Marpai, Inc. (NASDAQ:MRAI) Q4 2022 Earnings Call Transcript

Marpai, Inc. (NASDAQ:MRAI) Q4 2022 Earnings Call Transcript March 30, 2023

Operator: Good day, and thank you for standing by. Welcome to the Marpai Fourth Quarter and Full-Year 2022 Earnings Conference Call. . I would now like to hand the conference over to Simon Li, who is Vice President with Marpai. Please go ahead.

Simon Li: Thanks, Operator. Welcome, everyone, to our fourth quarter and full-year 2022 call. With me on the call today are Marpai’s Chief Executive Officer, Edmundo Gonzales; 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: Thanks, Simon, and good morning to everyone, and thank you for joining us. It’s a pleasure to be here to discuss our Q4 and full-year 2022 financial results. For some of you that are joining for the first time, let me just take one minute and review who we are and our and our strategy. Marpai is a technology company which is reinventing how employers around the country manage their spending on healthcare. Often, this is the second-largest expense for businesses outside of payroll. We work with employers that elect not to buy traditional health insurance for their employees, but rather they self-insure. What we do is create company health plans and manage them for our employer 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 doctors’ offices, pharmacies, and hospitals around the country, just as one would with health plans from Blue Cross or other large insurance companies.

Our value proposition is simple. We save employers money by engaging our members proactively in a manner that improves their health. And yes, healthier employee populations cost our clients less. That’s what we do. Our revenue comes from management fees that employers pay us to manage their health plans, as well as fees from a portfolio of ancillary services, including care management, our team of nurses who guide patients on their healthcare journeys. 2022 was a transformational year for Marpai. We closed the acquisition of Maestro Health in November €˜22, and this acquisition dramatically increased the size and scale of our business in both revenue and the number of employee lives whose healthcare we manage. At year-end, we managed over 42,000 employee lives on behalf of approximately 188 self-funded employers across the country.

To give you an idea of our new scale, last year we paid over 1.15 million medical claims, which cost over $462 million to our clients. Now, Maestro’s business was quite similar to ours in terms of their core offering. It’s also an administrator of health plans. It had similar clients, which are employers with hundreds of employees, and it had a long-term commitment to serving the members of its health plans. Because the businesses are so similar, we have the opportunity to gain efficiencies by eliminating duplicative positions, standardizing systems from two to one in most areas, and cross-selling products from each legacy client base. We have made much progress since the acquisition in all of these fronts, but there is still much work to do.

Yoram Bibring, our CFO, will give a detailed analysis of the results of Q4 and 2022 as a whole, but let me take a minute to describe the effects of our acquisitions on our revenue over the last few years, and how I see 2023 developing. Our net revenues have gone from zero in 2020 to $14.2 million in 2021 due to our first acquisition, and to $24.3 million in 2022, including the acquisition of Maestro for November and December, 2022. We have given guidance on 2023 revenue to be between $34 million and $35 million. Given the nature of our business, where clients enter into contracts with us of no less than one year, we have relatively good visibility on revenue. Now, 2023 is the foundational year where we are setting the groundwork to reach profitability in 2024.

I’ve said before that my goal is to create a substantial public company that benefits our members, our clients, and of course, our shareholders. So, what should investors look for during 2023? In my mind, there are three big strategic items before us, and each is important as we reach toward profitability. First, we have an opportunity to grow our business based on clients we already have. During 2023, we are selling all the new products that we have gained via the acquisition of Maestro Health to the Marpai client base. I mentioned in previous calls that the per employee per month revenue, this is a key metric in our industry, at Maestro approaches $50, while in Marpai it is approximately $33. Our goal is to bring our total base up to $50 per employee per month.

Second, investors can see the transformation of our business during 2023, looking at adjusted EBITDA, excluding discontinued operations. This measure excludes severances, unused leases that are no longer necessary in our joint business, and other one-time expenses related to our integration of the two companies into one. We believe this metric will improve every quarter of 2023 as we continue to implement our integration plan. We’ll be sharing this with you on future calls. Third, investors should also monitor the future, which we believe is all about value-based care, and see how we play a role in this. Let me explain. Venture capitalists have spent over $20 billion in recent years on some amazing healthcare companies that attack a particular disease or condition.

These have spent much capital on solutions that reverse a1c for people with diabetes, for example. They have the products, the medical staff, and the data on efficacy. They also put their fees at risk and work with the largest employers in America. Now, they do this because they need a virtual insurance pool since they’re putting their fees at risk. We’ve partnered with these companies to bring the solutions to the lower middle market, companies with 100 employees or so versus say 5,000 employees. We have made significant investments in AI and other technologies to create a marketplace for these solutions to our member base. Think of a mini Amazon for the healthcare space, one that matches your healthcare journey to the most appropriate evidence-based provider.

Members love it because these solutions make them healthier. Employers love it because these vendors charge only on consumption. There are no fixed fees, and all these vendors have published ROIs. We have announced the creation of an ecosystem of very specific partners that are value-based like Virta for people with diabetes, and Vori for people that are suffering from musculoskeletal issues. More are coming. This is a pillar for us in bringing better health to our members as a goal in itself. But the other beneficiaries, of course, are clients. The self-insured employers will also have lower overall healthcare costs. As I mentioned, a healthier employee population costs less. More to come here. Let me turn it over to Yoram for a detailed overview of our financial results.

Yoram Bibring: Thank you, Edmundo and good morning, everyone. And previously mentioned by Edmundo, the main event of the fourth quarter was the closing of the Maestro acquisition on November 1. It means that our fourth quarter results include two months of Maestro’s operating results. And due to the materiality of this acquisition, most of the changes in our revenues and expenses, so Q3 to Q4, were a result of this acquisition, which contributed $3.4 million of revenues and $5.4 million of operating expenses. Our revenues for the fourth quarter of €˜22 were approximately $7.6 million compared to $4.9 million in the third quarter of €˜22. Included in our fourth quarter revenues are the $3.4 million that were derived from the Maestro legacy customers, while the revenues from the Marpai legacy customers declined by $700,000 due to the termination of the contract with a large customer who was not meeting his contractual obligations, which we told you about on the second and third quarter calls.

As of December 31, our total number of employee lives was 42,107, of which 1677662, were employees of legacy Marpai customers, and 25,345 were employees of the legacy Maestro customers. As you may recall, we finished the third quarter pre-Maestro acquisition with 16,357 employees lives, which means that there was a slight increase in the number of the Marpai legacy employee lives. Going forward, we’re not planning to separate the legacy Maestro and Marpai in our reporting. We’re doing it now as this is our first quarter as one company, and there is no other way to provide any meaningful comparative information without this separation. We’re quickly becoming one company, and most, if not all of our operating departments, are now running with one team led by one manager.

This does not mean that we have completed the integration process to the full extent, as this is still ongoing, but we’ve done a lot in terms of integrating the people side, which is where most of the costs are versus the system side and infrastructure side that take more time to integrate and there are more – and where more care needs to be taken to avoid customer-related issues. Moving on to expenses, I will be comparing the fourth quarter €˜22 expenses to the third quarter €˜22 expenses. Cost of revenues historically included cost of processing and adjudicating claims, customer service costs and amount 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 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 in our cost of revenues. Our cost of revenues for the fourth quarter, excluding depreciation and amortization expenses, were approximately $4.8 million or 63% of revenues, versus $3.6 million or 74% of revenues in the third quarter. Our gross profit was $2.8 million or 37% of revenues in the fourth quarter, up from $1.3 million or 26% of revenues in the third quarter. The reason for the increase in the gross profit was that Maestro’s ancillary products, primarily care management and cost containment, have a higher margin than the margin on administrative services, and that drives the overall blended margin higher. We expect our gross margin to remain higher than our historically reported gross margins, which preceded the Maestro acquisition.

Our fourth quarter operating expenses, not including cost of revenues, depreciation and amortization, and stock-based compensation expenses, were $9.8 million, an increase of approximately $4.2 million compared to the third quarter, where these expenses amounted to $5.6 million. Approximately $3.3 million of the increases were due to the inclusion of Maestro in the consolidated results for the first time. We’re expecting to reduce our ongoing operating expenses started in Q1 and continuing throughout the year. Operating loss for the fourth quarter was $8.9 million compared to $5.8 million operating loss for the third quarter. Approximately $2 million of this loss was from the Maestro legacy business, as the efficiencies associated with the integration of the two companies are not yet reflected in the fourth quarter results.

This will start changing in the first quarter and accelerate in the second and third quarter, and we will aim to report to you our results with and excluding what we call discontinued activities, which are mainly cost of leases of unused facilities, severance costs, and other one-time costs. Fourth quarter we recorded $259,000 of non-cash interest expense. This relates to the amount that 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 non-cash interest quarterly until the purchase price amount will be paid in full. You can find the details of this transaction in our SEC filings, and we will be happy to try to answer any questions you might have about the deal terms during the Q&A session.

During the quarter, we also recorded a non-cash tax benefit of $521,000. Our net loss for the fourth quarter was approximately $8.5 million or $0.41 per share, compared to a net loss of $5.8 million or $0.28 per share for the third quarter. Excluding net interest expense of $115,000, net tax benefit of $521,000, stock-based compensation of $680,000, and depreciation and amortization expenses, as well as one-time asset write-off cost of approximately $1.3 million, adjusted EBITDA for the fourth quarter was a negative of approximately $7 million, compared to a negative of $4.3 million in the third quarter. Moving on to guidance. We expect €˜23 annual revenues to be between $34 million to $35 million. We expect first quarter €˜23 revenues to be to be in the range of $9 million to $9.3 million.

First quarter revenues are expected to include approximately $0.5 million of one-time revenues from one of our new ancillary products, which we acquired through the Maestro acquisition, as well as $0.5 million of one time run-of revenues. And with that, we will open the call for questions. Operator?

See also 10 Cheap Jim Cramer Stocks to Buy and 12 Best Diversified Dividend Stocks to Buy Now.

Q&A Session

Operator: . The first question today comes from Allen Klee of Maxim Group. Please go ahead.

Allen Klee: Good morning. Hope all is well. In terms of the partnerships that you’ve been adding, can you talk about how that can impact your combined company over the next two years? Thank you.

Edmundo Gonzalez: Yes, thank you, Alan, and good morning to you. So, the ecosystem is just beginning. We have announced two partnerships. We will increase this to probably about a dozen value-based, evidence-based leaders in the healthcare space. This is good for our populations as a whole because what we’re doing is basically mapping the disease states that affect the different populations we’re lucky enough to serve, and basically getting the best vendor in the country, I’m not exaggerating, in the country and the world, to map that. We’re really the first to bring this to the lower middle market, as I mentioned briefly, because in many cases, these companies have to focus on the Fortune, say 500, Fortune 1000, simply because they’re putting fees at risk so that they need a bit of an insurance pool.

Now, what we did here was go to these companies and say, well, forget about the client with 100 lives. Let’s say you’re a law firm with 100 lives, right? Doesn’t matter. It’s not addressable to you. Treat me, Marpai, as someone that has 42,000 lives and I’m your client, right? And I will pass these programs on to my customer base. So, these solutions are definitely life-changing for many of the members. What’s also interesting is that all of these companies that we’ve partnered with, they’ve already done all the hard work on return on investment, and it’s published, right, and it’s vetted. They’ve been around for a few years. So, we have that data to share with our clients. Our high level estimates is that the impact of the ecosystem on our clients can be in the hundreds of dollars per employee per year, often equaling what one of our clients would pay for medical claims for a month.

Now, you know this business, Alan. There’s no – the slope of the healthcare curve only goes up, right, in terms of cost. So, if we’re going to our clients and saying, look, do you want to a free month? That’s very material. That’s very, very material to them. And I’m including in that calculation all the fees to the vendor, our fees that we get for managing everything. And still, there’s a pretty positive result. So, this is very exciting for our clients, obviously, for our members who have an opportunity to access these kind of best-in-class solutions as well.

Allen Klee: And then just following up on that, how do we think about how Marpai would maybe benefit financially from this?

Edmundo Gonzalez: Yes, so for Marpai, it’s very clear. So, we have taken the approach of creating essentially a marketplace, as I mentioned in the remarks. I mean, think of a mini Amazon, right, which has all that you need in healthcare as a member of a plan, right? So, we know, because of all of the investments we have made in technology and different elements of artificial intelligence, we can pinpoint who is on what healthcare journey in terms of our member base. So, we know not only that you are a person with diabetes. That’s easy, by the way. You don’t need advanced AI to do that. You can just look at the claims, but if you’re trending towards that, it may not be so obvious. The other thing that we do is understand which members may be best suited for which solution, right?