Marpai, Inc. (NASDAQ:MRAI) Q1 2023 Earnings Call Transcript May 12, 2023

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. [Operator Instructions] 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: 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: 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, which 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 for 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 add to our revenue. The ancillary services include care navigation and care management for members of our plans. We call employees of our clients and their families 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, yes, healthier employee populations cost our clients less.

That’s what we do. We reached $9.7 million of 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, which 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 search of greater efficiency given our new scale of over 40,000 employee lives.

We are executing per our plan and per our budget. Given the cost of severances and other break up 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, keep to our expense budget and adjust fast if the top line is falling behind. Mind you, our revenue is pretty visible given the nature of our contracts. Second, sell to customers we already have. There’s a great opportunity to upsell products, which we have to clients we already have. For example, many of our legacy Marpai clients before the acquisition 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. There’s plenty of product for us to meet or even beat our goal of having at least $50 per employee per month in every life we manage. Some investors ask 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 deploying AI and other technology to build a unique ecosystem of value-based care of vendors.

These are the best of 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 solution that’s evidence based 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 cost 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: 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, find achieve a deal if you will, and indeed, most of the churn was within Maestro legacy customer base. The transaction also impacted our ability to close new deals because many potential customers would shy away from signing up to the 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 that are delivered by our nurses and cost containment services that have laid 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 lumpy 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 figure 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 $8.9 million operating loss for the fourth quarter. We believe that operating loss, excluding the severance cost and cost 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 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 noncash interest quarterly until the purchase price amount will be 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 expense – net interest expense of $401,000, stock-based compensation of $702,000 and depreciation and 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 the severance of 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. The balance of the cash will stay with the company. And with that, we will open the call for questions. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question today comes from Allen Klee from Maxim Group. Please go ahead with your question.

Operator: [Operator Instructions] Ladies and gentlemen, at this time it is showing no additional questions, I’d like to turn the floor back over to Edmundo Gonzalez for any closing remarks.

Edmundo Gonzalez: 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: 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.