million in Q1 of 2022. During the first quarter, the number of our customers' employees covered under the company's administered health plans decreased to 21,139 versus 25,136 at the end of 2021. This net reduction in employee lives is largely due to the loss of one large customer, which we will name Customer B, as well as several legacy continental benefits clients. In the case of Customer B, despite the fact that they were a very happy customer, our network partner priced their claims higher than an alternative network we do not work with. The increase in revenue in Q1, despite this loss, is largely driven by payments related to run-out for departing clients. We are working hard to ensure that we are serving our clients and that they are very highly satisfied. We have ramped and revamped the entire account management function under new leadership. We believe the best way to ensure that churn is low is to continue executing our mission. At the end of the day, healthier groups cost less. That's what we're striving for.

Yoram Bibring, CFO

Thank you, Edmundo, and good morning, everyone. First, I want to remind us all that prior to April 1, 2021, when we acquired Continental Benefits, Marpai did not have any revenues, which is the reason that our comparative revenue number for the first quarter of 2021 is zero. Our revenues for the first quarter of 2022 were approximately $6.2 million compared to approximately $5.9 million in the fourth quarter of 2021, and revenues of $4.8 million for the third quarter of 2021. As Edmundo said, we're guiding our revenues to be declining in the second quarter of 2022. Marpai explained that our business is a lumpy business; our customers typically sign annual agreements with a plan based on their number of employees. As long as the number of employees remain stable during the year—which is usually not always the case—the monthly revenues we derive from this customer also remain stable. For the contract, you and your customers typically rely on brokers to assist them in making the selection of their TPA or health insurance vendor. The decision to make will be if they stay with the current TPA or insurance company, seek a new vendor, or simply pre-check the market to ensure that they're paying reasonable fees to their current TPA or insurance company. Because of the ongoing increase in the cost of healthcare, most companies see increased health insurance costs for the fully funded plans or an increase in the cost of claims of their employees for self-insured plans, like the ones we manage. This inflationary environment tends to promote companies to seek alternatives as they try to keep their costs in check. The brokers also have an inherent interest to show their customers that they're getting the best possible deal, which usually means seeking bids from multiple vendors, which in our case means multiple TPAs assuming they want to self-insure. Sometimes excellent TPAs can lose a customer only because that customer has high claims, and the low-quality TPAs prepared to lowball their fees. And sometimes, as happened in the Customer B situation, a network provider is prepared to discount their fees to win a customer. For the customer, the meaning employer, the decision to choose another TPA or health insurance provider is a complex one, and the influence of the broker in this decision can make it even less straightforward. All these elements can promote changing the vendors for short-term savings, which may or may not be the right decision from a longer-term perspective. Another element in this revenue lumpiness is that annual contracts tend not to be evenly spread throughout the year. More than 60% of the company's renewal change plans on January 1, and other key dates are October 1 and September 1, and to a lesser extent July 1. This means that a lot of our marketing efforts will only bear fruit towards the end of the year. We believe that in the long term, our strategy to provide excellent service with advanced technology-driven value-added services at competitive prices will help us grow by winning new business and reducing churn. But we're not insulated from the market dynamics including the bumps, like the one we just experienced with Customer B. This is just part of course as we grow into a successful and profitable TPO future. Moving on to expenses. I will be comparing the first quarter of 2022 expenses to the fourth quarter of 2021 expenses, while ignoring first quarter 2021 expenses as they do not include the Continental Benefits expenses and are therefore not comparable to our Q1 2022 expenses. Cost of revenues include our cost of processing and adjudicating claims, our customer service costs and the amounts charged by third-party vendors for their services as we resell that we sell to our customers. Our cost of revenue for Q1, excluding depreciation and amortization, are approximately $4.5 million or 73% of revenues compared to 72% of revenues for the fourth quarter of 2021. This decline reflects the impact of new customers and customers assurances on our gross profit. Gross profit, not including the impact of depreciation and amortization, was approximately $1.7 million, unchanged from the fourth quarter. Our first quarter operating expenses, not including cost of revenues, depreciation and amortization, and stock-based compensation, decreased by approximately $700,000 compared to the fourth quarter. Approximately $400,000 decrease was due to decreased sales and marketing expenses, and approximately $300,000 of the decrease were due to various one-time costs in accruals we incurred in the fourth quarter, which was our first quarter as a public company. Operating loss for the first quarter was $5.5 million compared to $5.7 million for the fourth quarter. A net loss for the first quarter was approximately $5.5 million, or $0.28 per share, compared to a net loss of $5 million or $5.7 million, or $0.34 per share, for the fourth quarter. Excluding stock-based compensation of $666,000 and depreciation and amortization expenses of $826,000, adjusted EBITDA for the first quarter was a negative of approximately $4 million compared to a negative of $4.7 million in the fourth quarter of 2021. Moving on to our 2022 revenue guidance, we expect second quarter 2022 revenues to be in the range of $5.2 million to $5.5 million.

Operator, Operator

Thank you, Edmundo. We will now open the call for questions. Operator?

Edmundo Gonzalez, CEO

Thank you very much everyone for joining. We appreciate your support and your interest. And have a good day. Thank you so much.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.