Skylight Health Group Inc.
Q1 2022 Earnings Call Transcript

Published: 17 May 2022

[Operator:]

Thank you, everyone, for standing by. This is the conference operator. We would like to welcome you to the Skylight Health’s First Quarter 2022 Financial Results Conference Call. The results are for the period ending March 31, 2022. As a reminder, all participants are in listen-only mode. After today’s speakers conclude the presentation portion of the call, should time permit, they will move to a question-and-answer period. As always, I would like to remind you that listeners are cautioned that, 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 Company’s cautionary statement contained in the Skylight Health’s 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, Tuesday, May 17, 2022 at 8 AM and will be posted to the Skylight Health’s website within 24 hours after 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:]

Thank you, Ariel, and a good morning to everyone, and thank you for joining us today for our first quarter conference call for the period ending March 31, 2022. With me this morning I have Andrew Elinesky, our CFO who will hop on a moment here to walk you through the financial performance. Skylight Health is a primary care focused organization that is committed to changing how healthcare works in the U.S. We operate a multi state primary care health care network comprised of practices providing a range of services from primary care subspecialty allied health laboratory diagnostic testing. Our business model is focused on solving two major issues in U.S. healthcare first, providing a white knight solution to small and independent primary care practices looking to consolidate within a highly fragmented market, and where providers and practices are easily looking forward to qualified and supportive buyers. Through a national platform, we aim to bring scale, efficiency and improved revenues to these practices. Second, we aim to realign the reimbursement models and these practices to outcome based care, or more commonly known as value based care contracting. Our focus with a specific patient population such as Medicare is to shift them from a traditional fee for service model, where in general, they can generate between $200 to $400 of visits per year, I’m sorry, to a value based care contract. Where some of these full risk, total cost of care contracts can generate over $10,000 a year per patient that’s paid by the payers and not the patient. This model enables the practice to receive the full healthcare 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. I am proud to reflect on the past 18 months. As we have communicated our goals and objectives we have now achieved transformative growth through a disciplined acquisition strategy. We have secured a partnership with one of the top health insurers in the country. We have now entered full risk with Medicare Advantage. And we’ve established our teams with the tools and resources required to organically grow. We now have all the pieces in place, and are in a position to execute into 2022. The first quarter was a very busy period for us to the company. Our number one focus was the continued integration and implementation of the systems and tools that are required to successfully operate our network. Far too often we have seen in the similar acquisition platform, the lack of proper integration and systems to manage that lead to revenue and cost implications and in some cases failure to operate. Our experienced both as practice managers as well as to the various acquisitions in the last 18 months has been that certain tools including tools like a single electronic health record platform provides us with the visibility and information we need to manage and make objective decisions. It is these systems and tools that in the past as of now does today, allow us to be flexible and move quickly with business decisions that support rapid growth or changes in our markets to patient volume and health overall indicators. I’m happy to announce that we have now completed the launch of Athena Health, our EMR or electronic medical record system across all practices as at the end of the first quarter, and we will begin at the implementation process within Neighbor MD who just recently joined our network this month. Further, we’ve implemented a more robust accounting and financial system, a human resource platform that drives improved engagement and efficiencies on the back end with regards to our overall accounting and reporting workflows. With tools now in place, many of these onetime expenses to launch and implement, as well as cost synergies through workflow improvement have led to over 40% in cost savings on a pro forma basis. While costs were higher in Q1 this year, as we communicated on the last earnings call, we expect future quarters; we’ll continue to see an improving EBITDA margin. As we expect that Q2 will still carry cost as we transition out of some of these expense items to three will be more reflective of our cost saving initiatives from a reporting standpoint. We made some exciting announcements over the past few weeks. The first was our joint venture with Collaborative Health Systems, or CHS, which is a wholly owned subsidiary of Centene, one of America’s largest pairs, today trading at over a $50 billion market cap. As we’ve communicated our plans to enter into a JV with a large U.S. payer over the last six months or more, efforts to get here we’re no small feat, and for neither for ours team nor theirs. And so I would like to thank everyone on both sides of the JV for their commitment to getting this done, the time, the effort and the patience and the patients from our shareholder base as we worked towards this key milestone. I’ll share more on this JV later on this call. The second big announcement was the acquisition of Neighbor MD, a primary care group in Florida with nine practices. And more importantly, approximately 2400 Medicare Advantage lives at full risk, a trailing 12 month revenue for approximately 35 million U.S. Now it is important to note that the 2,400 lives, roughly 1,200 come from the old practices and 1,200 from the affiliate practices. And as we look to further established the affiliates over time, our goal is to continue to grow and an own model. But of course learn from neighbor how we can benefit from an affiliate model as well. This acquisition allows Skylight to both bolster density and one of the largest Medicare markets in the U.S. but also accelerates our plan to full risk into 2022 this year, where originally we were planning it for three to five years out. The acquisition of Neighbor along with the ability to leverage growth in the Medicare Advantage market means that we can begin transitioning our Medicare and Medicare Advantage lives in a fee for service model in ‘22, and ‘23. These are with both payers Humana and CarePlus today as the contract covers Neighbor. Under these agreements, we will move to a capitated model where a full risk we can realize on today’s estimates between $10,000 to $12,000 per member per year. This is a substantial increase from to 200 to 400 a year, we might get today on a fee for service model alone. Today we have over 1000 Medicare lives in Jacksonville alone that can benefit from this program. The medium to long term goal will be to leverage these contracts with CHS and our JV into full risk contracts into Colorado and Pennsylvania as well. I’ll explain more on the economics and how shareholders can look at the impact to revenue and EBITDA after Andrew goes over the financial overview. So with that, Andrew, hand it over to you.

[Andrew Elinesky:]

Thanks, Prad. And thank you once again everybody for joining us today. As Prad mentioned, we’re very pleased with the company’s achievements spoken last 18 months and the year so far. The first quarter financial results reflected the impact of the acquisitions that we’ve made in the last year and a half, and are in line with the investments that we’ve been making in the business development through our systems and operations as we continue with our plan of growth via acquisitions, optimization and the expansion of our book of business. Please note, when I go to the financials here, my comparisons will mainly be with the prior quarter of Q4, 2021 considering the business only a partial revenues for primary care in Q1 of ‘21 due to the timing of our acquisitions mostly occurring post the first quarter last year which makes Q4 a more comparable quarter to Q1 of this year. Jumping in, revenue came in just over $7.7 million, and our gross profit came in at just over $3.4 million for the first quarter. This compares to nine 9.4 million and 5.3 million respectively for the prior quarter. The reduction in revenue can be attributed to two primary reasons the implementation of our new electronic medical record system and secondly, the reduction in urgent care visits as COVID-19 cases reduced within the markets. Our cost of sales were reduced when compared to the prior quarter. But not offset the difference in revenues. Our gross margin was reduced and came in at 44% versus 57% In the previous quarter. The company expects to see this number improve in the coming quarters for this fee for service business line as the first quarter was an outlier. Our loss from operations remained relatively flat, which came in at 7.6 million versus 7.7 million in Q4. Despite this reduction in gross margin, the reduction in revenue was offset primarily by savings in salaries and wages just under a million in an office and admin of just about a half a million as well as the lack of acid impairments that were recorded at yearend of $1.4 million. Adjusted EBITDA came in at 6.7 million versus 5.1 million for Q4. Normalizing for the impairment of 1.4 in Q4., EBITDA remained at similar levels compared to that quarter. The company expects us to improve going forward, as on already realized a large part of integration costs and platform development costs in Q1 of this year, as Prad said, and in addition, we expected synergies and efficiencies from this more robust unified platform will allow for further savings. We also continue to generate strong revenue improvements from our research division. We’re on pace to outperform in FY in the financial year ‘22 versus ‘21. Based on performance today, the practices remain profitable from an operating model and were incorporated admin expenses related to the public market listings and integrations have been the primary contributors to a negative EBITDA. As with all integration efforts, the company has seen a major cost reduction over the past few months and which Prad already mentioned, are projected to be vastly improved compared to this quarter. Moving over to the balance sheet, we closed the quarter with a cash balance of just over $4 million. From Q4 the main changes were 6.5 million spent on operations and investments. Just under 1 million was spent on principal and interest on our lease liabilities. But a quarter million spent on insurance and another 200,000 spent on dividends for preferred shares. These net outflows were slightly offset by 0.3 million received as part of a legacy business sale. Subsequent to quarter end, as Prad mentioned, we closed on a U.S. $20 million debt facility with FLC credit partners, a New York based lender and concurrently completed the deal to acquire Neighbor MD. As mentioned by Prad this was with total cash consideration of U.S. $8 million. The company drew down us 10 million from the facility to pay for the acquisition and the cost of the transactions. And the company still has a further 10 million available to draw down from the debt facility to fund future acquisitions. Moving to the outlook for 2022 as Prad mentioned, with the addition of Neighbor MD completed, just recently, we’re holding off increasing guidance until we get a longer track record of operating a new business. We do know that there will be a material increase to our revenue starting in Q2 and that the shift of value in 2022 is expected to boost annual per patient revenue growth by way of increased fee for service rates, as well as quality and outcome based payments. And as mentioned earlier, we anticipate our operating costs to decrease for the full year in 2022 considering the completion of the build out of our internal infrastructure across all of our clinics and corporate offices. And when you align these with further synergies in the pipeline and expected improvements to revenues organically through M&A contracting and other efforts, the company continues working towards profitability by the end of this year. With that, I’ll turn it back to Prad.

[Pradyum Sekar:]

Thanks, Andrew. So our focus going forward is going to be on really four key areas. One, the continued management and operational efficiencies within our existing practices. Two, the integration of Neighbor MD into Skylight. As you can all imagine it is a fairly large acquisition and we’re going to want to focus on a successful integration. Three, next steps with the JV as we began to expand value based care contracting efforts, both starting with Medicare and Medicare Advantage and four, the expansion of these MA programs in Florida with both Humana on CarePlus. The two most frequent questions I get from our model is how shareholders can see the benefit from our JV with CHS, and what the Neighbor MD acquisition means going forward. So I’ll take a few minutes here on this call to break down both of these, and then end with how we can look at growth in the coming quarters before turning to our Q&A. CHS is an organization that under the ownership of 17 provides management and operations services to help primary care groups take on risk with healthcare payers. What this means is that for over 10 years, CHS has been perfecting a recipe that helps providers understand their patients, drive quality improvement programs, and realize the benefits and improved health of their patients via cost savings or shared savings with the payers. Some of these programs also benefit from improved capitated payments that we’ve discussed before. With CHS, the JV will look to accomplish two fundamental goals. The first is value based care contracting. With the experience and size of CHS, Skylight will have a stronger platform to negotiate full risk contracts with payers across multiple markets. This means getting better contracts and better rates but also a better chance of getting these contracts as otherwise if Skylight were to enter these conversations alone. Secondly, the contracts that the JV is able to get at full risk significantly improved the revenue and EBITDA contribution, as I will explain shortly. Performing against these contracts means that we would need to have both downside risk protection, and an infrastructure that knows how to keep medical expenses down while focusing on patient quality and care. Since CHS, has the recipe for success in the past, and currently, Skylight will begin benefiting from this knowledge and access to resources through the JV. This means that not only will we be able to look to win contracts, but also improve our performance under them translating to more contribution to the bottom line and we’ll talk about that here in a minute. While our patients continue to benefit from the improved services, they can now also receive better overall care from their health care provider. As shareholders look forward to the future updates from the JV, we expect that they will be in the form of new contracts and opportunities in the near term in the Medicare and Medicare Advantage space and both teams have already begun working towards these goals and objectives for ‘22. Next, I’d like to touch on the Neighbor MD acquisition and what this means for Skylight. Taking on full risk and Medicare Advantage, something that we’ve communicated as our goal for shifting the fee for service practices into value based care means materially also growing top line revenues, but opportunities for improved contributions for EBITDA. Let me take a few minutes to provide a high level how the Medicare Advantage with program works. Let’s look at a payer like Humana or Centene. In different states, they offer an opportunity to go full risk on Medicare Advantage lies. What this means is that as a provider group, we have an opportunity to receive a capitated fee, plus an upside based on our ability to keep our patients healthier, and manage the total cost of care. When I refer to the total cost of care, I’m referring to all health care expenses for the patient for the year. This includes hospital costs, clinical costs, specialist costs, drug or pharmaceutical costs. The payers based on a benchmark rate, assign a risk score for every patient in our panel. The risk score is determined based on coding that our providers put on the patient based on the level or complexity of care, the patient will need higher risk or complex patients, the higher a risk score. The higher risk or risk score also means a higher benchmark or an annual expected cost of care. So let’s use some numbers here to describe this. As an example, let’s assume that in our case, our patients on average have a risk score that sets a benchmark rate of $1,000 per member per month. That means $12,000 per member per year. This is what we at Skylight will receive from the payer. From this the payer calculates all the medical costs associated with that panel of patient. This can be done monthly, quarterly or annually. Let’s assume the medical costs are 95%. Skylight would effectively see a gross margin of 5% or $600 per member per year. This is an addition to a monthly capitated rate based on the payer which is usually $300 to $800 per member per year. So in effect, Skylight would realize a gross profit contribution of approximately $1,400 per member per year. This differs greatly from a gross profit standpoint from how we report a fee for service. The accounting practice for full risk models follows this type of principal where a typical fee for service model the gross margins are your revenue, which is your 200 to 400 a year minus your cost of sales, which is typically your providers and other related medical costs. On a fee for service model if you see a 60% gross margin, you’ll recognize roughly $240 as the gross margin. So yes, while the contribution percentage is less in a full risk model, the contribution dollar is significantly more. You’re talking about 1400 a year versus 240 a year. On the other hand, while these dollar amounts continue to be significantly larger, this is where we believe as an organization will continue to drive more EBITDA to the bottom line. As we continue to perform against these contracts, and leveraging our JV with CHS we can also expect to see an improvement to things like medical costs per year, thereby looking to reduce medical costs say from 95% to 90% or less than 90%. And all of that means direct contribution to the surplus or contribution to Skylight from a gross profit margin improvement. This results in a direct improvement to the patient’s health and well being; certainly a model where we continue to say we can do well by doing good. As we looked at the rest of ‘22, and ‘23, we can look to expand Humana and CarePlus plans in Jacksonville, where currently we have over 1000 Medicare lives and traditional fee for service. Further future organic growth income from both increasing our patient panels within our existing practices but also our relationship with CHS to look at other Medicare Advantage plans in the market. We also look forward to our ability to grow and support these growth initiatives. We are cognizant of the current market that we find ourselves in. We recognize that this is a highly bearish market and we’re not alone in having a share price that does not reflect the value and growth that we have brought to the business in the last 18 months. While transformative news unfortunately does not immediately translate into improved shareholder value that we are committed and continue to operate our business for growth. We remain focused on growing the top line, while remaining fiscally responsible on costs and focusing on a pathway to profitability. We recognize that access to capital is not easy in today’s environment. And we’re working to be as focused on cash management, while ensuring our practices operate to provide the highest quality of care to our patients. Most also believe that a bear market can turn as we’ve seen past and as such, we will continue to explore all opportunities that allow us as a company to continue to build and benefit our patients and shareholders. It will take patience. It will take elbow grease, and it will take commitment, something that we as executives and a company are committed to. While we explore all strategic options for the company we will continue to leverage a strong pipeline of deal flow; a committed reliable and large JV partner, a new debt facility with 10 million U.S. still remaining to support growth initiatives, and a commitment to continue moving towards value based care. We are and ready to drive this company forward in 2022 and beyond. So with that, Ariel, I’ll turn it back to you for any questions.

[Operator:]

Thank you. We will now begin the question and answer session. Our first question comes from Carl Byrnes of Northland Capital Markets. Please go ahead.

[Carl Byrnes:]

Thanks for the question and congratulations on your progress. You mentioned that pro forma expenses are expected to be 40% to 50% lower than what we saw in the first quarter ‘22. Principally where do you expect those savings to be achieved and over what time frame do you expect them to be fully achieved? Understanding that you mentioned or Andrew mentioned that the third quarter would be more reflective with respect to these cost savings. Thanks.

[Pradyum Sekar:]

Hey, Carl, thanks for that. So the cost savings that you’re going to see coming as a reduction both in terms of opportunities to look to right side some of the practice level staffing. You’re going to see some of the changes reflecting some of the corporate investments that we’ve made as an organization to support the implementation costs of the systems that we put in place. But you’ll also see some of those savings come from the cost of implementation of those systems as well. We’re also looking at multiple factors of how we invest our capital going forward. And one thing I’ll continue to saying is that on an operational level, the clinics will continue to be generating a positive margin. It’s where we continue to look at investment as a corporate entity where we believe growth will come from the most and now specifically, both within teams JV and our sort of newest welcome partnership with neighbor, the ability to look at membership growth and MA offers another opportunity as well, where the ability to look at membership growth in MA offers another opportunity as well, where there’s significant organic growth opportunities that can be done also at a alternative cost implementation and so some of these changes happen sort of overall. And we can certainly chat through that as we start to report those changes. But these are changes that will also continue to still continue to be evolved and evaluated as we sort of roll forward this year.

[Carl Byrnes:]

Thanks. That’s very helpful. And one really quick follow up question. How quickly might you be able to convert the Medicare eligibles to or MA eligibles, rather, in Jacksonville, to a full risk? And I think you mentioned there’s well over 1000 eligibles in the market. Thanks.

[Pradyum Sekar:]

Yes, of course. Thanks. And so that answer comes from the health plans, I suppose. So, again, one of the things I didn’t mention I should have mentioned, of course, is along with neighbors ability to move into full risk we also have benefited greatly from having some very smart people joining our team that are leading the value based care efforts now on a national level to Skylight and so as part of this transition each health plan sort of has their own policy for annual enrollment. As I understand it currently CarePlus has an open enrollment period which can be enrolled during the course of a calendar year. Some health plans can only enroll during an annual enrollment period which happens around Q4 of the year. So our plan right now is, of course, to get our existing practices in Jacksonville onto the same contracts so that whether that process takes 30 to 60 days or around there. We should be able to start enrolling patients in ‘22 but as we typically like to say we like to hold everything off for annual enrollment, because that’s typically how most payers will do it. But I think we can see some enrollment happening in ‘22.

[Carl Byrnes:]

Great, thanks. And congratulations again.

[Pradyum Sekar:]

Thanks, Carl.

[Operator:]

Our next question comes from Rahul Sarugaser of Raymond James. Please go ahead.

[Rahul Sarugaser:]

Morning Prad, Andrew. Thanks so much as always for taking our questions. So just a little bit of the top line, you identified that EMR implementation in COVID were what affected revenue this quarter. So how should we see that playing through into Q2 particularly given COVID continues to knock on wood remain on the decline? And also just extend that question as to Q2 revenue, recognizing that you close the Neighbor MD deal on May 6? Is that the date that we should be using for consolidation into the revenue for that quarter?

[Pradyum Sekar:]

Thanks Rahul. Let me let me answer the first half of that and I’ll turn it over to Andrew there for comments on the second part. So with regards to the first part in, I’m sorry, I made note here Rahul, I’m going to be the guy that asks you to. Yes, okay, I’m sorry, EMR on COVID. I apologize. So let’s talk about the two separately. So as EMR, I consider that more of a onetime reduction in inpatient volume. As you can imagine, when you’re shifting a new computer system that all the providers are documenting and charting on and patients are being scheduled on, we probably are going to reduce our daily patient volume, because providers will take a little take a little longer with a new system in charting and documenting but also, in terms of registering patients and upfront time and so forth. So of start to finish, there’s going to be a small reduction in that. And that’s what we saw through February and into a bit of March as we rolled out Florida and Colorado. But from that point forward, we’ve seen the patient volumes come back in terms of the day, which means that providers have started to take on a little bit more comfortability with the new system and their ability to sort of manage and practices ability to manage that patient flow. So I don’t think that impact continues on in Q2 and beyond. In terms of the COVID-19 visits, that’s something that we’re just mindful. Of course, when you look at past six months, September, October, November, we’re probably heightened piece of the overall volume that would have come into urgent care with the Omicron variance. But it’s not as shifted away January, February, our ability now adjust our numbers and look at where we see health care from a non-pandemic model reflects something that we’re seeing today and what you’re seeing in lower urgent care visits you’re starting to see primary care visits again why we believe it’s so important to be positioned in the primary care sector patients starting to come back now that they’re not so fearful of exposure. So that’s comments on that. Andrew I will hand it back to you for the other piece.

[Andrew Elinesky:]

Thanks. And as for with regards your question on Neighbors, well so we closed on the sixth, but the effective date of the transaction was Monday the second. So effectively, we’re getting the benefit of the entire month of May. And so you can count on basically two thirds of the quarter to show up in the Q2 results for us.

[Rahul Sarugaser:]

Sure thing. Thanks for the clarity. So now my second question is, of course, with the execution of the Centene deal, harking back to the ACO acquisition, I am sure you guys are building a good infrastructure for conversion of patients towards managed care. And thanks, Prad for that color where you essentially outlined for us what that looks like. All of this said, I would assume that it’s going to take a little bit of time for all of this to flow through your executing contracts so on and so forth. So do you have an internal estimate of when you expect a material inflection on revenue as a result of these converted patients?

[Pradyum Sekar:]

Yes, we’re all like I said to there’s two components to that. On the Medicare Advantage side, depending on some of these health plans and the ability to enroll during the course of the year, we might see some enrollment happening in ‘22. But typically, with most things Medicare, be it Medicare traditional to the ACO or Medicare Advantage, they tend to follow a calendar year patterns. So whatever efforts we put into place this year gets reflected in sort of Q1, ‘23. So if I were to be more conservative and refer to when I believe we will have a greater inflection outside of the revenue contribution that’s coming from the acquisitions we’re making, but more specifically relates to the organic enrollment of our current patients, you’re probably looking safe to say Q1, ‘23 is when you’ll see those lives moving into a capitated for risk models, as well as the ACO reach that will kick off in January 23.

[Rahul Sarugaser:]

Great, that’s all for me today. And thanks again for taking our questions. And best of luck with the next quarter.

[Pradyum Sekar:]

Thanks Rahul.

[Operator:]

Our next question comes from Yue Ma of Mackie Research Capital Corporation. Please go ahead.

[Yue Ma:]

Good morning Prad and Andrew. I have a couple of questions. Firstly, in terms of the company’s acquisition pipeline, I was wondering if you could talk about what type of transactions we should expect going forward in terms of the size, strategic reasons etc and it kind of would be helpful and secondary can you please clarify the value based for care program on the company’s gross margin because I noticed the in the press release under financial highlights, the third states BBC models you the higher gross margin. However, under outlook, it discuss the gross margin in full risk models will be much lower than FFS model. Just wondering if you can clarify that. That’s all for me. Thank you.

[Pradyum Sekar:]

So let me maybe start with your second question first, and then I’ll flip back to your first question. So with regards to the gross margins certainly, you are right. Gross margins in a fee for service model will be higher. So let’s look at two variables. One is percentage of gross margin, second one is value of gross margin. So percentage of gross margin will be higher and fee for service model as will typically be reported in a full risk capitated model. And that is just something that will follow industry standards on and most likely look to segment in future earnings so that you can also track those two independently. Now, while the percentage is higher, call it I’m just going to use round numbers here 60% fee for service, a 10% for risk capitation. Now let’s look at the dollar value. If your annual value per patient revenue is approximately 400 a year 60% would be, 200 and odd dollars. If you look at a fully capitated model at 12,000, a year your gross margin value is $1,200. So while the percentage is lower, the dollar value is significantly greater, and so on the same patient life to operate and run the business, you’ve got more capital available to you from the premium from the full risk contract. And of course, there’s opportunities to improve that margin on the full risk contract based on your ability to keep your patients healthier, and your ability to overall have a lower cost of expense with regards to their medical expenses. But again, we’ll clarify that in future earnings, as we look to segment those out. The second question on the acquisition pipeline, I don’t think anything changes materially for us in terms of our acquisition pipeline continues to be robust. We’ve always communicated that as you can tell, sometimes we work on larger deals, sometimes on smaller deals. We are much more specific and strategic now and how we evaluate these transactions. But we’re not necessarily looking at just Medicare Advantage or any of those lines. We continue to keep our focus on the primary care practices where we think we can have the most impact to the health of the patients post acquisition by being able to leverage now at least in the state of Florida and then eventually in the states of Colorado and Pennsylvania as well. Our ability to bring better contracts through these four risk arrangements or traditional MSO arrangements so that we have more capital to focus on the patient’s health as opposed to just in a fee for service model. So we’ll continue to remain. I’ll call it discipline in the same acquisition pipeline that we have. And while we have deals that we continue to keep evaluating we’re also going to communicate that our number one goal at this point in time will be the integration of neighbors successfully and their teams and bringing them onto the Skylight network and culture and so forth. So hopefully that answers those questions.

[Yue Ma:]

Yes. That’s very helpful. Thank you. That’s all from me.

[Pradyum Sekar:]

Thanks, Toby.

[Operator:]

Our next question comes from Rob Goff of Echelon Wealth Partners. Please go ahead.

[Rob Goff:]

Good morning. And thank you for taking my question. Also, thank you for putting forth the per member revenue economics and the margins. Could you perhaps talk to the risk management disciplines associated with those gross margins and any variability that has been seen in the past?

[Pradyum Sekar:]

Yes, I definitely appreciate that question, Rob. So when you’re looking at forecasting out your risk, and of course, keep in mind, I’m very glad for having the team at Neighbor coming on board at Skylight, because we leverage not only their experience over the last five years and successfully operating under these contracts, but also their ability to accurately, in most cases, beat their expected savings rates that they had forecasted. There could be some variance, of course, when you’re looking at medical expenses, especially with new patient populations or with population of patients that you don’t have a lot of time with or size with. This reduces as the density of the population becomes bigger, you start to spread that risk over more patients. But overall, from a percentage standpoint what Neighbor has been able to do successfully as effectively call it and beat out their expected savings rates based on their original expectation of what they forecast. And so, so far, what we’ve seen is to the positive and like I said, our goal is to get it down to a margin, where it’s significantly lower than where the current benchmark might be at and allows us for us to see that growth in the leverage that we can continue to keep impacting here, we’ll both be accurately coding our patients to the cost of care that matches what their conditions are, and what they’re expected to receive as treatments for their conditions. And then secondly, really putting up a robust infrastructure I should say, sort of expanding on a robust infrastructure that we have today in Florida, through Neighbor around the areas of care management and an overall cost management of these patients by being able to have a better impact on their lives in and out of our practices.

[Rob Goff:]

Okay. Thank you and perhaps could you also talk to the affiliate model within Neighbor in terms of as it stands, and in terms of do you look to expand that as an area of growth?

[Pradyum Sekar:]

Yes, of course. Now I think just always keeping in mind, our model has always been an own clinic model. And so the affiliate piece for us is a piece that came along with the acquisition, not something that’s necessarily that we had to increase our value of acquisition to acquire. So I think it’s a great model. The affiliate models are, of course relationships with third party providers that we do not own in their practice. And so we basically manage their Medicare Advantage, or they participate in our Medicare Advantage contracts and received the benefit of the surplus and cap payments, while we receive a percentage of that as well for providing and managing that risk. It’s a model that is similar to other healthcare players like Agilon, and a few other ones. But in the case of saying an affiliate model is that stickies and own model would be a little bit in our mind, we wouldn’t do that. And affiliate model has options over time. And so that’s one of the reasons why it’s part of our approach to integration is also assessing the performance of the affiliates looking at who might be sticky or where we want to consider these affiliates long term. Certainly there’s an opportunity through the affiliates to look at anyone that’s looking to exit, they’ve now got a partner in their management team that effectively could they could exit into. But as we look at the affiliates going long term, certainly an opportunity for us to build a business without the layer of operational needs. If it continues to show promise, I don’t see why we wouldn’t be looking to grow the affiliate program. But again with the Neighbor MD team coming on board, there is a team that’s now driving those efforts forwards managing those relationships. And so we’ll look to leverage at least what we can in the near term to be able to see the assessments in our program.

[Rob Goff:]

Very good. Thank you and good luck.

[Pradyum Sekar:]

Thanks, Rob.

[Operator:]

Our next question comes from Frank Takkinen of Lake Street Capital Markets. Please go ahead.

[Frank Takkinen:]

Hey, guys, thanks for taking my question. I wanted to start with integration. How long do you expect the Neighbor MD integration process to take the balance sheet as provides the adequate liquidity to get there? I think I’ve got you guys at about $5 million U.S. cash on the balance sheet. So we consider the 2 million or so you’ll receive for working capital purposes for the first $10 million tranche from the debt facility that was established. So how long integration and you have the adequate liquidity to get there?

[Pradyum Sekar:]

Yes, so Frank, we’re looking at I mean, our game plan is 90 days, what will probably stretch that 90 day mark might just be things like Athena’s implementation, or maybe some of the system implementation. But some of these things just have sometimes their own timelines attached with them. But as quickly as we can operationally, organizationally, the integration has already begun. We’ve already integrated in aspects of their business from day one. And we had a fairly good chance to understand the company prior to acquisition and work with many of the team members. And so from areas like human resources to revenue cycle management, to even regional leadership and operations, these teams are starting to now integrate and with our integration plan in place and like I said, we’ve strong team members on both sides we’re looking forward to call it a 90 day out integration period. I am sorry, let me address regarding the balance sheet. Yes, I mean while Neighbor does have cost expense attached with it, we did see a significant portion of those costs come off prior to closing the acquisition and just decisions that we didn’t need to have in terms of Skylights infrastructure and what we possess from a overall infrastructure standpoint, systems, people resources, etc. There are significant opportunities to continue to move towards some cost savings with a neighbor that we can look to hopefully achieve within this 90 day period. So the answer for me like everything else is its cash management and we’re going to be working hard to be able to get there. Andrew, I don’t know if you want to add any more to that?

[Andrew Elinesky:]

I think the only thing I’d add Frank is just really about the working capital, although we acquired Neighbor on a cashless basis. There was receivables that came with that, receivables and payables. But it did give us a working capital to handle and deal with which is some acquisitions we’ve made. We do not acquire the receivables, for example, or we cut off the working capital. This was done with an inclusion of working capital. So we do have the ability to kind of manage that alongside our own working capital and we tend to do that over that integration period.

[Frank Takkinen:]

Okay. That’s helpful. Congrats on the progress. I will stop there. Thanks.

[Operator:]

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

[Pradyum Sekar:]

Thanks, Ariel. And again, I really appreciate everybody’s time and participating in today’s call. As always, we hope we’re able to convey some of the excitement we have about Skylight and our prospects going forward. You can always learn more on our website, Skylighthealthgroup.com more information about our company and of course contact details should you wish to reach out to us. I wish everybody a great day and we look forward to speaking to you again soon. Thank you.

[Operator:]

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