UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-40904
“
MARPAI, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
86-1916231
(State or other jurisdictionof incorporation)
(IRS EmployerIdentification Number)
615 Channelside Drive, Suite 207
Tampa, Florida 33602
(Address of principal executive offices)
(646) 303‑3483
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share
MRAI
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 13, 2023, there were 7,810,625 shares of the Company’s common stock, par value $0.0001 per share, outstanding.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Unaudited Condensed Consolidated Financial Statements
1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
27
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Item 6.
Exhibits
28
SIGNATURES
29
i
PART I — FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements.
MARPAI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2023
December 31, 2022
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents
$
3,018,424
13,764,508
Restricted cash
11,233,440
9,352,608
Accounts receivable, net of allowance for credit losses of $23,458 and $23,458
977,400
1,437,786
Unbilled receivable
594,552
350,393
Prepaid expenses and other current assets
961,182
1,601,920
Other receivables
32,251
30,634
Total current assets
16,817,249
26,537,849
Property and equipment, net
662,208
1,506,082
Capitalized software, net
2,742,947
4,588,706
Operating lease right-of-use assets
2,520,453
3,841,810
Goodwill
6,035,200
5,837,060
Intangible assets, net
5,501,918
6,323,279
Security deposits
1,308,908
1,293,166
Other long-term asset
21,668
Total assets
35,610,551
49,949,620
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable
3,101,229
1,457,670
Accrued expenses
4,659,407
5,274,716
Accrued fiduciary obligations
9,877,871
9,024,463
Deferred revenue
1,261,067
288,499
Current portion of operating lease liabilities
600,104
1,311,295
Other short-term liability
947,376
—
Due to related party
3,201
Total current liabilities
20,447,054
17,359,844
Other long-term liabilities
19,113,390
20,203,700
Operating lease liabilities, net of current portion
3,812,609
4,771,871
Deferred tax liabilities
1,479,880
Total liabilities
44,852,933
43,815,295
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’(DEFICIT) EQUITY
Common stock, $0.0001 par value, 227,791,050 shares authorized; 7,810,625 and 5,319,758 issued and outstanding at September 30, 2023 and December 31, 2022, respectively (1)
781
532
Additional paid-in capital
62,475,786
54,127,893
Accumulated deficit
(71,718,949
)
(47,994,100
Total stockholders’ (deficit) equity
(9,242,382
6,134,325
Total liabilities and stockholders’ (deficit) equity
(1) Reflects 1-for-4 reverse stock split that became effective June 29, 2023. See Note 1 to the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended September 30,
Nine months ended September 30,
2023
2022
Revenue
8,729,152
4,938,105
28,448,176
16,713,420
Costs and expenses
Cost of revenue (exclusive of depreciation and amortization shown separately below)
5,691,278
3,625,415
18,529,768
12,323,770
General and administrative
4,986,185
2,717,905
15,937,675
7,940,014
Sales and marketing
1,842,018
1,053,814
5,494,446
4,829,718
Information technology
1,269,088
1,538,136
4,775,340
3,862,142
Research and development
267,269
781,750
1,290,910
2,684,014
Depreciation and amortization
927,391
842,047
2,973,973
2,443,856
Loss on disposal of assets
6,604
350,192
60,471
Facilities
767,602
193,494
1,917,626
586,430
Total costs and expenses
15,757,435
10,752,561
51,269,930
34,730,415
Operating loss
(7,028,283
(5,814,456
(22,821,754
(18,016,995
Other income (expenses)
Other income
130,453
56,274
231,357
95,565
Interest expense, net
(383,756
(2,908
(1,102,045
(7,415
Foreign exchange loss
(13,794
(18,770
(32,407
(5,461
Loss before provision for income taxes
(7,295,380
(5,779,860
(23,724,849
(17,934,306
Income tax expense
Net loss
Net loss per share, basic & fully diluted (1)
(0.98
(1.14
(3.62
(3.58
Weighted average shares of common stock outstanding, basic and diluted (1)
7,479,401
5,087,164
6,552,575
5,004,779
2
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY
Common Stock
Additional Paid-
Accumulated
Total Stockholders’
Three months ended September 30, 2023
Shares (1)
Amount
In Capital
Deficit
(Deficit) Equity
Balance, July 1, 2023
7,255,818
725
61,754,084
(64,423,569
(2,668,760
Share-based compensation
-
721,556
Issuance of common stock upon vesting of restricted stock units
524,244
53
Issuance of common stock upon exercise of stock options
21,849
146
148
Issuance of round up shares in connection with reverse split
8,714
Balance, September 30, 2023
7,810,625
Three months ended September 30, 2022
Balance, July 1, 2022
5,170,711
517
52,750,138
(33,680,156
19,070,499
689,375
61,890
6
19
25
Common Stock issued to vendors in exchange for services
1,875
7,726
Balance, September 30, 2022
5,234,475
523
53,447,258
(39,460,016
13,987,765
Nine months ended September 30, 2023
Balance, December 31, 2022
5,319,758
1,836,930
557,631
56
Common stock issued to vendors in exchange for services
25,000
79,128
79,130
49,522
5
408
413
Issuance of common stock in connection with public offering, net
1,850,000
185
6,431,427
6,431,612
Nine months ended September 30, 2022
Balance, December 31, 2021
5,074,932
507
51,233,615
(21,525,710
29,708,412
2,182,696
152,044
15
46
61
7,500
30,901
30,902
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
2,973,972
1,836,986
2,432,758
30,899
Amortization of right-of-use asset
1,288,744
517,985
Gain on termination of lease
32,613
Non-cash interest
1,204,441
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivable
640,737
16,215
Prepaid expense and other assets
216,226
376,821
(1,617
34,665
Security deposit
(15,743
335,647
(432,986
(692,991
(436,385
853,408
(1,642,220
Operating lease liabilities
(1,670,454
(512,095
(3,201
(437
Other liabilities
972,568
(294,458
Net cash used in operating activities
(15,324,191
(15,339,217
Cash flows from investing activities:
Capitalization of software development costs
(809,856
Disposal of property and equipment
26,914
Purchase of property and equipment
(70,176
Net cash provided by (used in) investing activities
(880,032
Cash flows from financing activities:
Proceeds from stock options exercises
Proceeds from issuance of common stock in a public offering, net
Net cash provided by financing activities
6,432,025
Net decrease in cash, cash equivalents and restricted cash
(8,865,252
(16,219,249
Cash, cash equivalents and restricted cash at beginning of period
23,117,116
25,933,643
Cash, cash equivalents and restricted cash at end of period
14,251,864
9,714,394
Reconciliation of cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheet
4,747,951
4,966,443
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows
Supplemental disclosure of non-cash activity
Measurement period adjustment to goodwill
198,140
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Marpai, Inc.'s (“Marpai” or the “Company”) operations are principally conducted through its wholly-owned subsidiaries, Marpai Health, Inc. (“Marpai Health”), Marpai Administrators LLC (“Marpai Administrators”), and Maestro Health LLC (“Maestro”). Marpai Administrators and Maestro are our healthcare payer subsidiaries that provide administration services to self-insured employer groups across the United States. They act as a third-party administration (“TPA”) handling all administrative aspects of providing healthcare to self-insured employer groups. The Company has combined these two businesses to create what it believes to be the Payer of the Future, which has not only the licenses, processes and know- how of a payer but also the latest technology. This combination allows the Company to differentiate itself in the TPA market by delivering a technology-driven service that it believes can lower the overall cost of healthcare while maintaining or improving healthcare outcomes. Marpai Captive, Inc. (“Marpai Captive”) was founded in March 2022 as a Delaware corporation. Marpai Captive engages in the captive insurance market and commenced operations in the first quarter of 2023.
Nature of Business
The Company’s mission is to positively change healthcare for the benefit of (i) its clients who are self-insured employers that pay for their employees’ healthcare benefits and engage the Company to administer the latter’s healthcare claims, (ii) employees who receive these healthcare benefits from its clients, and (iii) healthcare providers including doctors, doctor groups, hospitals, clinics, and any other entities providing healthcare services or products.
The Company provides benefits outsourcing services to clients in the United States across multiple industries. The Company’s backroom administration and TPA services are supported by a customized technology platform and a dedicated benefits call center. Under its TPA platform, the Company provides health and welfare administration, dependent eligibility verification, Consolidated Omnibus Budget Reconciliation Act (“COBRA”) administration, and benefit billing services.
The Company continues to monitor the effects of the global macroeconomic environment, including increasing inflationary pressures; supply chain disruptions; social and political issues; regulatory matters, geopolitical tensions; and global security issues. The Company is also mindful of inflationary pressures on its cost base and is monitoring the impact on customer preferences.
Reverse Stock Split
On June 29, 2023 the Company effectuated a one-for-four reverse stock split of its outstanding shares of common stock. The number of authorized shares was not adjusted in connection with the reverse stock split. Throughout these unaudited condensed consolidated financial statements common stock share and per share information, including employee stock options, restricted stock awards, restricted stock units and warrants, have been revised for all periods presented to give effect to the reverse stock split.
NOTE 2 – UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim consolidated financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. The unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for its year ended December 31, 2022.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Maestro is included as of November 1, 2022, the date of the Acquisition (see Note 5). All significant intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements. Descriptions of the Company’s significant accounting policies are discussed in the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Management evaluates the related estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
NOTE 3 – LIQUIDITY AND GOING CONCERN
As shown in the accompanying condensed consolidated financial statements as of September 30, 2023, the Company had an accumulated deficit of approximately $71.7 million and negative working capital of approximately $3.6 million. At September 30, 2023, the Company had long term debt of approximately $19.1 million and approximately $3.0 million of unrestricted cash on hand. For the nine months ended September 30, 2023, the Company recognized a net loss of approximately $23.7 million and negative cash flows from operations of approximately $15.3 million. Since inception, the Company has met its cash needs through proceeds from issuing convertible notes, warrants and sales of its common stock.
The Company currently projects that it will need additional capital to fund its current operations and capital investment requirements until the Company scales to a revenue level that permits cash self-sufficiency. As a result, the Company needs to raise additional capital or secure debt funding to support on-going operations until such time. This projection is based on the Company’s current expectations regarding revenues, expenditures, cash burn rate and other operating assumptions. The sources of this capital are anticipated to be from the sale of equity and/or debt. Alternatively, or in addition, the Company may seek to sell assets which it regards as non-strategic. Any of the foregoing may not be achievable on favorable terms, or at all. Additionally, any debt or equity transactions may cause significant dilution to existing stockholders.
If the Company is unable to raise additional capital moving forward, its ability to operate in the normal course and continue to invest in its product portfolio may be materially and adversely impacted and the Company may be forced to scale back operations or divest some or all of its assets.
As a result of the above, in connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Update (“ASU”) 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that the Company’s liquidity condition raises substantial doubt about the Company’s ability to continue as a going concern through twelve months from the date these unaudited condensed consolidated financial statements are available to be issued. These unaudited condensed consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Combination
The Company accounts for business combinations in accordance with the FASB’s Accounting Standard Codification (“ASC”) 805, Business Combinations. Accordingly, identifiable tangible and intangible assets acquired, and liabilities assumed are recorded at their estimated fair values, the excess of the purchase consideration over the fair values of net assets acquired is recorded as goodwill, and transaction costs are expensed as incurred. The Company includes the results of operations of the businesses that are acquired as of the acquisition date.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such
estimates include, but are not limited to, valuation of share-based compensation, accounting for warrants, allowance for credit losses, useful lives of internally developed software, fair values of net assets acquired, goodwill, intangible assets and property and equipment, incurred but not reported (“IBNR”) reserves, whether an arrangement is or contains a lease, the incremental borrowing rate used for operating leases, income tax accruals, the valuation allowance for deferred income taxes, and contingent liabilities.
The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ from those estimates.
Restricted Cash
Restricted cash balances are composed of funds held on behalf of clients in a fiduciary capacity, cash held in a separate bank account pledged to a bank as collateral for a bank guarantee provided to the lessor to secure the Company’s obligations under a lease agreement, cash in a money market account as required by a credit card company for collateral, and a certificate of deposit held for collateral of a letter of credit. Fiduciary funds generally cannot be utilized for general corporate purposes and are not a source of liquidity for the Company. A corresponding fiduciary obligation, included in current liabilities in the accompanying condensed consolidated balance sheets, exists for disbursements to be made on behalf of the clients and may be more than the restricted cash balance if payment from customers has not been received.
Capitalized Software
The Company complies with the guidance of ASC Topic 350‑40, “Intangibles—Goodwill and Other—Internal Use Software”, in accounting for its internally developed system projects that it utilizes to provide its services to customers. These system projects generally relate to software of the Company that is not intended for sale or otherwise marketed. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Once a project has reached the development stage, the Company capitalizes direct internal and external costs until the software is substantially complete and ready for its intended use. Costs for upgrades and enhancements are capitalized, whereas, costs incurred for maintenance are expensed as incurred. These capitalized software costs are amortized on a project-by- project basis over the expected economic life of the underlying software on a straight-line basis, which is generally three to five years. Amortization commences when the software is available for its intended use.
Goodwill is recognized and initially measured as any excess of the acquisition-date consideration transferred in a business combination over the acquisition-date amounts recognized for the net identifiable assets acquired. Goodwill is not amortized but is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not result in an impairment of goodwill. The Company operates in one reportable segment and reporting unit; therefore, goodwill is tested for impairment at the consolidated level. First, the Company assesses qualitative factors to determine whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company conducts a quantitative goodwill impairment test comparing the fair value of the applicable reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, the Company recognizes an impairment loss in the condensed consolidated statement of operations for the amount by which the carrying amount exceeds the fair value of the reporting unit. The Company performs its annual goodwill impairment test at December 31, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying value. There was no goodwill impairment for the nine months ended September 30, 2023 and 2022.
7
Intangible Assets
Intangible assets consist of customer relationships, non-compete agreements, and amounts attributed to patent and patent applications that were acquired through an acquisition and are amortized on a straight-line basis over useful lives ranging from five to ten years. The Company’s intangible assets are reviewed for impairment when events or circumstances indicate their carrying amounts may not be recoverable. The Company reviews the recoverability of its intangible assets by comparing the carrying value of such assets to the related undiscounted value of the projected cash flows associated with the assets, or asset group. If the carrying value is found to be greater, the Company records an impairment loss for the excess of book value over fair value. No impairment of the Company’s intangible assets was recorded for the nine months ended September 30, 2023 and 2022.
During the three and nine months ended September 30, 2023, the Company identified triggering events that may indicate the carrying amount of goodwill and intangible assets are not recoverable. The triggering events identified included the decline in the Company’s stock price and the Company’s shortening cash reach. As a result of identifying these potential indicators of impairment, the Company performed a quantitative goodwill impairment analysis for the three months ended September 30, 2023, and the analysis determined that the fair value of the Company’s reporting unit exceeded its carrying value, so no goodwill impairment loss was recorded. During the three and nine months ended September 30, 2023, the Company also determined that its intangible assets were not impaired. The continuation of operating losses, negative cash flows from operations, negative working capital, and decreases in the Company’s market capitalization could result in impairment to goodwill and/or intangible assets that could be material to the consolidated financial statements in future periods. The Company will continue to monitor these events and circumstances each reporting period and perform the required quantitative impairment tests, as applicable.
Revenue Recognition
Third Party Administrator Revenue
Revenue is recognized when control of the promised services is transferred to the Company’s customers in an amount that reflects the consideration expected to be entitled to in exchange for those services. As the Company completes its performance obligations, it has an unconditional right to consideration, as outlined in the Company’s contracts.
The Company also provides certain performance guarantees under their contracts with customers. Customers may be entitled to receive compensation if the Company fails to meet the guarantees. Actual performance is compared to the contractual guarantee for each measure throughout the period. The Company had performance guarantee liabilities of $163,093, which is included in accrued expenses on the accompanying condensed consolidated balance sheet as of September 30, 2023.
Significant Payment Terms
Generally, the Company’s accounts receivable are expected to be collected in 30 days in accordance with the underlying payment terms. Invoices for services are typically sent to the customer on the 15th day of the month prior to the service month with a 10-day payment term. The Company does not offer discounts if the customer pays some or all of the invoiced amount prior to the due date.
Consideration paid for services rendered by the Company is nonrefundable. Therefore, at the time revenue is recognized, the Company does not estimate expected refunds for services.
The Company uses the practical expedient and does not account for significant financing components because the period between recognition and collection does not exceed one year for all of the Company’s contracts.
Timing of Performance Obligations
All of the Company’s contracts with customers obligate the Company to perform services. Services provided include health and welfare administration, dependent eligibility verification, COBRA administration, and benefit billing. Revenue is recognized over time as services are provided as the performance obligations are satisfied through the effort expended to research, investigate, evaluate, document, and report claims, and control of these services is transferred to the customer. The Company has the right to receive payment for all services rendered.
8
Determining and Allocating the Transaction Price
The transaction price of a contract is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer.
To determine the transaction price of a contract, the Company considers its customary business practices and the terms of the contract. For the purpose of determining transaction prices, the Company assumes that the services will be transferred to the customer as promised in accordance with existing contracts and that the contracts will not be canceled, renewed, or modified.
The Company’s contracts with customers have fixed fee prices that are denominated per covered employee per month. The Company includes amounts of variable consideration in a contract’s transaction price only to the extent that it is probable that the amounts will not be subject to significant reversals (that is, downward adjustments to revenue recognized for satisfied performance obligations). In determining amounts of variable consideration to include in a contract’s transaction price, the Company relies on its experience and other evidence that supports its qualitative assessment of whether revenue would be subject to a significant reversal. The Company considers all the facts and circumstances associated with both the risk of a revenue reversal arising from an uncertain future event and the magnitude of the reversal if that uncertain event were to occur.
Captive Revenue
All general insurance premiums pertain to annual policies and are reflected in income on a pro-rata basis.
Loss and Loss Adjustment Expenses
The establishment of loss reserves by the policies primary insurer is a reasonably complex and dynamic process influenced by a large variety of factors. These factors principally include past experience with like claims. Consequently, the reserves established are a reflection of the opinions of a large number of persons and the Company is exposed to the possibility of higher or lower than anticipated loss cost due to real expense.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of outstanding shares of common stock for the period, considering the effect of participating securities. Diluted earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. During the periods when they are anti-dilutive, shares of common stock equivalents, if any, are not considered in the computation. At September 30, 2023 and 2022, there were 1,123,173 and 994,999 common stock equivalents, respectively. For the nine months ended September 30, 2023 and 2022, these potential shares were excluded from the shares used to calculate diluted net loss per share as their effect would have been antidilutive.
Recently Issued Accounting Pronouncements
In September 2022, the FASB issued ASU No. 2022-04, “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations,” which is intended to enhance the transparency surrounding the use of supplier finance programs. The amendments in this update require a buyer in a supplier finance program to disclose information about the program's nature, activity during the period, changes from period to period, and potential magnitude. The Company adopted the guidance when it became effective on January 1, 2023, except for the rollforward requirement, which becomes effective January 1, 2024. The Company does not have any supplier finance programs, and accordingly the adoption did not have a material impact on the Company’s condensed consolidated financial statements and the Company does not believe the impact of adopting the rollforward requirement in this accounting standard update will be material to the condensed consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. For the Company, the new guidance is effective for
9
fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Adoption of the ASU should be applied prospectively. Early adoption is also permitted, including adoption in an interim period. The Company is currently evaluating the impact of this accounting standard update on its condensed consolidated financial statements.
NOTE 5 – ACQUISITION
On November 1, 2022, the Company consummated the acquisition of Maestro. Pursuant to the terms of the Purchase Agreement (“Maestro Agreement”), Marpai agreed to acquire all of the membership interests (the “Units”) of Maestro. In consideration for Marpai’s acquisition of the Units, Marpai agreed to pay the seller (the “Seller”) an aggregate purchase price (the “Purchase Price”) of $19,900,000 determined on the closing date (the “Base Purchase Price”), which shall be payable on or before April 1, 2024 (the “Payment Date”), and shall accrue interest until such time that is paid, such that on the Payment Date the Purchase Price, plus all accrued and unpaid interest, shall equal $22,100,000 (the “Adjusted Purchase Price”).
Any unpaid portion of the Purchase Price shall accrue interest at ten percent (10%) per annum, compounding annually, calculated on the basis of a 365-day year for the actual number of days elapsed (the “Specified Rate”), and shall be repaid as promptly as practicable to the Seller. In addition, in the event Marpai or its subsidiaries receive proceeds from the sale of any securities in a private placement or public offering of securities (each an “Offering”), then Marpai shall pay to the Seller an amount equal to thirty-five percent (35%) of the net proceeds of the Offering no later than sixty (60) days after the closing of Offering until such time as the Purchase Price has been paid in full.
Notwithstanding the foregoing, Marpai shall be required to make cumulative payments, representing the Adjusted Purchase Price and any additional interest that will accrue on the Adjusted Purchase Price after the Payment Date, as follows: (i) $5,000,000 to be paid by December 31, 2024, (ii) $11,000,000 of cumulative payments to be paid by December 31, 2025, and (iii) $19,000,000 of cumulative payments to be paid by December 31, 2026 and (iv) $28,000,000 of cumulative payments to be paid by December 31, 2027.
On April 19, 2023, the Company closed a public offering of 1,850,000 shares of common stock at a public offering price of $4.00 per share, for gross proceeds of $7.4 million. After deducting underwriters' discounts and offering expenses, the net proceeds from the public offering were approximately $6.4 million. In accordance with the terms of the Maestro share purchase agreement, $2,294,751 or 35% of the net proceeds from the offering were expected to be used to pay down the debt to the Seller. Based on an agreement reached with the Seller on July 18, 2023, 50% of the amount due or $1,147,376 was paid to the Seller on July 19, 2023 and the balance will be paid no later than September 18, 2023. On September 18, 2023, Marpai paid the Seller $200,000 and the parties agreed that the balance of $947,376 will be paid at the earlier of (i) October 18, 2023, and (ii) within 48 hours of the closing of certain funding initiatives that Marpai was engaged in. On October 24 2023, the Seller agreed to extend the due date of such payment from October 18, 2023 to November 15, 2023.
As of September 30, 2023, the outstanding principal balance is $19,900,000 and the accrued interest on the principal is $115,765 for a total of $20,015,765 of which $947,376 is in other short-term liabilities and $19,068,389 is other long-term liabilities.
The following table represents the allocation of the purchase consideration among Maestro’s assets acquired and liabilities assumed at their acquisition-date fair values:
10
Adjustment
Purchase Price
19,900,000
Purchase Price Allocation
Cash
17,081,602
16,306,547
Accounts receivable
321,198
646,189
1,751,371
Property and equipment
921,680
(159,920
761,760
Operating lease - right of use assets
2,555,375
3,454,143
3,652,283
Trademarks
800,000
Customer relationships
840,000
1,240,889
Account payable
(150,328
(4,554,280
(38,220
(4,592,500
(16,306,547
(4,816,490
(191,349
Total fair value of net assets acquired and liabilities assumed
The Company recorded a measurement period adjustment to goodwill for the nine months ended September 30, 2023 for property and equipment of $159,920, that was subsequently identified as not received during the acquisition, and accrued expenses of $38,220, relating to pre-acquisition liabilities.
The following table summarizes the estimated fair values of Maestro’s identifiable intangible assets, their estimated useful lives and expected amortization periods:
Useful
Acquisition
Life in
Fair Value
Years
5 Years
The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2022:
Three Months Ended
Nine Months Ended
September 30, 2022
(pro forma)
9,687,891
31,621,036
(9,049,986
(29,744,227
The unaudited pro forma financial information includes adjustments that are directly attributable to the business combination and are factually supportable. The pro forma adjustments include incremental amortization expense of $82,000 related to intangible and tangible assets acquired.
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The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating Maestro into the Marpai legacy business.
Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations.
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
Equipment
49,905
402,675
Furniture and fixtures
753,133
1,007,699
Leasehold improvements
745,453
Total cost
803,038
2,155,827
Accumulated depreciation
(140,830
(649,745
Depreciation expense was $306,852 and $164,800 for the nine months ended September 30, 2023 and 2022, respectively. Depreciation expense was $38,350 and $82,066 for the three months ended September 30, 2023 and 2022, respectively.
NOTE 7 – CAPITALIZED SOFTWARE
Capitalized software consists of the following at:
Capitalized software
5,656,885
8,094,385
Accumulated amortization
(2,913,938
(3,505,679
Amortization expense was $1,845,759 and $1,703,699 for the nine months ended September 30, 2023 and 2022, respectively. Amortization expense was $615,253 and $568,195 for the three months ended September 30, 2023 and 2022, respectively.
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS
Goodwill consists of the following:
Balance as of December 31, 2022
Measurement period adjustment to goodwill (Note 5)
Balance as of September 30, 2023
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Intangible assets consist of the following:
Gross Carrying
Net Carrying
Life
Amortization
5-10 Years
2,320,000
(526,674
1,793,326
Noncompete agreements
990,000
(495,000
495,000
5-7 Years
3,760,000
(1,196,858
2,563,142
Patents and patent applications
(*)
650,450
7,720,450
(2,218,532
(292,671
2,027,329
(346,500
643,500
(758,000
3,002,000
(1,397,171
Amortization expense was $821,361 and $575,357 for the nine months ended September 30, 2023 and 2022, respectively. Amortization expense was $273,787 and $191,786 for the three months ended September 30, 2023 and 2022, respectively.
NOTE 9 – LOSS AND LOSS ADJUSTMENT EXPENSES
The following tables shows changes in aggregate reserves for the Company's loss and loss adjustment expenses:
September 30,2023
September 30,2022
Net reserves at January 1,
Incurred loss and loss adjustment expenses
Provisions for insured events of the current year
205,238
Change in provision for insured events of prior year
Total incurred loss and loss adjustment expense
Payments
Loss and loss adjustment expenses attributable to insured events of the current year
4,268
Loss and loss adjustment expenses attributable to insured events of the prior year
Total payments
Net reserves at September 30,
200,970
13
Net reserves at July 1,
143,147
57,823
For the three and nine month periods ended September 30, 2023, initial reserves were established for the start of the Company's captive operations.
NOTE 10 – REVENUE
Disaggregation of Revenue
The following tables illustrates the disaggregation of revenue by similar products:
For the three months period
TPA services
8,638,615
Captive insurance
90,537
Total
For the nine months period
28,212,995
235,181
NOTE 11 – SHARE-BASED COMPENSATION
Global Stock Incentive Plan
On May 31, 2022, the shareholders of the Company approved the Company’s Board of Directors proposal to increase the Company’s Global Incentive Plan (the “Plan”) by 1,575,000 shares, thus bringing the total number of stock options, restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) that may be issued pursuant to the Plan to 1,950,855.
On May 31, 2023, the shareholders of the Company approved the Company’s Board of Directors proposal to increase the Company’s Plan by an additional 500,000 shares, thus bringing the total number of stock options, RSUs and RSAs that may be issued pursuant to the Plan to 2,450,855.
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Under the term of the Plan, on the grant date, the Board of Directors determines the vesting schedule of each stock option and RSUs on an individual basis. All stock options expire ten (10) years from the date of the grant. Vested options expire 90 days after the termination of employment of the grantee.
Stock Options
The fair value of options and share awards granted under the Plan during the nine months ended September 30, 2023 was estimated at the date of grant using the Black-Scholes option pricing model and the following assumptions for grants:
August 2023
January 2023
Risk-free interest rates
4.44
%
3.43
Expected life
5 years
Expected volatility
136.99
41.00
Expected dividend yield
0.00
The following table summarizes the stock option activity:
Weighted Average
Aggregate
Number of
Remaining
Intrinsic
Options
Exercise Price
Contractual Term
Value
Balance at January 1, 2023
931,934
5.88
8.91
203,295
Granted
717,250
2.56
Forfeited/Cancelled
(207,048
6.13
Exercised
(49,522
0.008
Balance at September 30, 2023
1,392,614
4.33
8.99
1,909
Exercisable at September 30, 2023
617,066
5.50
8.61
The following table summarizes the Company’s non-vested stock options:
Weighted-Average
Non-vested Options
Grant Date Fair
Outstanding
At January 1, 2023
507,664
2.64
Options granted
1.50
Options forfeited/cancelled
(155,306
2.39
Options exercised
(9,554
5.42
Options vested
(284,506
1.85
At September 30, 2023
775,548
1.71
For the nine months ended September 30, 2023 and 2022, the Company recognized $641,628 and $655,973 of stock compensation expense relating to stock options, respectively. For the three months ended September 30, 2023 and 2022, the Company recognized $253,392 and $172,799 of stock compensation expense relating to stock options, respectively. As of September 30, 2023, there was $1,323,313 of unrecognized stock compensation expense related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of approximately 2.9 years.
Restricted Stock Awards
In July 2019, the Board of Directors of the Company authorized grants of restricted stock awards (“RSAs”) through a restricted stock award purchase agreement to certain founders, consultants, and advisors of the Company. Certain grants to the Company’s founders were fully vested at the date of incorporation, other grants vest over a four-year period on each anniversary of the grant date, based on continued employment, and other grants vest based on various milestones. The shares of common stock underlying the RSAs are issued upon grant.
The following table summarizes the restricted stock awards activity:
Outstanding at January 1, 2023
55,735
5.92
Forfeited/cancelled
Vested
(54,517
5.85
Outstanding at September 30, 2023
1,218
8.53
For the nine months ended September 30, 2023 and 2022, the Company recognized $288,183 and $749,086 of stock compensation expense relating to RSAs, respectively. For the three months ended September 30, 2023 and 2022, the Company recognized $46,401 and $120,891 of stock compensation expense relating to RSAs, respectively. As of September 30, 2023, there was $24,447 of unrecognized compensation expense related to unvested restricted share awards that is expected to be recognized over a weighted-average period of approximately 3 months.
Restricted Stock Units
On June 14, 2022, the Board of Directors of the Company authorized the grant of 356,851 RSUs, of which 336,538 were granted to an officer of the Company who joined the Company in February 2022. Of the RSUs granted to the officer, 48,077 vested immediately and the balance of 288,461 vested in equal quarterly installments through February 28, 2023. Under the terms of the officer’s employment agreement, the Company also agreed to guarantee the minimum value of the RSUs on their vesting dates.
On February 28, 2023, the Company issued 33,387 fully vested RSUs to an officer upon his one year anniversary of employment.
On August 2, 2023, the Company issued 28,090 fully vested RSUs to an officer.
On August 16, 2023, the Company issued 400,000 fully vested on September 7, 2023 RSUs to an advisor, the Company also agreed to guarantee the minimum value of the RSUs on their vesting dates. The Company accrued $548,450 in accounts payable in the condensed consolidated balance sheet, reflecting this minimum value obligation as of September 30, 2023, to be paid over three installments.
The following table summarizes the restricted stock units activity:
72,957
580,227
1.58
(127,605
3.25
(525,579
1.57
For the nine months ended September 30, 2023 and 2022, the Company recognized $782,175 and $777,637 of stock compensation expense relating to RSUs, respectively. For the three months ended September 30, 2023 and 2022, the Company recognized $421,819 and $337,351 of stock compensation expense relating to RSUs, respectively. As of September 30, 2023, there was no unrecognized compensation expense remaining related to unvested restricted share units .
NOTE 12 – WARRANTS
Upon closing of the Company's public offering (Note 16), the Company issued to the underwriter, warrants to purchase 92,500 shares of common stock (the “Underwriter’s Warrants”). The Underwriter’s Warrants are exercisable at a per share exercise price equal to
16
125% of the public offering price per share in the offering, which was determined to be $5.00. The Underwriter’s Warrants are exercisable at any time, in whole or in part, from October 19, 2023 through April 19, 2028.
The table below summarizes the Company’s warrant activities:
Warrants to
Weighted
Purchase Common
Range Per
Average
Shares
Share
412,218
$5.72 to 31.60
23.68
92,500
5.00
Forfeited
504,718
$5.00 to 31.60
20.25
Balance at January 1, 2022
Balance at September 30, 2022
NOTE 13 – SEGMENT INFORMATION
Research and development activities are conducted through the Company’s wholly owned subsidiary, EYME Technologies, Ltd., in Israel. Geographic long-lived asset information presented below is based on the physical location of the assets at the end of year. All of the Company’s revenues are derived from customers located in the United States.
Long-lived assets including goodwill, intangible assets, capitalized software, property and equipment and operating lease right-of-use, by geographic region, are as follows at:
United States
15,661,857
17,993,006
Israel
1,800,869
4,103,931
Total long-lived assets
17,462,726
22,096,937
NOTE 14 – RELATED PARTY TRANSACTIONS
The Company receives consulting services and marketing services from various shareholders and directors. The total cost of these consulting services for the three months ended September 30, 2023 and 2022 was approximately $0 and $44,000, respectively. The total cost of these consulting services for the nine months ended September 30, 2023 and 2022 was approximately $95,000 and $158,000, respectively. The total cost of marketing services for the three months ended September 30, 2023 and 2022 was approximately $0 and $0, respectively. The total cost of marketing services for the nine months ended September 30, 2023 and 2022 was approximately $0 and $565,000, respectively. No amounts due to these certain shareholders were included in accounts payable of September 30, 2023 and December 31, 2022.
On December 30, 2020, the Company received an advance from a certain investor for reimbursement of certain expenses. This is recorded as due to related party on the accompanying condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 in the amount of $0 and $3,201, respectively.
17
NOTE 15 – ACCRUED EXPENSES
Accrued expenses consisted of the following:
Employee compensation
1,597,212
1,433,327
Accrued bonuses
1,696,875
1,712,009
Performance guarantee liabilities
163,093
244,029
Other accrued expenses and liabilities
1,202,227
1,885,351
NOTE 16 – STOCKHOLDERS’ (DEFICIT) EQUITY
On April 19, 2023, the Company closed its public offering of 1,850,000 shares of common stock at a public offering price of $4.00 per share, for gross proceeds of $7.4 million. After deducting underwriters' discounts and offering expenses, the net proceeds from the public offering were approximately $6.4 million. In accordance with the terms of the Maestro share purchase agreement (Note 5), $2,294,751 or 35% of the net proceeds from the offering were expected to be used to pay down the debt to the Seller. Based on an agreement reached with the Seller on July 18, 2023, 50% of the amount due or $1,147,376 was paid to the Seller on July 19, 2023 and the balance will be paid no later than September 18, 2023. On September 18, 2023 Marpai paid the Seller $200,000 and the parties agreed that the balance of $947,376 will be paid at the earlier of (i) October 18, 2023, and (ii) within 48 hours of the closing of certain funding initiatives that Marpai was engaged in. On October 24 2023, the Seller agreed to change the aforementioned October 18, 2023 date to November 15, 2023.
During the nine months ended September 30, 2023, the Company issued 25,000 shares of common stock to a vendor in consideration for services.
NOTE 17 – INCOME TAXES
The effective tax rate was 0% for the nine months ended September 30, 2023 and 2022. The effective tax rate differs from the federal tax rate of 21% for the nine months ended September 30, 2023 and 2022 due primarily to the full valuation allowance on deferred tax assets, and other discrete items.
At December 31, 2022, the Company had federal and state net operating losses (“NOLs”) in the amount of $29,547,000 and $26,649,000 respectively. These NOLs expire from 2031 to 2041 or have indefinite lives. However, the Tax Cuts & Jobs Act of 2017 limits the amount of net operating loss the Company can utilize each year after December 31, 2020 to 80% of taxable income.
Income tax expense is recorded using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between amounts reported for income tax purposes and financial statement purposes, using current tax rates. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset will not be realized. The Company must assess the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent that the Company believes that recovery is not likely, it must establish a valuation allowance. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets.
The Company and its subsidiaries’ income tax returns since 2019 are open to review by the tax authorities.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act") that includes, among other provisions, changes to the U.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income,” and a one percent excise tax on net repurchases of stock after December 31, 2022. The Company is continuing to evaluate the Inflation Reduction Act and its requirements, as well as the application to its business.
18
NOTE 18 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date the unaudited condensed consolidated financial statements were available for issuance.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MARPAI, INC.
As used in this report, the terms “we”, “us”, “our”, the “Company”, and “Marpai” mean Marpai, Inc., and our wholly owned subsidiaries, Marpai Captive, Marpai Administrators, Maestro Health, and Marpai Health and its wholly owned Israeli subsidiary EYME Technologies, Ltd. (“EYME”), unless otherwise indicated or required by the context.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10‑Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements other than statements of historical fact included in this Form 10‑Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performances, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performances or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to Part II, Item 1A of this Quarterly report and the Risk Factors section of our Annual Report on Form 10-K, filed on March 29, 2023 with the SEC.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10‑Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.
The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Nasdaq Deficiency Letters
On May 31, 2023, we received a notification letter (the “Notice”) from The Nasdaq Capital Market LLC (“Nasdaq”) advising us that for the last 30 consecutive business days preceding the date of the Notice, our Market Value of Listed Securities (“MVLS”) has been below the minimum of $35,000,000 required for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(b)(2) (the “MVLS Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(C), we have 180 calendar days, or until November 27, 2023, to regain compliance with the MVLS Requirement (the “Compliance Period”). Our securities will continue to trade on Nasdaq during the Compliance Period. To regain compliance, our securities must trade at or above a level such that the Company’s MVLS closes at or above $35,000,000 for a minimum of ten consecutive business days during the Compliance Period, or we must meet another listing standard as required under Nasdaq rules. If we do not regain compliance by November 27, 2023 (or the second compliance period, if applicable), then Nasdaq staff will provide written notice to us that our securities are subject to delisting. At that time, we may appeal the delisting determination to a Hearings Panel. We intend to monitor its MVLS and may, if appropriate, consider implementing available options to regain compliance with the MVLS Requirement.
On October 6, 2023, we received a notification letter from Nasdaq indicating that we did not satisfy the requirement for continued listing on the Nasdaq Capital Market under the Bid Price Requirement. We became deficient with Rule 5550(a)(2) as of October 6, 2023, as the closing bid price of our common stock was less than $1.00 per share for 30 consecutive business days prior to the date of the notice.
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have 180 days, or until April 3, 2024, to comply with the Bid Price Requirement by maintaining a closing bid price of at least $1.00 per share for at least 10 consecutive business days during this 180 day period. In the event that we do not regain compliance within this 180 day period, we may be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary.
We intend to monitor the closing bid price of our common stock and consider our available options in the event that the closing bid price of our common stock remains below $1.00 per share. There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements.
Overview
We were formed as a Delaware corporation on January 22, 2021, with the intention to facilitate an initial public offering and other related transactions in order to carry on the business of two healthcare entities, Marpai Health and Marpai Administrators. We acquired Maestro on November 1, 2022 to increase the capacity to service the heath industry. Marpai Inc.’s mission is to positively change healthcare for the benefit of (i) our clients who are self-insured employers that pay for their employees’ healthcare benefits and engage the Company to administer the latter’s healthcare claims, to whom the Company refers as “Clients”; (ii) employees who receive these healthcare benefits from its clients, to whom we refer as “Members”, and (iii) healthcare providers including doctors, doctor groups, hospitals, clinics, and any other entities providing healthcare services or products to whom we refer as “Providers”. Our mission is to positively change healthcare for the benefit of Clients, Members and Providers.
Our company is the combination of Marpai Health, Inc., Marpai Administrators, and Maestro. Marpai Administrators and Maestro are our healthcare payer subsidiaries that provides administration services to self-insured employer groups across the United States. They act as a TPA handling all administrative aspects of providing healthcare to self-insured employer groups. We have combined these three businesses to create what we believe to be the Payer of the Future, which has not only the licenses, processes and know- how of a payer but also the latest technology. This combination allows us to differentiate in the TPA market by delivering a technology-driven service that we believe can lower the overall cost of healthcare while maintaining or improving healthcare outcomes. Marpai Captive was founded in March 2022 as a Delaware corporation. Marpai Captive engages in the captive insurance market and commenced operations in the first quarter of 2023.
After the acquisition of Maestro, we commenced an integration project that combines the operations of Marpai Administrators and Maestro. We expect to complete the integration of the two businesses in 2023 and they will then operate as one business.
Representation in the Financial Statements of Marpai, Inc.
The unaudited condensed consolidated financial statements of Marpai, Inc and the discussion of the results of its operations in this quarterly report, reflect the results of the operations of Marpai Health (and its subsidiary EYME) for all periods presented, the results of Maestro since its acquisition on November 1, 2022 and the results of Marpai Captive since January 1, 2023. The results for the three months and nine months ended September 30, 2023, as applicable, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
We also continue to monitor the effects of the global macroeconomic environment, including increasing inflationary pressures, supply chain disruptions, social and political issues, regulatory matters, geopolitical tensions, and global security issues. We are also mindful of inflationary pressures on our cost base and are monitoring the impact on customer preferences.
21
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2023 and 2022
The following tables set forth our consolidated results of operations for the periods indicated.
Three Months Ended September 30,
Change
3,791,047
76.8
2,065,863
57.0
2,268,280
83.5
788,204
74.8
(269,048
(17.5
)%
(514,481
(65.8
927,390
85,343
10.1
767,603
574,109
296.7
(5,004,874
(46.5
1,213,827
(20.9
Other income and (expenses)
Other income (expense), net
74,179
131.8
Interest expense
(380,848
13,096.6
Foreign exchange gain (loss)
4,976
(26.5
Total other income (expense)
(267,097
34,596
301,693
872.0
Loss before income taxes
1,515,520
(26.2
Net loss per share, basic and fully diluted
(0.16
14.2
Nine Months Ended September 30,
11,734,756
70.2
6,205,998
50.4
7,997,661
100.7
664,728
13.8
913,198
23.6
(1,393,104
(51.9
530,116
21.69
289,721
479.1
1,917,628
1,331,198
227.0
51,269,931
(16,539,516
(47.6
(22,821,755
4,804,760
(26.7
Other income, net
135,792
142.1
(1,094,630
14762.4
Foreign exchange (loss) gain
(26,946
493.4
Total other (expense) income
(903,095
82,689
(985,784
(1192.2
(23,724,850
(5,790,544
32.3
(0.04
1.0
22
Revenues and Cost of Revenue
During the three months ended September 30, 2023 and 2022, our total revenue was $8,729,152 and $4,938,105, respectively, representing an increase in revenue of $3,791,047. The main reason for the increase in revenues was due to the revenue generated by Maestro amounting to $4,446,257 (which were not included in the operating results of the Company prior to its acquisition on November 1, 2022), and new services offered to existing clients, amounting to $149,365, partially offset by a decline of $958,672 in revenue due to the termination by the Company, effective September 2022, of a contract with a client that failed to meet its contractual obligations.
During the nine months ended September 30, 2023 and 2022, our total revenue was $28,448,176 and $16,713,420, respectively, representing an increase in revenue of $11,734,756. The main reason for the increase in revenues was due to the revenue generated by Maestro amounting to $15,157,941 (which were not included in the operating results of the Company prior to its acquisition on November 1, 2022), and new services offered to existing clients amounting to $149,365, partially offset by a decline of $3,738,447 in revenue due to the termination by the Company, effective September 2022, of a contract with a client that failed to meet its contractual obligations.
Total revenues consist of fees that we charge our customers in consideration for administering their self-insured healthcare plans as well as fees that we receive for ancillary services such as care management, case management, cost containment services, and other services provided to our customers by us or other vendors.
During the three months ended September 30, 2023 and 2022, our cost of revenue exclusive of depreciation and amortization was $5,691,278 and $3,625,415, respectively, representing an increase of $2,065,863. The main reason for the increase in the cost of revenue was due to the cost of revenue generated by Maestro amounting to $2,437,535(which were not included in the operating results of the Company prior to its acquisition on November 1, 2022), and increased computer and telephone costs of $268,416 due to vendor alignment between Maestro and Marpai, partially offset by the reduction in the cost of revenues amounting to $696,006 relating to the termination of the customer contract described above.
During the nine months ended September 30, 2023 and 2022, our cost of revenue exclusive of depreciation and amortization was $18,529,768 and $12,323,770, respectively, representing an increase of $6,205,998. The main reason for the increase in the cost of revenue was due to the cost of revenue generated by Maestro amounting to $7,976,153 (which were not included in the operating results of the Company prior to its acquisition on November 1, 2022), increased computer and telephone costs of $857,297 due to vendor alignment between Maestro and Marpai, partially offset by the reduction in the cost of revenues amounting to $2,841,477 relating to the termination of the customer contract described above.
Total cost of revenues consists of (i) service fees, which primarily include vendor fees associated with the client’s benefit program selections, (ii) the direct labor cost associated with claim management and processing services, and (iii) direct labor costs associated with providing customer support and services to the clients, members, and other external stakeholders.
Research and Development Expenses
We incurred $267,269 of research and development expenses for the three months ended September 30, 2023 compared to $781,750 for the three months ended September 30, 2022, a decrease of $514,481. The decrease is attributable to (i) decreased expenditures in EYME amounting to approximately $423,168, associated primarily with a lower number of research and development employees in the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, (ii) a decrease in employee stock based compensation of $47,598, and (iii) in 2022, the President of Production and Development’s time was split and allocated with $138,911 being included in research and development expenses, but no allocation was made for research and development in 2023 due to change in the President of Production and Development’s job responsibilities.
We incurred $1,290,910 of research and development expenses for the nine months ended September 30, 2023 compared to $2,684,014 for the nine months ended September 30, 2022, a decrease of $1,393,104. The decrease is attributable to (i) decreased expenditures in EYME amounting to approximately $675,030, associated primarily with a lower number of research and development employees in the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, (ii) a decrease in employee stock based compensation of $268,950, and (iii) in 2022, the President of Production and Development’s time was split and allocated with
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$449,124 being included in research and development expenses, but no allocation was made for research and development in 2023 due to change in the President of Production and Development’s job responsibilities.
General and Administrative Expenses
We incurred $4,986,185 of general and administrative expenses for the three months ended September 30, 2023 compared to $2,717,905 for the three months ended September 30, 2022, an increase of $2,268,280. The reason for the increase is due to (i) general and administrative expenses generated by Maestro amounting to $1,651,433 (which were not included in the operating results of the Company prior to its acquisition on November 1, 2022), (ii) an increase in legal and professional fees expenses of $95,446 due to exploration of equity issuance and capital raising initiatives and additional audit services, and (iii) an increase in Marpai Administrators’ employee cost of approximately $450,000 severance and expanded leadership.
We incurred $15,937,675 of general and administrative expenses for the nine months ended September 30, 2023 compared to $7,940,014 for the nine months ended September 30, 2022, an increase of $7,997,661. The reason for the increase is due to (i) general and administrative expenses generated by Maestro amounting to $6,240,737 (which were not included in the operating results of the Company prior to its acquisition on November 1, 2022), (ii) an increase in legal and professional fees expenses of $358,713 due to exploration of equity issuance and capital raising initiatives and additional audit services, and (iii) an increase in Marpai Administrators’ employee cost of approximately $1,550,000 severance and expanded leadership.
Sales and Marketing Expenses
We incurred $1,842,018 of sales and marketing expenses for the three months ended September 30, 2023 compared to $1,053,814 for the three months ended September 30, 2022, an increase of $788,204. This increase was primarily due to (i) sales and marketing expenses generated by Maestro amounting to $116,990 (which were not included in the operating results of the Company prior to its acquisition on November 1, 2022), (ii) increased expenditures amounting to approximately $338,000, associated with severance expenses and increased employee cost, and (iii) an increase in consulting and contract employee expenses amounting to $438,013, all partially offset by reduction in outside marketing cost of $244,520.
We incurred $5,494,446 of sales and marketing expenses for the nine months ended September 30, 2023 compared to $4,829,718 for the nine months ended September 30, 2022, an increase of $664,728. This increase was primarily due to (i) sales and marketing expenses generated by Maestro amounting to $968,563 (which were not included in the operating results of the Company prior to its acquisition on November 1, 2022), (ii) increased expenditures amounting to approximately $456,000, associated with severance expenses and increased employee cost, (iii) an increase in consulting and contract employee expenses amounting to $606,638, and (iv) increased stock compensation of $373,676, all partially offset by reduction in outside marketing cost of $244,520.
Information Technology Expenses
We incurred $1,269,088 of information technology expenses for the three months ended September 30, 2023 compared to $1,538,136 for the three months ended September 30, 2022, a decrease of $269,048. This decrease was primarily due to information technology expenses generated by Maestro amounting to $474,365 (which were not included in the operating results of the Company prior to its acquisition on November 1, 2022), offset by employee reassignment due to department reorganization of approximately $530,000, and (ii) the allocation in 2022 of the President of Production and Development’s time of $138,911 being included in information technology expenses but no allocation was made to information technology in 2023.
We incurred $4,775,340 of information technology expenses for the nine months ended September 30, 2023 compared to $3,862,142 for the nine months ended September 30, 2022, an increase of $913,198. This increase was primarily due to information technology expenses generated by Maestro amounting to $2,157,881 (which were not included in the operating results of the Company prior to its acquisition on November 1, 2022), offset by employee reassignment due to department reorganization of approximately $335,000, (ii) the allocation in 2022 of the President of Production and Development’s time of $449,125 being included in information technology expenses but no allocation was made to information technology in 2023, and (iii) decreased computer and telephone costs of $373,291 due to vendor alignment between Maestro and Marpai.
Depreciation and Amortization
We incurred $927,390 of depreciation and amortization expenses for the three months ended September 30, 2023 compared to $842,047 for the three months ended September 30, 2022, an increase of $85,343. This increase was primarily due to (i) depreciation and amortization expense generated by Maestro amounting to $114,336 (which were not included in the operating results of the Company
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prior to its acquisition on November 1, 2022), and (ii) partially offset by a reduction by approximately $29,000 in the depreciation of assets that were disposed of during the current year.
We incurred $2,973,972 of depreciation and amortization expenses for the nine months ended September 30, 2023 compared to $2,443,856 for the nine months ended September 30, 2022, an increase of $530,116 . This increase was primarily due to (i) depreciation and amortization expense generated by Maestro amounting to $526,454 (which were not included in the operating results of the Company prior to its acquisition on November 1, 2022).
Loss on Disposal of Assets
We incurred $6,604 of loss on disposal of assets for the three months ended September 30, 2023 compared to $0 for the three months ended September 30, 2022, an increase of $6,604. This increase was primarily due to disposal of furniture assets that were no longer needed as the lease terms ended.
We incurred $350,192 of loss on disposal of assets for the nine months ended September 30, 2023 compared to $60,471 for the nine months ended September 30, 2022, an increase of $289,721. This increase was primarily due to disposal of furniture and leasehold improvement assets that were no longer needed as the lease terms ended.
Interest Expense, net
We incurred $383,756 of interest expense for the three months ended September 30, 2023 compared to $2,908 for the three months ended September 30, 2022, an increase of $380,848. Interest expense increased primarily due to the interest accrued on outstanding debt relating to the acquisition of Maestro which closed on November 1, 2022.
We incurred $1,102,045 of interest expense for the nine months ended September 30, 2023 compared to $7,415 for the nine months ended September 30, 2022, an increase of $1,094,630. Interest expense increased primarily due to the interest accrued on outstanding debt relating to the acquisition of Maestro which closed on November 1, 2022.
Liquidity and Capital Resources
As of September 30, 2023, the Company had an accumulated deficit of approximately $71.7 million, unrestricted cash and cash equivalents of approximately $3.0 million and negative working capital of approximately $3.6 million. For the nine months ended September 30, 2023, the Company recognized a net loss of approximately $23.7 million and negative cash flows from operations of approximately $15.3 million.
The Company has spent most of its cash resources on funding its operating activities. Through September 30, 2023, the Company has financed its operations primarily with the proceeds from the issuance of convertible promissory notes and warrants as well as sales of its equity securities.
On April 19, 2023, we closed a public offering of 1,850,000 shares of common stock at a public offering price of $4.00 per share, for gross proceeds of $7.4 million. After deducting underwriters' discounts and offering expenses, the net proceeds from the public offering were approximately $6.4 million. In accordance with the terms of the Maestro share purchase agreement, $2,294,751 or 35% of the net proceeds from the offering were expected to be used to pay down the debt to the Seller. Based on an agreement reached with the Seller on July 18, 2023, 50% of the amount due or $1,147,376 was paid to the Seller on July 19, $200,000 was paid to the Seller on September 18, 2023, and the balance will be paid no later than November 15, 2023.
Management continues to evaluate additional funding alternatives and is seeking to raise additional funds through the issuance of equity or debt securities.
If we are unable to raise additional capital moving forward, our ability to operate in the normal course and continue to invest in its product portfolio may be materially and adversely impacted and we may be forced to scale back operations or divest some or all of our assets.
As a result of the above, in connection with our assessment of going concern considerations in accordance with Financial Accounting Standard Accounting Standards Update (“ASU”) 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that our liquidity condition raises substantial doubt about our ability to continue as a going concern through twelve months from the date these condensed consolidated financial statements are available to be issued. These
condensed consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should we be unable to continue as a going concern.
Cash Flows
The following tables summarizes selected information about our sources and uses of cash and cash equivalents for the nine months ended September 30, 2023 and 2022:
Comparison of the Nine Months Ended September 30, 2023 and 2022
Net decrease in cash and cash equivalents and restricted cash
Net Cash Used in Operating Activities
Net cash used in operating activities totaled $15,324,191 for the nine months ended September 30, 2023, a decrease of $15,026 as compared to $15,339,217 for the nine months ended September 30, 2022. Net cash used in operating activities was primarily driven by our net loss for the period of $23,724,849 net of (i) non-cash items totaling $7,766,078 and (ii) decrease in net working capital items amounting to $634,580.
Net Cash Provided by (Used in) Investing Activities
A total of $26,914 was provided by investing activities in the nine months ended September 30, 2023, a decrease of $906,946 as compared to $880,032 in cash used in investing activities for the nine months ended September 30, 2022. The primary reason for the decline is the decline in the capitalization of software development costs.
Net Cash Provided by Financing Activities
A total of $6,432,025 was received from financing activities during the nine months ended September 30, 2023, comprising of net proceeds provided from a public offering of common stock of $6,431,612 and $413 provided from the exercising of stock options.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. We evaluate our estimates, assumptions and judgments on an ongoing basis. Our estimates, assumptions and judgments are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our condensed consolidated financial statements, which, in turn, could change the results from those reported.
See Note 4 to our condensed consolidated financial statements included in this Form 10-Q for a description of the significant accounting policies that we use to prepare our consolidated financial statements.
New Accounting Pronouncements
We have considered recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our condensed consolidated financial statements.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) that includes, among other provisions, changes to the U.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income,” and a one percent excise tax on net repurchases of stock after December 31, 2022.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign exchange risk
The cash generated from revenue is denominated in U.S. Dollars. Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are in the United States and Israel. Our results of current and future operations and cash flows are therefore subject to fluctuations due to changes in the exchange rate of the New Israeli Shekel (NIS). The effect of a hypothetical 10% change in the exchange rate of the NIS versus the U.S. Dollar would not have had a material impact on our historical condensed consolidated financial statements for the nine months ended September 30, 2023. To date we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes or is expected to become more significant.
Interest rate risk
We had cash and cash equivalents balances of $3,018,424 and $13,764,508 on September 30, 2023 and December 31, 2022, respectively. Currently, management does not view this exposure to be a significant risk.
Inflation Risk
Inflation generally affects us by increasing our labor costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the nine months ended September 30, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial and Accounting Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of the end of the fiscal quarter ended September 30, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial and Accounting Officer have concluded that, during the period covered by this Quarterly Report, our disclosure controls and procedures were effective.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer or persons performing similar functions, as appropriate, to allow timely decisions.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) during the third quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II – OTHER INFORMATION
ITEM 6. Exhibits.
Exhibit No.
Description
10.1+
Separation Agreement, executed by and between Marpai, Inc. and Lutz Finger, dated August 16, 2023 (incorporated by reference to Exhibit 10.1 filed with the Current Report on Form 8-K filed with the SEC on August 17, 2023).
10.2+
Consulting Agreement, executed by and between Marpai, Inc. and Lutz Finger, dated August 16, 2023 (incorporated by reference to Exhibit 10.2 filed with the Current Report on Form 8-K filed with the SEC on August 17, 2023.)
31.1
Certification Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2
Certification Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1*
Certification Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2*
Certification Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
101*
Interactive Data Files
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.
** Filed herewith.
+ Management contract or compensation plan.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 13, 2023
/s/ Damien Lamendola
Name:
Damien Lamendola
Title:
Chief Executive Officer
(Principal Executive Officer)
/s/ Steve Johnson
Steve Johnson
Title
Chief Financial Officer
(Principal Financial and Accounting Officer)