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 Lee, who is Vice President with Marpai. Please go ahead.
Thanks, O perator. 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 reconciliation 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. With that, I will turn the call over to Marpai CEO, Edmundo Gonzalez. Edmundo?
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. Our revenue was $10.05 million during the second quarter, compared to $9.7 million during the first quarter.
Our adjusted EBITDA was -$5.5 million, excluding severance and unused facilities, it was -$4.1 million. We can compare this to our first quarter's adjusted EBITDA of $6.7 million and adjusted EBITDA, excluding severance and unused facilities, of -$5.9 million. 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, cash outlays related to these commitments will be subsidized by these multi-year subleases. We continue to report on adjusted EBITDA and on 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. 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. 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. Of course, the wonderful thing 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 break even in profitability. The mantra of 50 by 50, 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 of 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, 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 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 that 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. 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. Let me turn it over to Yoram Bibring, our CFO, for a more detailed view of our financials in Q2. Yoram?
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 1st, 2022, is 100% included in both the first and second quarter results. Our revenues for the second quarter of 2023 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 30th, 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. Our 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 lives. 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 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 the employee lives and the related decline in administration 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 administration 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 2023 expenses to the first quarter 2023 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. All these costs are now also included as our cost of revenues. Our cost of revenue 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 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 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 reduction 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. 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 in the value-based care platform, our operating loss was approximately $4.5 million, an improvement of $1.7 million, compared to $6.2 million, which was the 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. Net loss for the second quarter was approximately $7.6 million, or $1.11 per share, compared to a net loss of $8.5 million and, or $1.64 per share for the first quarter. These figures reflect the four-to-one 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 unused facilities costs as approximately $1.1 million invested in the value-based care platform. Moving on to guidance. We're increasing our 2023 annual revenue guidance from its previous guidance, for our previous guidance on between $34 million to $35 million, to a new guidance of between $35 million and $36 million. We expect third quarter 2023 revenues to be in the range of $8 million-$8.5 million. 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. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then two. Today's first question comes from Allen Klee with Maxim Group. Please go ahead.
Good morning. Congratulations, beating my top and bottom line and raising guidance, and your company seems to do more related to tackling key issues in healthcare than, than any other company I know, so I'm impressed. My, my first question just related to Maestro. In, in terms of, just how you feel about where you, where you are in the integration, in terms of... It sounds like most of the heavy lifting was done, but, but, integrating the products, just, just comment on kinda how you, how you feel like where you are today.
Yes. Thank you, Allen. Good morning. Look, the heavy lifting, and the maybe the nasty business of M&A is, is really behind us. This is, a lot obviously on cost cutting. Now, the more fun 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, and the new year. We are setting up and have set up obviously, to very aggressively cross-sell these. We are operating as one company, with one management team. The management team, by the way, is, is a mixed team with, legacy Marpai and legacy Maestro, senior executives, and end line managers as well. It is one company, and, we're, we're ready. We're, we're ready to go.
More than that, you know, even the Maestro brand and everything will continue to fade and disappear by the end of the year, as everything is, is melded in.
Thank you. You mentioned that the quarter had $1.7 million of integration costs, loss on disposal of assets and severance. You, you also, 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 subleased the offices that you said you subleased? And if it did, or when did you sublease them? What was the impact in the quarter of the cost that's gonna go away? Thank you.
Yeah. Hi, Allen, it's Yoram. It's gonna take-- we, we actually signed one, which we signed. The other one is in the process, and, you know, people are getting a couple of free months. You won't see it on the... It will-- You won't see it on the P&L until probably early next year. Yeah, all of that is sitting in that, in that number. It's actually, $1.4 plus $300,000 loss, asset write-off that we did because we got rid of offices. That's why you see that $300,000 write-off, total is $1.7, it's still, the cash base is one point, it's $1.4. You won't, you won't see it actually coming down much this year just because of the way these contracts are written.
What... I heard you guys say that you're, expect your expenses to go down through this year?
The ongoing, yes. Yeah, because the ongoing-
Go ahead.
Yeah, the, so the, the cost cutting that, you know, Edmundo said that most of the heavy lifting is behind us, is true, but it's behind us today, and we're already in August. The impact of this, you'll see some of it, you're gonna see in Q3, and then you see the full impact in Q4, right? There's still a little bit more, but most of it is done. Again, you don't see them in, in the numbers. That's the way, that's the way this translates into the, into the numbers, right?
Got it. Okay. Thank you. For value-based care, you've, you've, it's been, you've been signing these very impressive partners. You're working on building it out. I get you're taking actions to sign up customers. Can, can you talk about... I, I know it's pretty early days, kind of what, what are the steps you're doing now? How, how do you feel about the actions to, to sign up customers, if, if you feel like you have an effective approach and, and, and how, how you think about the ability to, you know, how, how much of the customers you can sign up and, and the savings you can get to employers, and, and maybe share-
Yeah.
Sorry, that's like 10 questions.
No, it's okay. It's, it's all, it's all wrapped into one, right? How, how do we commercialize
Right.
our Marpai Connect, which is our value-based care network. What 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're a tech company, right? We put all of their data in a very easy to read, easy to interpret dashboard, that basically takes technology in and projects their trend, their trend line of cost by disease state. If you have, you know, 1,000 employees and 120 are experiencing or living with Type 2 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.
Given that, the, we present these as, you know, very, very nice, easy to read charts, right, online. We also have the potential impact if part of the population would sign up to, say, our partner Virta, in the Type 2 diabetes front, including the cost of those claims, because you have to pay Virta, but also the ROI that is published based on their other clients who are, you know, very large. Remember, Virta has the longest running trial in diabetes, right? We've done that for our clients. We are meeting with the clients. Some of them have already adopted it. Others have said, look, let's roll this out in conjunction with our open enrollment.
I feel very good that a, a slice of our customer base, a significant slice, will take this. Why? Because it is aimed exactly at what is driving their costs, which are controllable, or reversible, right? This is good for the employer. We're managing... At the end of the day, we're managing part of the employer's P&L, right? By, by our work. It's also very good in terms of outcomes, meaning their employees, can live a healthier life, you know, a, a life without potential pain. These systems really, really work, and that's why we've chosen them. We've done a massive amount of work in vetting them, and we're confident that anyone we add is in the category of the, the best of the best in terms of their, their scientific approach, their clinical validation.
Of course, they are also confident enough in their solution to put their fees at risk, which, which is a, is a huge signal, obviously, to the strength of the program. Bottom line, I want this in every one of our clients. Will 100% of our clients take it? No, I don't think so. The good thing is some of our larger clients that are managing, you know, a lot, a lot of, of member lives, are actually the first that, that have, you know, stepped up for this, which is very, very promising.
And, and in terms of the cost of so your real cost is the cost of acquiring the customer. You're, you're doing some of the marketing of that, right? Then once you get a customer that's in the program, you get pretty much 100% profit margin of, of the savings. The question then is that your cost of acquiring a customer, how, how do you, how do you think about that and the, and the success of that?
Yeah. Let me just, just to be clear for, for other members of the audience that may not be clear. The virtual, or rather the value-based care network, is a network, right? 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. 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, ops in to one of these programs, then the fees related to that are charged as a medical claim. Just like because these are all provider groups, right? Just like you would pay a claim for visiting a doctor.
Based on that, that we make money off that, we make a slice of that. Clients also like it because there's no fixed fee, meaning you're paying on consumption, you're not paying on just to have it, right? That's a very important distinction here. And it's very easy for us to basically sign up clients we already have. More than that, any new client, this is wrapped in to their, to our standard contract. It's really, we want to make sure our clients are really enjoying the fruit of this. I think what you're getting at is more the cost of acquisition of a member. The member is part of a client we already have, right?
So, yes, there, there is some cost in texting, emailing, and potentially a call from a nurse, but those are really minimal costs. The biggest, I guess, advantage we have is the 200 clients, is the, you know, 70,000-80,000 member lives, right? We already have these. We, we've already acquired them. That, that is our base. 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, you know, method of getting a member, you know, to join one of these programs is a call from a nurse or a clinician.
That, that's interesting. So, something... Okay, could you just talk a little about how, how you use AI or how you've been using it, maybe in some new ways or, or the, the bigger ways that you've been using it?
Yeah. The, the most, the most kind of pervasive and impactful way here is, and, and the latest one is, just as I described it, 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, of AI and, and advanced analytics. This is a very tangible way that we have harnessed the, the power of AI with our own, with our own data, our own clients' data, and given them back, basically a little sneak peek of the future of cost. The rest, the, the, you know, telling them how much they may save, that's not really AI. That, that's based on, just analytics on, on published results from our vendors.
Getting into the data, seeing who is, who is on what journey, understanding those costs, and then projecting those costs based on how we see other claims, right, and progressing or other claimants progressing, that's a very tangible use of, of AI. That's just one example, obviously, but the other items that we'll, we'll use a lot more here in the future, are really about automating how we can contact and engage members, to get them, you know, to sign up, to get them to more engaged 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, a call from a clinician, who's part of our plan, part of our company, seems to be the most effective way right now, at least.
Thank you. Okay. I wanted to move on to something else. I heard you guys say that to get to profitability, you, it'll happen when, hopefully when you hit $50 per revenue per employer live, excluding pass-throughs and 50 lives, 50,000 lives. Then like I kind of made, 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. Thanks.
Yeah, let me explain and also call in Yoram as well here. If you just did the math on our revenue, it's actually a much higher number. We internally, we look at our revenue excluding pass-through items, for example, network fees. We call it RevX inside. It's the revenue excluding pass-throughs. That's the $50. That's basically what we keep, right? What we really keep. That's not a reported number, by the way. You won't find it on the P&L. I think our just our revenue on a per employee per month basis is in the 80s. We look at actually what we keep. That's the $50. Now, that number, yes, it's already in that safe range.
We still need more lives. As you know, Allen Klee, these are two levers, right? If you take that number to 55, okay, so you need less lives, right? That's, these are the two levers that all of the management team is very aware of. All of what we're doing when we're releasing a new product is talking in per employee per month language, right? Because we wanna make sure internally that everyone is understanding the economics, the, the fundamental economics that, that drive our business. In ours, it's pretty simple, right? That's... It's, it's price and volume, as in most businesses.
Our, 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, our share of revenue, from, from other ancillary products, this is what builds up our, our $50. Yes, we're, we're doing well on the revenue, RevX point of view, and we need more lives, which is exactly what, what, what we're focused on now.
Yeah. Just one of the things, the, the, in Q2, we had a high RevX number. It's gonna be low in Q3, because it, this is a little lumpy, right? Because we have some products that are higher margins and some with lower margins. When we say 50 by 50,000, we're talking average for the year, not just a specific month, a specific quarter. Also, we're talking about the TPA, right? We're not talking about... We're talking about the TPA as a profitable entity. 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, but we need, with them, we need more than 50,000 lives. 50,000 lives to bring our TPA to, to break even.
Got it. Then I think this is 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. Talk, so that that could get you, in the direction that you're hoping to get. Talk, can you how do you sell that or how, where does that stand? It's a pretty new product, obviously, but I'm getting. Does this get sold differently than, like, through brokers? How, just more about it, because it sounds like it's very important for you in terms of getting to your goals. Thank you.
Yeah, thank you for that. It is very important for us. It's, it's, it's a new product. It's a new packaging of everything we have. What we've done here is make it very easy for small businesses to sign up with us. self-funding, Allen, there's a, there's a statement in the industry that if you've seen one self-funded group, you've seen one self-funded group, right? Because everyone is, is slightly different. 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, right? 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, and we basically put everything from the plan design to wrapping our own PBM from MarpaiRx, access to the networks. Everything is just built in where they can basically select, they can pick and choose from established plans and go. 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, obviously, a lot of demand from these smaller businesses, and not necessarily a lot of solutions other than shopping, you know, among the fully insured carriers. That's one.
Two, is that we have various partnerships with established, insurance captives, and we are... That, that, those are channels for us. In many of those cases, we don't have a cost of sales. The, they are coming-... to those, channels that have essentially built the health plans, for smaller businesses, but we're powering everything in, in the background. It, it's multi-
I'm sorry, Marpai. I, I'm, I'm sorry. When you say you have a partnership with an insurance captive, could you describe, just define what a, what an insurance captive is? Start, start at the beginning.
Yeah. No, no, no. This is totally fine. There are multiple entities that we work with as, as sales channels, but they are focused on the stop-loss part of what we do in self-funding. You'll, you'll remember, Allen Klee, from our conversations, that everyone in this space, even though we call it self-insured, it's self-insured to a point, right? In other words, if you have a very, very sick member in your small business, i-if that member's gonna cost $1 million, you may go bankrupt. That never happens, right? Why?
Because we add a layer of stop-loss insurance to say, "Look, if, 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, et cetera." Now, there are entities that are called captives, and they basically manage that part of, of the business. Now, some of them have also created their own health plan, and they, 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, et cetera. We partner with several of these and basically do all that.
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.
Got it. Thank you. That's it for my questions. Thank you very much.
Sure. Thank you so much for attending.
This concludes our question and answer session. I would now like to hand the call back to Simon Lee for closing remarks.
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.
The conference has now concluded. Thank you for your participation. You may now disconnect your lines.