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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 jurisdiction
of incorporation)

(IRS Employer
Identification 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.

 

 

 


 

MARPAI, INC.

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

27

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

 

 

 

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

 

 

 

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

 

$

35,610,551

 

 

$

49,949,620

 

(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.

1


 

MARPAI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

2023

 

 

2022

 

 

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

 

$

(7,295,380

)

 

$

(5,779,860

)

 

$

(23,724,849

)

 

$

(17,934,306

)

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

 

 

(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.

2


 

MARPAI, INC. AND SUBSIDIARIES

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

 

 

 

-

 

 

 

721,556

 

 Issuance of common stock upon vesting of restricted stock units

 

 

524,244

 

 

 

53

 

 

 

-

 

 

 

-

 

 

 

53

 

 Issuance of common stock upon exercise of stock options

 

 

21,849

 

 

 

2

 

 

 

146

 

 

 

-

 

 

 

148

 

 Issuance of round up shares in connection with reverse split

 

 

8,714

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

 Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,295,380

)

 

 

(7,295,380

)

Balance, September 30, 2023

 

 

7,810,625

 

 

$

781

 

 

$

62,475,786

 

 

$

(71,718,949

)

 

$

(9,242,382

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2022

 

 

5,170,711

 

 

$

517

 

 

$

52,750,138

 

 

$

(33,680,156

)

 

$

19,070,499

 

 Share-based compensation

 

 

-

 

 

 

-

 

 

 

689,375

 

 

 

-

 

 

 

689,375

 

 Issuance of common stock upon vesting of restricted stock units

 

 

61,890

 

 

 

6

 

 

 

19

 

 

 

-

 

 

 

25

 

Common Stock issued to vendors in exchange for services

 

 

1,875

 

 

 

-

 

 

 

7,726

 

 

 

-

 

 

 

7,726

 

 Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,779,860

)

 

 

(5,779,860

)

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

 

 

$

532

 

 

$

54,127,893

 

 

$

(47,994,100

)

 

$

6,134,325

 

 Share-based compensation

 

 

-

 

 

 

-

 

 

 

1,836,930

 

 

 

-

 

 

 

1,836,930

 

 Issuance of common stock upon vesting of restricted stock units

 

 

557,631

 

 

 

56

 

 

 

-

 

 

 

-

 

 

 

56

 

Common stock issued to vendors in exchange for services

 

 

25,000

 

 

 

2

 

 

 

79,128

 

 

 

-

 

 

 

79,130

 

 Issuance of common stock upon exercise of stock options

 

 

49,522

 

 

 

5

 

 

 

408

 

 

 

-

 

 

 

413

 

 Issuance of round up shares in connection with reverse split

 

 

8,714

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

 Issuance of common stock in connection with public offering, net

 

 

1,850,000

 

 

 

185

 

 

 

6,431,427

 

 

 

-

 

 

 

6,431,612

 

 Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(23,724,849

)

 

 

(23,724,849

)

Balance, September 30, 2023

 

 

7,810,625

 

 

$

781

 

 

$

62,475,786

 

 

$

(71,718,949

)

 

$

(9,242,382

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

 

5,074,932

 

 

 

507

 

 

 

51,233,615

 

 

 

(21,525,710

)

 

 

29,708,412

 

 Share-based compensation

 

 

-

 

 

 

-

 

 

 

2,182,696

 

 

 

-

 

 

 

2,182,696

 

 Issuance of common stock upon vesting of restricted stock units

 

 

152,044

 

 

 

15

 

 

 

46

 

 

 

-

 

 

 

61

 

Common stock issued to vendors in exchange for services

 

 

7,500

 

 

 

1

 

 

 

30,901

 

 

 

-

 

 

 

30,902

 

  Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(17,934,306

)

 

 

(17,934,306

)

Balance, September 30, 2022

 

 

5,234,475

 

 

$

523

 

 

$

53,447,258

 

 

$

(39,460,016

)

 

$

13,987,765

 

(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.

3


 

MARPAI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

Nine months ended September 30,

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(23,724,849

)

 

$

(17,934,306

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

2,973,972

 

 

 

2,443,856

 

Loss on disposal of assets

 

 

350,192

 

 

 

60,471

 

Share-based compensation

 

 

1,836,986

 

 

 

2,432,758

 

Common stock issued to vendors in exchange for services

 

 

79,130

 

 

 

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

 

Other receivables

 

 

(1,617

)

 

 

34,665

 

Security deposit

 

 

(15,743

)

 

 

 

Accounts payable

 

 

335,647

 

 

 

(432,986

)

Accrued expenses

 

 

(692,991

)

 

 

(436,385

)

Accrued fiduciary obligations

 

 

853,408

 

 

 

(1,642,220

)

Operating lease liabilities

 

 

(1,670,454

)

 

 

(512,095

)

Due to related party

 

 

(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

 

 

26,914

 

 

 

(880,032

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from stock options exercises

 

 

413

 

 

 

 

Proceeds from issuance of common stock in a public offering, net

 

 

6,431,612

 

 

 

 

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

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,018,424

 

 

$

4,747,951

 

Restricted cash

 

 

11,233,440

 

 

 

4,966,443

 

Total cash, cash equivalents and restricted cash shown in the condensed
   consolidated statement of cash flows

 

$

14,251,864

 

 

$

9,714,394

 

Supplemental disclosure of non-cash activity

 

 

 

 

 

Measurement period adjustment to goodwill

 

$

198,140

 

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


 

MARPAI, INC. AND SUBSIDIARIES

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.

5


 

MARPAI, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

6


 

MARPAI, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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


 

MARPAI, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


 

MARPAI, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


 

MARPAI, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

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MARPAI, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

December 31, 2022

 

 

Adjustment

 

 

September 30, 2023

 

Purchase Price

 

 

 

 

 

 

 

 

 

Purchase Price

 

$