Skylight Health Group Inc

XTSX:SLHG

Earnings Call Transcript 2022-Q3

[Operator]

Thank you, everyone, for standing by. This is the conference operator. We would like to welcome you to the Skylight Health Third Quarter 2021 Financial Results Conference Call. The results are for the period ending September 30, 2022. [Operator Instructions] As always, I would like to remind you that listeners are cautioned on today's call and the responses to any questions may contain forward-looking statements, including certain statements which concern long-term earnings objectives. These should be considered in conjunction with the cautionary statement contained in the Skylight Health earnings release and in the company's MD&A and other filings. Forward-looking statements are subject to risks and uncertainties and assumptions. Accordingly, actual performance could differ materially and undue reliance should not be placed on such statements. Skylight Health does not undertake to update any forward-looking statements, except as required. All currencies discussed on this call will be in Canadian dollars unless otherwise stated. This conference call is being recorded today, Thursday, November 17, 2022 at 8:00 a.m. and will be posted to the Skye Health's website within 24 hours at the conclusion of the call. I would now like to turn the meeting over to Skylight Health's Chief Executive Officer, Mr. Pradyum Sekar. Please go ahead.

[Pradyum Sekar, executive]

Thank you, operator, and good morning to everyone, and thank you for joining us today for our third quarter conference call for the period ended September 30, 2022. I have with me today our CFO, Farooq Akhter, who will join us shortly to review our financial statements. Skylight Health is a primary care focused organization that is committed to changing how health care works in the U.S. We operate a multistate primary care health network comprised of practices providing a range of services from primary care, subspecialty, allied health and laboratory diagnostic testing. Our business model is focused on solving two major issues in the U.S. health care. First, providing a white knight solution to small and independent primary care practices looking to consolidate within a highly fragmented market. Secondly, we aim to realign the reimbursement model within these practices to value-based care from traditional fee-for-service only. Under these models focusing on populations, including Medicare, it allows us to receive the full health care dollar, putting the patient first and allocating expenses accordingly. Value-based care models are designed to manage the growing cost of care while improving on patient health outcomes. We continue to execute against our objectives for 2022 and progressive changes to our cost structure and establishment of new contracts for Medicare and Medicare Advantage Global Risk plan for 2023. I am pleased to see that efforts made year-to-date have resulted in significant improvement in adjusted EBITDA from the previous quarter. And I expect that further improvements in the first quarter will result in a reduced cash burn by the end of 2023. We saw a full quarter of revenue and cost of sales from our acquisition of NeighborMD in the third quarter, which resulted both in higher revenues as well as a lower gross profit margin. As previously mentioned, the global risk model or value-based care model has a lower gross profit margin as a percentage due to the medical expenses that are deducted from the premium benchmark we received. However, we received a higher dollar contribution due to the increased capitated revenue under this new model. This is an industry standard and one that will continue to improve upon plan performance both by accurate coatings as well as the cost of care. We have already seen a positive trend towards an improved benchmark for our high-risk members, which more accurately reflects the conditions of our patients. The trend we expect will continue as more efforts are placed with education with our providers and additional care staff to support our high-risk membership base. Additionally, we have seen significant improvements to our quality scores nationally within our Medicare membership base, which we believe will set us up well for 2023 in the ACL reach program. Our work with managed care teams will focus on expanding support to Colorado, Pennsylvania and Texas to bring care coordination, coding and quality support to those Medicare members. For this, we will receive a global capitation per member per month in Medicare, which we expect to have between 1,500 to 2,000 new Medicare members in the ACO reach in 2023. We have also elected to participate in the new alternative payment model for Medicaid in Colorado. In this model, we will shift to a capitation per member per month for our Medicaid members. We have always been in a traditional fee-for-service model with our Medicaid population, which has resulted in revenue variation month-over-month based on volume of patient visits. With the capitated payment model, we removed the volume-based volatility as well as have an opportunity to improve our per member per year fee to drive similar managed care services as our Medicare membership base. We had significant density in Colorado with Medicaid, now with over 25,000 members. We see a strong opportunity to excel in our plan with Medicaid and become a leading provider for Medicaid at-risk programs in the future within the state. While typically many have stayed away from Medicaid due to the challenges in adequate funding, we believe the density and growth potential we have can see success within this population group as peers have in other markets, such as Citi block, who was recently merged with VillageMD. Finally, we strengthened our balance sheet, completing two convertible financing in August and October for CAD 2.35 million and a committed USD 5 million, of which $3.37 was completed. With this capital, our focus has been to continue driving efforts to streamline operations, cost reduction through location consolidations and headcount reductions as well as setting up new contracts such as Medicare ACO reach and Medicaid that we expect will begin resulting in improved revenue in 2023. So, with that, I will turn the call over to Farooq and be back for closing remarks.

[Farooq Akhter, executive]

Thanks, Pradyum, and good morning, everyone. Within five months since I took over my new role and was diligently alongside the two co-founders to positively improve the results of the company. As Pradyum mentioned, we are very pleased with the company's achievements during the quarter. I will start off with a review of the income statement. Please note that my comparisons will mainly be in the prior quarter of Q2 2022. Revenue for the quarter came in at just over $20 million, a growth of 30% compared to just over $16 million for the previous quarter. This increase was primarily a result of the full quarter revenue from the recognition of NMD in Q2 2022. The primary driver of the capitated business segment from value-based care, where the company earned a fixed or capitate per member per month at a significant premium to traditional fee for service. The cost of sales and related gross profit margin percentage for the quarter was $17.1 million and 18%, respectively, compared to $12.1 million and 25%, respectively, in the last quarter. The margins in Q3 2020 were lower due to the change in how gross profits are calculated in a traditional fee Conservice model versus our value-based care or capitated model accretion. To explain further, I would like to bear some context here. Cost of sales for people services and the revenue mainly from prices of service fees paid to doctors and nurse practitioners, medical billing costs and medical supplies consumed at the time of service. In comparison, the cost of sales of category revenue comprises of all the costs associated to the medical care of the members, irrespective of who provided the service. Due to this, the cost of cavitary services are significantly higher compared to the fee-for-service and underwriting. Margins in Q3 2022 were lower due to the first full quarter of N&B's capitated revenue. The company believes the gross profit margins are in line with industry standards and will establish a new baseline as the [indiscernible] even segment is expected to contribute significantly to the growth in the future. Although the gross margin percentage is lower, but the gross margin dollar contribution is significantly greater in capitation. To further improve the margins, the company has identified three major cost control areas where the company can achieve cost savings and reduce [indiscernible] medical loss ratio. Posting hospital emissions, then medical utilization of services and high-cost pharmacy prescriptions. The company also expects to see further improvements in its gross profit margin through increased marketing efforts, to increase the numbers and also equate medical coding for its live at risk to improve the MRI and pulling all major levers to further improve [indiscernible]. Moving on to the net loss. Net loss from continuing operation in the quarter was $4.3 million compared to $5.2 million for the last quarter, an improvement of 16% primarily achieved due to the cost ratio [indiscernible] initiated by the company further discussed with the adjusted [indiscernible]. Adjusted EBITDA was a loss of $3.9 million compared to a loss of $5.4 million for the prior quarter, an improvement of 27%. All of this was achieved due to effective cost rationale is an effort across the company, which should be fully realized by end of the year. We anticipate our operating cost to decrease in the coming quarter, considering the cost market initiatives being implemented and expected improvements to revenue organically through any contracting and other efforts. The company continues to work towards adjusted EBITDA profitability by the end of 2022. Moving on to the balance sheet and cash flow now. We closed the quarter with a low cash balance of around 200,000 compared to $11.7 million last year. The significant drop in cash was addressed by a financing commitment of [indiscernible], the first tranche of USD 3.37 million was closed on October 21, 2022. Second tranche of USD 1.63 million will be closed shortly. NIM changes in the cash were $10.9 million of cash flow used in the operations during the nine months of the year. Operating cash was also used in the quarter to pay for the world term cost and one-off charges we had to call has now is initiated. $10.1 million of cash was used in investing activities, primarily on the acquisition of MD. A net cash of $11.6 million was drawn from the FRC debt facility, $1.7 million was raised from the debenture of financing. This is partially offset by $3.1 million paid for the principal and interest on these parities and dividends paid on preference shares. The company is in the process of completing the second tranche of debenture financing to improve the short-term cash position. At the same time, cash conservation is the top priority. With that, I'll turn it back to Pradyum.

[Pradyum Sekar, executive]

Thanks, Farooq. We've come a long way in 2022, both in setting up a business model to enter and begin participation in global risk and value-based care plans in Medicare, Medicare Advantage and beginning in 2023 Medicaid. We expect further efforts in the management of our members as well as growth of new members to the current annual enrollment period, AEP, to reflect an improved economics for 2023 across revenue, gross margin and EBITDA contribution. With AEP currently underway, we are active in our practices in Florida and have already begun seeing a growth in new leads starting to convert into new members. To aid in our membership growth, we have made several improvements and additions to our Medicare Advantage plan. We expanded Humana to our three Central Florida offices as well as our four Jacksonville practices. We expanded CarePlus to Jacksonville as well as Avnet health plans to Central Florida. In addition to these, we introduced two new health plan for 2023, Ultimate in Central Florida and alignment in Jacksonville. With these plans, we expect to see stronger membership growth from AEP this year as well as into 2023. We also recognized a change in market conditions and extending into 2023 means that we need to be ultimately focused on getting to cash flow positivity. As Farooq mentioned, we have made significant progress in 2022 and recognize that while these changes have resulted in a cash burn of less than 50% of what we had entering this year, we have more work ahead of us. To address this, we are continuing to work tirelessly against our cost improvement plan, while we wait for 2023 to bring an expected growth in revenue contribution within our existing centers. We remain committed to getting to cash flow positivity in 2023 and then looking to benefit from the growth across our value-based care segment from new members and improved membership performance. So, with that, I think it's time to open the call for any questions. Operator, please go ahead.

[Operator]

Thank you. [Operator Instructions] The first question comes from Rob Goff with Echelon Wealth Partners. Please go ahead.

[Robert Goff, analyst]

Congratulations on all of the hard efforts taking the quarter, definitely starting to put you on a good trend. Pradyum in your commentary, you were talking about some of your quoting efforts. Could you talk to what you have seen with respect to some of your route scores and what your leverage might be to further improvements on those scores?

[Pradyum Sekar, executive]

Yes. Absolutely. And Rob, thank you for the comment. I appreciate it. So, the risk-adjusted scores, which are largely aligned with what we call as the driver for our benchmark revenue on the capitated Medicare Advantage risk plan is typically aligned with the health and well-being of our membership base. And normally, what happens with a new membership base or patients that have sort of largely not been adequately cared for. We tend to have a lower rad score even though their conditions may be greater. And so typically, the way the rad score the line is more conditions a patient is diagnosed with or it can be at risk for the higher the rad score. Therefore, the intended cost of care for that patient will also then be commensurate with that increased condition base. Therefore, your benchmark revenue, the PMPM, per member per month or per member per year that's been allocated from the health plan to us as Skylight goes up based on what we define as accurate coding. And so, we've been putting in a lot of effort over the last six months since the acquisition of NeighborMD, been really targeting and focusing on provider education, working with our risk-adjusted coding team to be able to identify any mis gap and opportunities with our current patient base, and this has to be done on an annual basis. And so really focusing on making sure that those patients are being accurately diagnosed their conditions are being properly mapped in the billings to the health plans, which then gets reflected in the rad [indiscernible] health plan has led to over the past six months now and expected growth and a trending growth from the health plan of our current population base, which is typically trails on a six-month window. And so, what we expect to see starting January and then as we go six months forward is further effort in this will increase the ability for us to get improved funding for the adequate condition and cost of care for our patients, which will both help improve gross margins due to increased revenue, but also increased top line revenue with the existing membership base.

[Robert Goff, analyst]

And dropping down the income statement. Could you talk to when you see your operating cost structure at a level to support positive EBITDA?

[Pradyum Sekar, executive]

Yes. Thanks. So, our expectation is, and we've been driving pretty heavily this year. We've been communicating that through the various quarterly results. But our focus is to get to a cost structure by the end of this year, that is a cost structure one that does not need to necessarily reflect positivity but reflects the ability to flip to positive in '23. The cost of operating a value-based care business, the practices, et cetera, have far improved since the start of this year, and that's reflected in the financial statements that we've been able to show reducing adjusted EBITDA or improved adjusted EBITDA with increased revenues, and we're pretty confident that as we exit this year, especially now as you look forward into '23, which is less than two months ago, we've got the new Medicaid program. We've got increased membership from the AEP this year. We thought the changeover of our traditional Medicare lives into the ACO reach program that this expected revenue growth with an improved cost structure as we exit this year, we'll start to look to now generate positive cash flow in the new year. So, we're continuing to stay positive, and we'll continue to stay consistent with our messaging that that's our #1 focus, and that will ultimately be our plan as we exit this year.

[Robert Goff, analyst]

Perfect. Thank you very much. Good luck.

[Operator]

The next question comes from Carl Byrnes with Northland Capital Markets. Please go ahead.

[Carl Byrnes, analyst]

Prad, you mentioned that you expect 1,500 to 2,000 additions in terms of value-based care at risk. Where would that bring the number of value based and at-risk patient count, given that 1,500 to 2,000. And I have a follow-up as well. And then also, what might that translate in terms of revenue on a run rate basis for fiscal '23 from the at-risk population?

[Pradyum Sekar, executive]

Carl, thanks for the question. So mindful that we want to hold back on any formal guidance for '23 until we get the final attribution like from CMS on those Medicare lives, which we're probably not going to see until December. And so, once we have that, we'll be able to provide a better update but also the initial attribution list is not going to be reflective of the final list in '23 as many members will continue to roll into the program through our efforts in alignment with those patients in '23. So, if we look at the sort of targeted 1,500 to 2,000 new Medicare members and the reach, we're adding on to an existing approximately 2,400, 2,500 patient panels today. So that will take us to somewhere between 4,000 to 4,400 total Medicare members within a globally capitated risk program. Now the membership base in an ACO reach typically doesn't have the same benchmark as Medicare Advantage as there's a small benchmark of a few percentage that allocated from CMS. But we're expecting, based on the data we've received so far. And again, we can confirm this once we get the final attribution looks for CMS. But that benchmark should be somewhere around $11,000 PMPY per member per year. And so, we're looking at somewhere between 17 million to about USD 22 million in terms of improved revenues for 2023 through the increased attribution of the membership base going to risk within Medicare. But again, that's still subject to us getting the final attribution list for January 1 and then what will continue to roll in during the course of the year. One thing to note is with Medicare Advantage typically with existing health plans, you can continue to enroll, but with most new health plans, you don't typically tend to enroll until the fourth quarter of the year. With ACO Reach, you could actually continue to align Medicare members over the course of the 12-month period, although there is typically a quarterly lag in their attribution. And so, with Medicare -- with traditional Medicare, we should continue to see membership growth even continue during the course of 2023.

[Carl Byrnes, analyst]

That's very helpful. And then just a follow-up question on the ACO program in Colorado. Maybe you can go through how that works mechanically in terms of percent sharing of savings and what that might mean in terms of what could possibly drop to the bottom line with that program in Colorado hence.

[Pradyum Sekar, executive]

Yes. So, with the ACO reach at risk, the percentage savings is really going to be dependent on surplus deficit similar to how we see the Medicare Advantage. So, with the partnership we have with CHS, that's effectively what our joint venture will be focused on is sort of maximizing that opportunity to keep healthy patients and our patients manage the number of care wells so that we have an opportunity to beat the benchmark based on what CMS is set for the annual period. Difficult to say what the direct contribution will be to the bottom line. But typically, what we see in gross profit margins on these things should be somewhere between 6% to 8% on the ACO reach program. But again, we're trying to do better and trying to achieve that. But this will be something that we'll be able to probably speak to more during the course of the calendar year. And with regards to the actual managed care services, Colorado, Pennsylvania, Texas, I mean these providers have been obviously caring for the patient a panel for quite some time. And so, it's a known patient panel. We have a fair bit of claims data on these patients that have been generated through our joint venture program. We've been able to process. And now it's just a question of ensuring that we have the right team in place around those providers and to support those members similar to, again, what we've done within the Medicare manage programs to be able to improve on things like utilization within hospitalization, overall quality and care management capabilities and so forth. So that will be our time moving forward to '23.

[Carl Byrnes, analyst]

Great, thanks. Very helpful, and congratulations on the progress.

[Operator]

[Operator Instructions] The next question comes from Rahul Sarugaser with Raymond James. Please go ahead.

[Rahul Sarugaser, analyst]

Prad, Farooq please let me reiterate the congratulations on all the progress this quarter. So, I just want to start with a little bit from last quarter where you had indicated that you'd be providing a little bit more reporting on the KPIs like member counts, medical risk adjustment medical loss ratio. So, I wanted to see if you could give us any color there and whether we can be expecting to see that being reported in future quarters?

[Pradyum Sekar, executive]

Rahul, thank you. Yes, we certainly can provide a little bit of color on that. The exact [indiscernible] numbers are a little bit difficult for us to buy currently right now just because we're still getting our hands on what the changes made over the last six months reflect in terms of trends. What I can say is overall membership growth has improved within our Cares program that we have. Humana has seen a few patient reduction primarily due to the fact that we've had one of our offices that has a provider gap, but we now have a new provider that has begun seeing patients in that location, and so we anticipate that membership growth to recover back again.But overall, membership base is still strong within both the health plans on an average basis. MRA, which is the benchmark reporting score for rad score has been an improvement, and we've seen that continued trend continue over the last few months, we're expecting to get an updated report this month, which should give us sort of what we can expect to see and then what we can potentially expect to see by the end of the year, which, again, is a pretty significant improvement from where we started off back in May post acquisition of NeighborMD. In terms of the cost of sales, again, we'll provide more firm numbers probably once we have a couple of quarters of this data under us. But in terms of cost of sales, Q3 did see a higher cost of sales with regards to our membership base. But maybe what I'll do, I'll turn it over here to Farooq maybe if you want to provide a little bit of color into that and maybe what we can expect in Q4 in terms of that MLR.But just briefly before I do, one caveat I want sort of context, I'd like to provide around the cost of sales on our patients is that unlike the benchmark revenue, which is the MRA, which can be more consistent to the six months -- six-month trailing basis, MLRs are typically dependent on your patient population in a given time of year. And so, we do our best in terms of forecasting the health of our population. But sometimes it ebbs and flows based on quarterly results, you tend to look at this more on an annualized basis. And this is something that we've seen pretty consistent across the board with our other peers as well and listening and understanding how they explained and how they're able to communicate to shareholders how to think about the MLR on a quarter-by-quarter basis is that there tends to be a fair amount of adjustments made by the health plans to these metrics over the course of a 12-month cycle based on claims data. And we just have to have that context in mind when we talk about the MLR in that you might have one or two months of higher expenses, followed by a few months of improved performance, and that just sort of reflects the nature of the need for patients with regards to things like medications, referral, hospitalizations, et cetera. But Farooq I'll turn it over to you, if you want to provide a little bit of color in terms of how MLR has performed in Q3 and what we can expect in Q4.

[Farooq Akhter, executive]

Thanks, Prad. On to your point, [indiscernible] Prad has already explained about the medical loss ratio on EBITDA [indiscernible]. What you see in quarter three when you go to the cost of sales, we saw higher expenses in the service funds in quarter three. Now any improvement in the service fund and improvement in medical loss ratio, which we have been doing over the course of the quarter three, that would be reflected with the time line, which can range from three months to six months. Moving on to October. We have already started to see improvements in the [indiscernible] October, November, December, when we report the fourth quarter results along the year-end, you will see a significant improvement in the medical loss ratio and the [indiscernible] impact on the P&L. So, the significant improvements, which we did in quarter three were -- as Prad mentioned, the hospital admissions, medical insurance [indiscernible] prescriptions, which are the higher cost charging items in the service funds. And to your point, we have already started to see the improvement in quarter four.

[Rahul Sarugaser, analyst]

[indiscernible] that’s very helpful. Thanks very much for that. So now tipping a little bit to the top line, given I've much of the top line growth has been through inorganic acquisitions, NDA recognizing that you're not giving guidance for the moment, how just -- how should we be thinking about top line growth, particularly as we enter 2023, in balancing inorganic growth with organic growth?

[Pradyum Sekar, executive]

Yes. Thanks, Sarugaser. So, I'll take that. I think you should think about it as sort of a transition to organic growth ahead of inorganic growth is typically our cost has been M&A growth historically. The levers for organic growth for us entering '23 are strong, which is partially why we're very excited based on reflected cost structure we expect at the end of this year against what we can see currently into 2023. There are really four levers in 2023 that will drive organic growth for us. The first one is increased membership base within our current Medicare Advantage plans and potentially new membership within our new membership plans that we have within Florida, as I communicated earlier, that will be number one for organic growth. Number two will be the ACO reach, where now our traditional Medicare members will move to a risk model in the joint venture that we have with CHS team that will allow for us to see increased revenues on those membership population. But of course, that will come with increased care coordination and overall managed care services, but that will be a second driver for organic growth, as I was previously explaining on the Q&A. The third driver for organic growth will be within the Colorado Medicaid program and the Medicaid program is something that we've been participating in for a few years now for quite some time. But of course, shifting to the new alternative payment model, it does improve our overall consistency of cash flow on a month-to-month basis because we move to capitation versus fee-for-service, but it also does increase our Capitated dollar amount compared to what we saw in fee-for-service as a result of now being able to provide more quality and care services to those memberships within Medicaid. So that will be the third lever for organic growth. And then the fourth level for organic growth will come from our existing fee-for-service contracts where we've been able to see some improved negotiation with health care payers, specifically in a few markets where now on a fee-for-service basis with the existing revenue -- with the existing patient volume that we're seeing, we'll see improved funding per patient visit based on those contract negotiations that we're going to speak. So that's going to be really where our focus is right now. We're looking at same practice sales. We're looking at same practice growth. We're looking at adding new providers. We're looking at adding increased capacity in days and times for our membership to be seen, of course, with the four levers that I mentioned before as well. Moving forward, as we start to move into cash flow positivity, it does present us an option again to start looking at increasing density in these markets. Now strategically, as tuck-in acquisitions now that we have a very clear game plan and health plans in place to convert new practices into value-based care much quicker and actually start to report on that sooner. But of course, the inorganic growth for us will really be based on first achieving a cash flow positive model, which also has been benefiting from organic growth and then continue to build from there. I hope that answers the question, Rahul.

[Rahul Sarugaser, analyst]

[indiscernible] very, very [indiscernible]. Thanks very much. Okay. Well, congratulations again on the quarter, we'll certainly be looking forward to seeing how this all plays out into Q4.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Sekar for any closing remarks.

[Pradyum Sekar, executive]

Thank you, everybody, for participating in today's conference call. We hope, as always, we're able to convey some of the excitement that we feel overall about where Skylight Health is going and its prospects for 2023. As always, we like you to visit our website, skylighthealth.com or you can find out more about our company and contact details should you wish to reach out to us. Thank you very much, and hope you all have a great day.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.