Q2 2023 Marpai Inc Earnings Call
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 helped 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 by a nurse led management.
We do all of this in support of our value proposition delivering healthier outcomes as a mechanism to control healthcare costs.
Activist approach to healthcare works being proactive with the member who has just been diagnosed with a chronic condition for example.
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 adjusted EBITDA of $6 7 million and adjusted EBITDA, excluding severance and unused facilities of negative $5 nine.
Thus EBITDA from our ongoing operations improved pretty dramatically by 31% as we.
To implement our integration plan of Maestro health and aggressively cut costs.
I'd further note that we have managed to sublease. The two large offices that we inherited from my stroke health. So cash outlays related to these commitments will be subsidized by these multi year sub leases.
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 wanted to remind you of our focus which is simple.
First keep our expense budget and adjust fast as the top line is falling behind I'm.
I am 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 is a great opportunity to upsell products, we have to clients. We already have for example, many of our legacy PE 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 mark <unk>, our own pharmacy benefit manager and of course, we continue to see great opportunity in market 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, <unk> 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 muscular skeletal issues too. They have agreed to put their fees at risk against delivering health outcomes for our clients and.
And three they have published a historical ROI, which our clients can lean into.
Mark pain has been rolled out Marvin 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 plants and of course, the wonderful things 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 business, our core business to breakeven and profitability.
The mantra of 50 by 50, meaning $50 of net revenue excluding pass through items on a per employee per month basis, and 50000 employee lives.
At that level, our core business breaks EBIT.
We are already north of 40000 employee lives and in Q2 are.
Per employee per month at net revenue excluding pass through items was $51, we're getting them.
More products adopted get or per employee per month revenue up and we're committed to selling more and more into the clients we already have.
On the other lever.
Our employee lives to manage I wanted to let you know about our new offering called <unk> vitality.
This is our self insured health plan in a box or virtual box, specifically targeting smaller employers.
Remember that with the Affordable Care Act.
Smaller businesses with 50 or more employees have to provide health insurance now what has happened in the last years is a traditional insurance has become so expensive that smaller employers often can simply not 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.
<unk> vitality makes it easy for these businesses to get self insured.
We have created template health plans to select and included all of 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 Europe Big break our CFO for a more detailed view of our financials in Q2.
Europe .
Thank you Manuel and good morning, everyone.
This is the first quarter since we acquired last June in which we can truly compare consecutive quarters as the impact of the Maestro acquisition, which closed on November one 2022 is 100% included in both the first and second quarter results.
Our revenues for the second quarter of 'twenty, three where approximately $10 million.
200000 dose higher than the high end of our guidance, which was $9 8 million.
Over $300000 higher than our revenues for the first quarter of the year.
As of June 30, our total number of employee lives was $47 93.
Down 778 lives compared to 41 571 at the end of the first quarter.
Approximately half of the decline was due to net Sherman and half was due to a decrease in employee lives within our customer base.
Our monthly revenues are a function of the number of lives that we serve and charge our customers for the average monthly revenue per employee lives.
Since the basic administration processing fees are extremely competitive almost a commodity when they say our ability to increase the average monthly revenue per employee life depends to a large extent on the ancillary products and services.
Able to sell to our customer base.
Currently our two maintenance salaries services, our care management and cost containment, but we also offer other services 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 employee lives and the related decline in administration fees.
For that is that in the second quarter, we had substantial revenues from our affordable care Act reporting or ACI reporting as we call it.
More than made up for the declining the administration fees.
These 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 continued to increase our average revenue per employee per month.
Moving on to expenses.
I will be comparing the second quarter 'twenty three expenses to the first quarter 'twenty three expenses.
Cost of revenues historically included cost of processing and adjudicating claims customer service costs and the amount charged by third party vendors for their services that we sell 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, because they have a labor component as well and all of these costs are now also includes 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 on 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, it's not all our revenue streams at 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 local disposal of assets stock based compensation with $9 2 million.
A decrease of approximately 800000 compared to the first quarter. When these expenses amounted to $10 million.
Included in our second quarter expenses are approximately $1 4 million related 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 cost as a result of the efficiencies derived from integration of illustrating to MRP, which we told you about on our first quarter call.
In the second half of the year, we're expecting to see continued reduction in ongoing operating expenses.
During the first during the second quarter, we invested approximately $1 1 million in a value based care platform.
<unk> to one 5 billion in the first quarter.
Operating loss in the second quarter was $7 3 million compared to $8 5 million operating loss for the first quarter.
Excluding the cost of unused facilities and severance costs and our discretionary investment and the value based care platform. Our operating loss was approximately $4 5 million an improvement of a one point improvement of $1 7 million compared to $6 2 million, which was the first quarter loss.
In the second quarter, we recorded 388000 of non cash interest expense. This relates to the amount we own for the acquisition of Maestro, which we booked based on the present value of the purchase price.
Net loss for the second quarter was approximately $7 6 million.
Dollars 11 per share compared to a net loss of $8 5 billion.
Dollars 64 per share for the first quarter.
These figures reflect the 41 reverse stock split that we completed in June 2009.
Excluding net interest expense of $336000 stock based.
Compensation expenses of 367000, and depreciation and amortization and asset write off expenses of approximately $1 3 million adjust.
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 facilities costs.
Approximately $1 1 million invested in the value based care platform.
Moving on to guidance, we're increasing our 'twenty three annual revenue guidance from our previous guidance for our previous guidance of between <unk> 34, $34 billion to $35 million to a new guidance of between $35 million a $36 million.
And we expect third quarter to 23 revenues to be in the range of eight to $8 5 billion.
And with that we will open the call for questions operator.
Thank you very much we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Victor Tseng, please pickup your handset before pressing mckean.
Thanks, Jonathan the question can you. Please press Star then two.
Today's first question comes from Allen Klee with Maxim Group. Please go ahead.
Good morning.
Congratulation speeding my top and Bottomline and raising.
Guidance.
Your company since you do more related to tackling key issues in health care than in any other company right now so I'm.
I'm impressed.
My first question just related to maestro.
In terms of.
Just how you feel about where you are.
Where you are in the integration.
Terms of.
It sounds like most of the heavy lifting was done but.
Integrating the products just comment on kind of how you feel like where you are today.
Yes. Thank you Alan good morning, So look the heavy lifting.
And maybe the nasty business of M&A is.
<unk> is really behind US this is a.
A lot obviously on cost cutting now the more fun part preqin switches.
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. So we are setting up and have set up obviously to very aggressively cross sell. These we are operating as one company for twin management team.
The management team by the way is a mixed team with legacy <unk> and legacy Maestro senior executives.
And then line managers as well.
So it is one company and we're ready we're ready to go.
And more than that even the <unk> brand and everything will continue to fade and disappear by the end of the year.
Everything is melted in.
Thank you you mentioned that the quarter at one 7 million of.
<unk>.
Integration costs loss on disposal of assets and severance.
Could you.
You also.
Sure.
I'm just trying to understand that number goes down over time, but.
Does that $1 7 million also factor in the cost of the two sublease.
The officers that you said you sublease then.
Or when did you sublease them what was the impact in the quarter of the cost that is critical.
Thank you.
Hi, Alan its euro.
It's going to take.
We signed one which we signed the other one is in the process.
And <unk>.
People are getting a couple of three months.
Don't see it on the.
You won't see it in the P&L until probably early next year.
But yes, all of that is sitting in that number essentially.
One four plus $300000.
Asset write off that we did because we got rid of offices. That's why you see the 301000 write offs totaled $1 seven.
But on the cash basis one is.
Is one four.
But if you only want to see it actually coming down much. This year, just because of the way. These contracts are written.
For what.
I heard you guys say that you expect your expenses to go down through the ongoing yes, yes, because we honestly.
So okay. So yes.
Yes.
Cost cutting.
Understood that most of the heavy lifting is behind us shoe, but it's behind us today and we're already in August .
So the impact of this youll see some of it you're going to see in Q3, and then you see the full impact in Q4 right. So.
There is still a little bit more but most of it is done but again you don't see it in the numbers. That's the way that's the way this translates into the into the numbers right.
Got it okay. Thank you.
And then.
For value based care.
It's been you've been shining vision.
Very impressive partners.
Youre working on building. It out you are taking actions to sign up customers can.
Can you talk about I know, it's pretty early days kind of what what are the steps you're doing now how do you feel about the actions too.
Sign up customers or if you feel like you have an effective approach and.
And how how you think about.
The ability.
How much of the customers you can China.
And the savings you can get to employers.
Sure sure Thats like 10 questions.
No. It's okay. It's all it's all wrapped into one how do we commercialize.
Our market connect which is our value based care network. So basically when we have done as a starting point.
Is mapped out every single one of our 200 clients.
And put all of their data remember we are a tech company right. So we put all of their data in a very easy to read easy to interpret dashboard that basically takes technology and projects theyre trend their trend line of cost.
By disease state.
If you have.
1000 employees.
And 120.
We are experiencing are living with type two diabetes. So we can pinpoint exactly what those costs are today, but also where they will end up at the end of this year and then into 2024.
Now given that we.
We present these.
Very very nice easy to read charts right online.
We also have.
The potential impact.
<unk>.
Part of the population would sign up to say our partner bird in the type two diabetes front, including the cost of those claims because you have to pay for our tests, but also the ROI that is published based on there.
Embedding them and were confident that anyone we add.
As in the category of the best of the best in terms of their their scientific approach their clinical validation and of course. They are also confident announced.
And their solution to put their fees at risk, which is a huge signal obviously too.
The strength of the program so bottom line.
<unk>. This in every one of our clients Willa.
100% of our clients take it no I don't think so but the.
Good thing is some of our larger clients that are managing.
A lot of lot of member lives.
Actually the first half.
Stepped up for this.
Which is very very promising.
And in terms of the cost of it. So your real cost is the cost of acquiring the customer youre doing some of the marketing of that but then once you get a customer to the program.
You get.
Pretty much 100% profit margin of the savings.
The question then is that your cost of acquiring a customer how do you. How do you think about that in the end.
The successful with that.
Yes, So let me just just to be clear for other members of the audience that may not be clear so the virtual.
Rather the value based care network.
As the network right, so like Aetna and.
And Sigma our networks, obviously, they are much bigger than that but they have all the providers with negotiated rates.
Our <unk> connect as as that is the network.
So we actually do not charge.
Upfront fees to our clients our clients are the self insured employers.
Once a member.
An employee or their family.
Ups into one of these programs than the fees related to that are charged at the medical claims just like because there is these are all provider groups right. So just like you would pay a claim for visiting a doctor.
And based on that we make money of that we make a slice of that so clients also like it because there is no fixed speed, meaning youre paying on consumption youre not paying on just just to have it right.
That's a very important.
Distinction here.
It's very easy for us to basically.
<unk> clients, we already have more than that any new client. This is wrapped in there to our standard contracts. So it's really we want to make sure. Our clients are really enjoying the fruit of this and I think what youre getting at is more the cost of acquisition of a member of the member as part of our call.
We already have right. So yes, there is some cost and taxing E mailing.
And potentially a call from a nurse.
But those are really minimal costs.
The biggest advantage we have is the 200 clients is the.
780000 member lives right, we already have these we've already.
<unk> them that is our base so our cost of acquiring a member within that base.
It's pretty low.
And getting lower obviously with with technology, Although I will tell you that.
Effective.
Method of getting a member to join one of these programs is <unk>.
From a nurse or a clinician.
That's interesting.
So.
Some things.
Okay.
Could you just talk a little about how you use AI for how you've been using it may be in some new ways for them to figure ways that you've been using it.
Yes, the most of them the.
The most.
Kind of pervasive and impactful way here is and then 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.
Or based on discipline of AI and advanced analytics.
This is a very tangible way.
That we have harnessed the power of AI and with our own with our data our clients' data and given them back.
The.
Basically a little sneak peek of the future of cost now the rest.
<unk>.
Telling them how much they may say, that's not really AI that's based on just.
Analytics.
Published results from our vendors, but getting into the data seeing who is.
Who is on what journey understanding of those costs and then projecting those costs based on.
How do we see other claims right.
<unk>, our other claimants progressing.
That's a very tangible.
The use of AI.
That's just one example, obviously, but the other items that will we'll use a lot more here.
In the future are really about automating.
Now we can.
Contact and engage members.
To get them.
To sign up to get them to more engage with these programs.
As I mentioned right now we do everything we do tax we do phone calls.
What is working it.
It is mixed but obviously a call from a clinician.
As part of our plan.
Part of our company.
It seems to be the best effective way right now at least.
Thank you.
Okay I wanted to move on to something else here.
Did you guys say that.
To get to profitability.
Yeah.
It'll happen when hopefully when you hit $50 per revenue per employer lives, excluding pass throughs and 50 lives 50000 lives.
Sure.
Yes.
I kind of did I hear you say after that that Youre currently at $51.
<unk> per lives and.
And then I have some follow ups on that.
Yes, let me explain and also called in Europe as well here. So if you just did the math on our revenue it's actually much higher numbers. So we internally we look at our revenue excluding <unk>.
Pass through items for example network fees.
So we call it Rev ex inside revenue excluding pass throughs, that's the $50. That's basically what we keep all right where do we really keep.
That's not a reported number by the way you won't find it on the on the P&L, but.
I think our just our revenue on a per employee per month basis is in the <unk>. So we look at actually what do we keep that $50 down that number.
Yes, it's already in that in that.
And the safe range, we still need more lives now as you know these are two levers right. So if you take that number $2 55, okay. So you need less lines right.
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 right. Because we want to make sure internally that everyone is understanding.
The economics.
Fundamental economics that drive our business and it's pretty simple right.
It's price and volume.
And then both businesses are evolving here is based on employee lives because thats, 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 from other ancillary products business, what builds up our $50, but yes, we are.
And we're doing well on the revenue <unk> point of view and we need more lives, which is exactly what.
But we're focused on now yes, just wanted to things.
In Q2, we had a high.
The mix number is going to be lower than Q3, because this is a little lumpy right because we have some products with higher margins and some with lower margin. So.
When we say 50 by 50000, we're talking average for the year, let's just a specific month or quarter and also we're talking about the tpa right. We're not talking about we're talking about the tpa is profitable.
So it doesn't apply to the company as a whole.
And value based care a lot of money that's not covered by this $50 with them, we need more than 50000 50000 lives to bring our tpa to breakeven.
Got it.
And then just.
This may be one of the most important things I heard.
You said that this new product that you have.
Mark Kaye vitality, that's focused on small employers setback could potentially add.
Chubb employees lodge in quarters to come.
So that could get you.
And the direction that youre, hoping to get it.
Can you.
How do you sell that or where does that stand, it's a pretty new product obviously.
But im just does get sold differently than like through brokers and.
And just.
Just just more and more about it because it sounds like it's Murray.
For you in terms of getting to your goals. Thank you.
Yes. Thank you for that it is very important for us.
It's a new products its 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 Alan.
There is a there is a statement in the industry that if you've seen one self funded group <unk> seen one self funded group, Brian because everyone is slightly different.
And Thats the point here bigger companies that were traditionally self funded could customize their plan every single way, we believe that thats not appropriate for many small businesses, who want simplicity ease and at the end of the day they want to control their costs right. That's the bottom line they may.
I would also have the HR infrastructure to start creating different plans that are very bespoke they want something thats, great thats off the shelf and that looks and feels like a traditional insurance program full insurance program. That's what we've created an MRP vitality.
And we basically put everything from the plan design to wrapping our own PVM from <unk>.
That's the big difference here.
The way we are selling it is twofold. The yes, we can sell it through our traditional broker channels, who are asking for this because they also have to see a lot of demand from these smaller businesses and not necessarily a lot of solutions other than the.
<unk> among the fully insured.
Carriers.
So that's one two is that we have various partnerships with established.
Insurance captives and we are those are channels for us so in <unk>.
Many of those cases, we don't have a cost of sales that they are coming.
To those channels that have essentially built the health plans.
Smaller businesses, but we're powering everything in the background. So it's Marty.
I'm sorry, when you say you have a partnership with an insurance captive could you just describe to define what a put an insurance captive im sorry, sorry.
No no no this is totally fine.
So there are multiple entities that we work with us as sales channels, but they are focused on the stop loss part of what we do in.
Self funding, you'll you'll remember Alan from our conversations that everyone in this space.
Even though we call it self insured that self insured to a point right.
In other words, if you have a very very sick member and you're a small business.
Members going to cost $1 million you may go bankrupt.
Sure happens right why because we add a layer of stop loss insurance to say look if your planned cost above X dollars lets say $300000 youre trading that risk away to an insurance company like <unk> like Berkshire Hathaway et cetera.
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 when we when they don't do as all of the core work meeting processing claims providing all of the ancillary services like care management.
<unk>.
The pharmacy benefit management et cetera. So we've partnered with several of these and days.
Is it dozens and dozens of businesses signed up underneath them.
But.
We don't have cost of acquisition there.
Particularly.
Got it thank you.
That's it for my questions. Thank you very much.
Sure. Thank you so much for attendance.
Concludes our question and answer session I would now like to hand, the call back to Simon Lee for closing remark.
Okay I'll take it actually this is the bundle, but I'd like to thank everyone for participating.
Reading the transcript also thank you for your interest and you can always find more information at <unk> Dot com. Thank you so much.
The conference has now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
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Yeah.
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