UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
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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 | 18 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 24 |
| Item 4. | Controls and Procedures | 24 |
| PART II. OTHER INFORMATION | ||
| Item 1A. | Risk Factors | 25 |
| Item 6. | Exhibits | 25 |
| SIGNATURES | 26 | |
i
PART I — FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements.
MARPAI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| September 30, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS: | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net of allowance for credit losses of $ | ||||||||
| Unbilled receivable | ||||||||
| Due from buyer for sale of business unit | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Capitalized software, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Security deposits | ||||||||
| Other long-term asset | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued fiduciary obligations | ||||||||
| Deferred revenue | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of convertible debentures, net | ||||||||
| Other short-term liabilities | ||||||||
| Total current liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Convertible debentures, net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Deferred tax liabilities | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 17) | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
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)
(in thousands, except share and per share data)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Costs and expenses | ||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization shown separately below) | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Information technology | ||||||||||||||||
| Research and development | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Impairment of goodwill and intangible assets | ||||||||||||||||
| Loss on disposal of assets | ||||||||||||||||
| Loss on sale of business unit | ||||||||||||||||
| Facilities | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign exchange gain (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share, basic & fully diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares of common stock outstanding, basic and diluted | ||||||||||||||||
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
(UNAUDITED)
(in thousands, except share data)
| Common Stock | Additional Paid- In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Three months ended September 30, 2024 | Shares | Amount | Capital | Deficit | Deficit | |||||||||||||||
| Balance, July 1, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | ||||||||||||||||||||
| Issuance of privately placed shares | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Three months ended September 30, 2023 | ||||||||||||||||||||
| Balance, July 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | ||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | ||||||||||||||||||||
| Issuance of round up shares in connection with reverse split | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Nine months ended September 30, 2024 | ||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | ||||||||||||||||||||
| Issuance of privately placed shares | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Nine months ended September 30, 2023 | ||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | ||||||||||||||||||||
| Common stock issued to vendors in exchange for services | ||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | ||||||||||||||||||||
| Issuance of round up shares in connection with reverse split | ||||||||||||||||||||
| Issuance of common stock in connection with public offering, net | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
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)
(in thousands)
| Nine months ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Loss on disposal of assets | ||||||||
| Loss on sale of receivables | — | |||||||
| Share-based compensation | ||||||||
| Loss on sale of business unit | — | |||||||
| Common stock issued to vendors in exchange for services | ||||||||
| Amortization of right-of-use asset | ||||||||
| Gain on termination of lease | ||||||||
| Non-cash interest | ||||||||
| Amortization of debt discount and debt issuance costs | ||||||||
| Impairment of goodwill and intangible assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable and unbilled receivable | ||||||||
| Prepaid expense and other assets | ||||||||
| Due from buyer for sale of business unit | ||||||||
| Security deposits | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Accrued fiduciary obligations | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Due to related party | ( | ) | ||||||
| Other liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Disposal of property and equipment | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock in a public offering, net | ||||||||
| Proceeds from sale of future cash receipts on accounts receivable | ||||||||
| Proceeds from issuance of convertible debentures (Note 9) | ||||||||
| Payments of convertible debenture issuance costs | ( | ) | ||||||
| Payments to buyer of receivables (Note 3) | ( | ) | ||||||
| Payments to seller for acquisition (Note 3) | ( | ) | ||||||
| Proceeds from issuance of common stock in a private offering, net | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | ||||||
| Reconciliation of cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheet | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash activity | ||||||||
| Measurement period adjustment to goodwill | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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 administrator (“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 members’ healthcare claims, (ii) employees who receive these healthcare benefits from our 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.
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 condensed 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, 2023.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
NOTE 3 – LIQUIDITY AND GOING CONCERN
As shown in the accompanying condensed consolidated
financial statements as of September 30, 2024, the Company had an accumulated deficit of approximately $
5
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 the issuance of 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 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.
On December 14, 2023, the Company, through Maestro,
entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Payflex Systems USA, Inc. (“Payflex”),
pursuant to which the Company agreed to sell certain assets relating to the consumer directed benefits business. Pursuant to the Asset
Purchase Agreement, Payflex agreed to pay the Company $
On January 16, 2024, the Company entered into
a securities purchase agreement (the “Second SPA”) with certain Company insiders consisting of HillCour Investment Fund, LLC
(“HillCour”), an entity controlled by the Company’s Chief Executive Officer, the Company’s Chairman, and one of
the Company’s directors, pursuant to which the Company agreed to issue and sell
On February 5, 2024, the Company entered into
an Agreement of Sale of Future Receipts (the “Libertas Agreement”) with Libertas Funding LLC (“Libertas”). Under
the Libertas Agreement, the Company sold to Libertas future receipts totaling $
Pursuant to the terms of the Libertas Agreement,
the Company agreed to pay Libertas $
On February 7, 2024, the Company entered into Amendment No. 1 to Purchase Agreement (the “AXA Amendment”) with AXA S.A., a French société anonyme (“AXA”). The AXA Amendment amends the Membership Interest Purchase Agreement, dated August 4, 2022 (the “AXA Agreement”), executed by and among the Company, XL America Inc., a Delaware corporation, Seaview Re Holdings Inc., a Delaware corporation and AXA, pursuant to which the Company acquired all the membership interests of Maestro.
6
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the AXA Amendment, the parties agreed to reduce the Base Purchase and the Full Base Amount each Price (as defined in the AXA Agreement) by three million dollars in the aggregate, provided that by December 31, 2024, (i) the Company’s largest shareholder has contributed at least three million dollars in equity, (ii) the Company maintains a listing of its securities on Nasdaq or a nationally recognized stock exchange and (iii) between February 29, 2024 and April 15, 2024, the Company makes all timely payments owed under the AXA Agreement (collectively, the “Reduction Criteria”).
In addition, the AXA Amendment provides that the requirement by the Company to pay AXA an amount equal to thirty five percent of the net proceeds, shall be deferred for any such funds raised in calendar year 2024 such that any such payments shall be paid no later than January 15, 2025, and any amounts due as a result of private offerings of any officers or directors of the Company shall be due and payable no later than December 31, 2025.
The AXA Amendment also provides that the Company
shall make three monthly payments of $
On March 7, 2024, the Company entered into a securities
purchase agreement with HillCour pursuant to which the Company agreed to issue and sell
On April 15, 2024, the Company entered into a
Securities Purchase Agreement (the “Purchase Agreement”) with each of the purchasers that are parties thereto (each, including
its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB Collateral LLC (“JGB”),
a Delaware limited liability company, as collateral agent for the Purchasers (the “Agent”). Pursuant to the terms of the Purchase
Agreement, on April 15, 2024, the Company issued the Senior Secured Convertible Debentures (the “Debentures”) due on April
15, 2027 for a principal sum of $
On May 24, 2024, the Company informed the staff of the Nasdaq Stock Market LLC of its intention to withdraw from the Nasdaq hearings process and transition the listing of its common shares from the Nasdaq Capital Market (“Nasdaq”) and have the Shares quoted on the OTCQX Market (“OTCQX”).
On August 28, 2024, the Company entered into a
securities purchase agreement with two investors, including HillCour, pursuant to which the Company agreed to issue and sell an aggregate
of
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
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, 2023. 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.
Concentrations of Credit Risk
For the three month periods ended September 30,
2024 and 2023, the Company had one customer that accounted for
7
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, cash in a money market account as required by a financial surety bond company for collateral, and a certificate of deposit (“CD”) held for collateral for 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
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 reporting 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.
During the nine months ended September 30, 2024, the Company recognized an impairment of its goodwill – see Note 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
During the nine months ended September 30, 2024, the Company recognized an impairment of its intangible assets – see Note 7.
8
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
Significant Payment Terms
Generally, the Company’s accounts receivable
are expected to be collected in
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.
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.
9
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Loss and Loss Adjustment Expenses
The establishment of loss reserves by the primary insurer is a reasonably complex and dynamic process influenced by numerous 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, 2024 and 2023,
there were
Recently Issued Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which will add required disclosures of significant expenses for each reportable segment, as well as certain other disclosures to help investors understand how the Chief Operating Decision Maker evaluates segment expenses and operating results. The new standard will also allow disclosure of multiple measures of segment profitability, if those measures are used to allocate resources and assess performance. The amendments will be effective for public companies for fiscal years beginning after December 15, 2023 and for interim reporting periods beginning after December 15, 2024. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. The standard will be effective for public companies for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
In March 2024, the FASB issued ASU No. 2024-01, “Scope Application of Profits Interest and Similar Awards” (“ASU 2024-01”). ASU 2024-01 clarifies appropriate accounting for awards issued with the intent to align compensation with operating performance by providing specific examples for issuers to follow. Beyond these clarifying examples, no changes to the codification were made. ASU 2024-01 is effective for fiscal years beginning after December 15, 2024, and interim periods within the fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures.
NOTE 5 – PROPERTY AND EQUIPMENT
(in thousands)
| September 30, 2024 | December 31, 2023 | |||||||
| Equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Total cost | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation expense was $
Depreciation expense was $
10
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – CAPITALIZED SOFTWARE
(in thousands)
| September 30, 2024 | December 31, 2023 | |||||||
| Capitalized software | $ | $ | ||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Capitalized software, net | $ | $ | ||||||
Amortization expense was $
Amortization expense was $
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
(in thousands)
| September 30, 2024 | ||||
| Balance as of December 31, 2023 | $ | |||
| Impairment of goodwill | ( | ) | ||
| Balance as of September 30, 2024 | $ | |||
The Company conducts an annual impairment test
of goodwill at December 31st or if events or circumstances exist that would indicate that the Company’s goodwill may
be impaired. As circumstances changed during the three months ended June 30, 2024, that would, more likely than not, reduce the Company’s
fair value below its net equity value, the Company performed qualitative and quantitative analyses of the potential impairment of its
goodwill, specifically evaluating trends in market capitalization, current and future cash flows, revenue growth rates, and the impact
of macroeconomic conditions on the Company and its performance. Based on the analysis performed, the Company determined that its goodwill
was fully impaired due to the continuation of revenues being below management’s expectations, continued operating losses and negative
operating cash flows, reductions in the Company’s stock price and market capitalization, and the delisting from Nasdaq and subsequent
transition to the OTCQX market in the second quarter of 2024 whereby the Company’s common stock has been thinly traded. As a result,
the Company recorded a goodwill impairment charge in the amount of $
(in thousands)
| September 30, 2024 | ||||||||||||||||||||||
| Useful | Gross Carrying | Accumulated | Net | Net Carrying | ||||||||||||||||||
| Life | Amount | Amortization | Disposal | Impairment | Amount | |||||||||||||||||
| Trademarks | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
| Noncompete agreements | ( | ) | ( | ) | ||||||||||||||||||
| Customer relationships | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Patents and patent applications | ( | ) | ( | ) | ||||||||||||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
| December 31, 2023 | ||||||||||||||||||||||
| Trademarks | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||
| Noncompete agreements | ( | ) | ||||||||||||||||||||
| Customer relationships | ( | ) | ( | ) | ||||||||||||||||||
| Patents and patent applications | ||||||||||||||||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||
| (*) |
11
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense was $
Amortization expense was $
The Company conducts an impairment test of intangible
assets when events occur or circumstances exist that would indicate the Company’s long-lived assets may be impaired. Based on the
matters discussed above for goodwill and the qualitative and quantitative analyses performed, the Company determined that its intangible
assets were fully impaired. As a result, the Company recorded an intangible impairment charge in the amount of $
NOTE 8 – LOSS AND LOSS ADJUSTMENT EXPENSES
(in thousands)
| 2024 | 2023 | |||||||
| Net reserves at July 1 | $ | $ | ||||||
| Incurred loss and loss adjustment expenses | ||||||||
| Provisions for insured events of the current year | ||||||||
| 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 | ||||||||
| Loss and loss adjustment expenses attributable to insured events of the prior year | ||||||||
| Total payments | ||||||||
| Net reserves at September 30 | $ | $ | ||||||
(in thousands)
| 2024 | 2023 | |||||||
| Net reserves at January 1 | $ | $ | ||||||
| Incurred loss and loss adjustment expenses | ||||||||
| Provisions for insured events of the current year | ||||||||
| 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 | ||||||||
| Loss and loss adjustment expenses attributable to insured events of the prior year | ||||||||
| Total payments | ||||||||
| Net reserves at September 30 | $ | $ | ||||||
NOTE 9 – CONVERTIBLE DEBENTURES
Securities Purchase Agreement
On April 15, 2024, the Company entered into the
Purchase Agreement with each of the Purchasers and JGB, as collateral agent for the Purchasers (the “Agent”). In accordance
with the Purchase Agreement JGB purchased an aggregate of $
12
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Debentures
The Debentures bear interest at a rate equal to
the prime interest rate plus
The Company’s obligations under the Debentures
may be accelerated, at the Purchasers’ election or upon the occurrence of certain customary events of default. The Debentures contain
customary representations, warranties and covenants including among other things and subject to certain exceptions, covenants that restrict
the Company from incurring additional indebtedness, creating or permitting liens on assets, amending its charter documents and bylaws,
repurchasing or otherwise acquiring more than a de minimis number of its Common Stock or equivalents thereof, repaying outstanding indebtedness,
paying dividends or distributions, assigning or selling certain assets, making or holding any investments, and entering into transactions
with affiliates. In addition, at any time within sixty days after the Closing Date, and provided that $
As of September 30, 2024, the net carrying amount
of the convertible debt instrument is $
| September 30, 2024 | ||||
| Convertible debenture principal | $ | |||
| Unamortized debt discount and issuance costs | ( | ) | ||
| Outstanding balance, Net | ||||
| Less: current portion | ( | ) | ||
| Long-term portion | $ | |||
NOTE 10 – REVENUE
Disaggregation of Revenue
For the nine months ended:
(in thousands)
| September 30, 2024 | September 30, 2023 | |||||||
| TPA services | $ | $ | ||||||
| Captive insurance | ||||||||
| Total | $ | $ | ||||||
For the three months ended:
(in thousands)
| September 30, 2024 | September 30, 2023 | |||||||
| TPA services | $ | $ | ||||||
| Captive insurance | ||||||||
| Total | $ | $ | ||||||
13
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – SHARE-BASED COMPENSATION
Global Stock Incentive Plan
On May 31, 2023, the shareholders of the Company
approved the Company’s Board of Directors proposal to increase the Company’s 2020 Global Incentive Plan (the “2020 Plan”)
by an additional
Under the term of the 2020 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 (
On May 6, 2024, the shareholders of the Company
approved the Company’s 2024 Global Incentive Plan (the “2024 Plan”) with
Under the terms of the 2024 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 (
Stock Options
There were options granted for the nine months
ended September 30, 2024.
| 2023 | ||||
| Risk-free interest rates | % | |||
| Expected life | ||||
| Expected volatility | % | |||
| Expected dividend yield | % | |||
(in thousands except share and per share data)
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Balance at January 1, 2024 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited/Cancelled | ( | ) | ||||||||||||||
| Exercised | ||||||||||||||||
| Balance at September 30, 2024 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2024 | $ | $ | ||||||||||||||
14
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Non-vested Options | Weighted- Average Grant Date | |||||||
| Outstanding | Fair Value | |||||||
| Balance at January 1, 2024 | $ | |||||||
| Options granted | ||||||||
| Options forfeited/cancelled | ( | ) | ||||||
| Options exercised | ||||||||
| Options vested | ( | ) | ||||||
| Balance at September 30, 2024 | $ | |||||||
For the nine months ended September 30, 2024 and
2023, the Company recognized $
Restricted Stock Awards
In July 2019, the Board of Directors of the Company authorized grants of 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 were issued upon grant.
For the nine months ended September 30, 2024 and
2023, the Company recognized $
Restricted Stock Units
On May 23, 2024, the Company approved a special
one-time grant of
On June 18, 2024, the Company approved a special
one-time grant of
15
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Restricted Stock Units | Weighted- Average Grant Date Fair Value Per Share | |||||||
| Outstanding at January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Forfeited/cancelled | ( | ) | ||||||
| Vested | ( | ) | ||||||
| Outstanding at September 30, 2024 | $ | |||||||
For the nine months ended September 30, 2024 and
2023, the Company recognized $
NOTE 12 – WARRANTS
The Company has issued warrants as part of equity offerings and severance packages.
| Number of Warrants to Purchase Common Shares |
Exercise Price Range Per Share |
Weighted Average Exercise Price |
||||||||||
| Balance at January 1, 2024 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Forfeited | — | — | ||||||||||
| Exercised | — | — | ||||||||||
| Balance at September 30, 2024 | $ | $ | ||||||||||
| Balance at January 1, 2023 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Forfeited | — | — | ||||||||||
| Exercised | — | — | ||||||||||
| Balance at September 30, 2023 | $ | $ | ||||||||||
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 reporting date. All of the Company’s revenues are derived from customers located in the United States.
(in thousands)
| September 30, 2024 | December 31, 2023 | |||||||
| United States | $ | $ | ||||||
| Israel | ||||||||
| Total long-lived assets | $ | $ | ||||||
16
MARPAI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended September 30,
2024, and 2023 was approximately $
In January 2024, March 2024, and August 2024, the Company entered into security purchase agreements with an entity controlled by the Company’s Chief Executive Officer (See Note 3).
NOTE 15 – ACCRUED EXPENSES
(in thousands)
| September 30, 2024 | December 31, 2023 | |||||||
| Employee compensation | $ | $ | ||||||
| Accrued bonuses | ||||||||
| Performance guarantee liabilities | ||||||||
| Other accrued expenses and liabilities | ||||||||
| Accrued expenses | $ | $ | ||||||
NOTE 16 – INCOME TAXES
The effective tax rate was
At December 31, 2023, the Company had federal
and state net operating losses (“NOLs”) in the amount of approximately $
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 remain subject to examination by tax jurisdictions.
NOTE 17 – LITIGATION AND LOSS CONTINGENCIES
From time to time, the Company may be subject to other legal proceedings, claims, investigations, and government inquiries (collectively, legal proceedings) in the ordinary course of business. It may receive claims from third parties asserting, among other things, infringement of their intellectual property rights, defamation, labor and employment rights, privacy, and contractual rights. There are no currently pending legal proceedings that the Company believes will have a material adverse impact on the Company’s business or condensed consolidated financial statements.
NOTE 18 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date the unaudited condensed consolidated financial statements were available for issuance.
17
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 26, 2024 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.
On May 24, 2024, the Company informed the staff of the Nasdaq Stock Market LLC of its intention to withdraw from the Nasdaq hearings process and transition the listing of its common shares from the Nasdaq Capital Market (“Nasdaq”) and have its shares of common stock quoted on the OTCQX Market (“OTCQX”). The Company’s common stock was suspended from trading on Nasdaq effective at the opening of trading on Wednesday, May 29, 2024, and commenced trading on OTCQX immediately thereafter.
Overview
We are a national technology-driven healthcare third party administration (“TPA”), which uses AI and data analytics combined with cost containment programs to help our Clients lower their cost of healthcare by enabling better health outcomes for their employees and families. Our 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 us to administer the latter’s healthcare claims, and we refer to them as our “Clients”, (ii) employees and their family members who receive these healthcare benefits from our Clients, and we refer to them as our “Members”, and (iii) healthcare providers including, doctors, doctor groups, hospitals, clinics, and any other entities providing healthcare services or products, and we refer to them as the “Providers.” We provide affordable, intelligent, healthcare programs for self-insured employers in the U.S. We provide administrative services, and act as TPA to self-insured employers who provide healthcare benefits to their employees. Most of our Clients are small and medium-sized companies as well as local government entities.
Based on our current financial condition, our Board of Directors, supported by our management team, is considering exploring strategic alternatives focused on maximizing shareholder value. Strategic alternatives may include, among others, a strategic investment financing which would allow the company to pursue its current business plan to commercialize its products, a business combination such as a merger with another party, or a sale of the company.
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 for all periods presented. The results for the three and nine months ended September 30, 2024, as applicable, are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
18
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2024 and 2023
The following tables set forth our consolidated results of operations for the periods indicated.
(dollars in thousands)
| Three Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | Change | % | |||||||||||||
| Revenue | $ | 7,008 | $ | 8,729 | $ | (1,721 | ) | (19.7 | )% | |||||||
| Costs and expenses | ||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization shown separately below) | 5,033 | 5,691 | (658 | ) | (11.6 | )% | ||||||||||
| General and administrative | 2,813 | 4,986 | (2,173 | ) | (43.6 | )% | ||||||||||
| Sales and marketing | 345 | 1,842 | (1,497 | ) | (81.3 | )% | ||||||||||
| Information technology | 1,273 | 1,269 | 4 | 0.3 | % | |||||||||||
| Research and development | 7 | 267 | (260 | ) | (97.4 | )% | ||||||||||
| Depreciation and amortization | 213 | 927 | (714 | ) | (77.0 | )% | ||||||||||
| Loss on disposal of assets | — | 7 | (7 | ) | (100.0 | )% | ||||||||||
| Loss on sale of business unit | 73 | — | 73 | N/A | ||||||||||||
| Facilities | 311 | 769 | (458 | ) | (59.6 | )% | ||||||||||
| Total costs and expenses | 10,068 | 15,758 | (5,690 | ) | (36.1 | )% | ||||||||||
| Operating loss | (3,060 | ) | (7,029 | ) | 3,969 | (56.5 | )% | |||||||||
| Other income and (expenses) | ||||||||||||||||
| Other income, net | 119 | 130 | (11 | ) | (8.5 | )% | ||||||||||
| Interest expense, net | (620 | ) | (383 | ) | (237 | ) | 61.9 | % | ||||||||
| Foreign loss gain | 1 | (14 | ) | 15 | (107.1 | )% | ||||||||||
| Total other expense | (500 | ) | (267 | ) | (233 | ) | (87.3 | )% | ||||||||
| Loss before income taxes | (3,560 | ) | (7,296 | ) | 3,736 | 51.2 | % | |||||||||
| Income tax expense | — | — | — | — | ||||||||||||
| Net loss | $ | (3,560 | ) | $ | (7, 296 | ) | $ | 3,736 | 51.2 | % | ||||||
| Net loss per share, basic and fully diluted | $ | (0.30 | ) | $ | (0.98 | ) | $ | 0.68 | 69.4 | % | ||||||
19
| Nine months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | Change | % | |||||||||||||
| Revenue | $ | 21,582 | $ | 28,448 | $ | (6,866 | ) | (24.1 | )% | |||||||
| Costs and expenses | ||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization shown separately below) | 15,078 | 18,530 | (3,452 | ) | (18.6 | )% | ||||||||||
| General and administrative | 9,954 | 15,938 | (5,984 | ) | (37.5 | )% | ||||||||||
| Sales and marketing | 1,383 | 5,494 | (4,111 | ) | (74.8 | )% | ||||||||||
| Information technology | 3,608 | 4,775 | (1,167 | ) | (24.4 | )% | ||||||||||
| Research and development | 22 | 1,291 | (1,269 | ) | (98.3 | )% | ||||||||||
| Depreciation and amortization | 2,078 | 2,974 | (896 | ) | (30.1 | )% | ||||||||||
| Impairment of goodwill and intangible assets | 7,588 | — | 7,588 | N/A | ||||||||||||
| Loss on disposal of assets | — | 350 | (350 | ) | (100.0 | )% | ||||||||||
| Loss on sale of business unit | 73 | — | 73 | N/A | ||||||||||||
| Facilities | 1,197 | 1,918 | (721 | ) | (37.6 | )% | ||||||||||
| Total costs and expenses | 40,981 | 51,270 | (10,289 | ) | (20.1 | )% | ||||||||||
| Operating loss | (19,399 | ) | (22,822 | ) | 3,423 | (15.0 | )% | |||||||||
| Other income and (expenses) | ||||||||||||||||
| Other income (expense), net | 360 | 231 | 129 | 55.8 | % | |||||||||||
| Interest expense, net | (1,890 | ) | (1,102 | ) | (788 | ) | 71.5 | % | ||||||||
| Foreign exchange loss | (3 | ) | (32 | ) | 29 | (90.6 | )% | |||||||||
| Total other expense | (1,533 | ) | (903 | ) | (630 | ) | 69.8 | % | ||||||||
| Loss before income taxes | (20,932 | ) | (23,725 | ) | 2,793 | (11.8 | )% | |||||||||
| Income tax expense | — | — | — | — | ||||||||||||
| Net loss | $ | (20,932 | ) | $ | (23,725 | ) | $ | 2,793 | (11.8 | )% | ||||||
| Net loss per share, basic and fully diluted | $ | (1.96 | ) | $ | (3.62 | ) | $ | 1.66 | 45.9 | % | ||||||
Revenues and Cost of Revenue
During the three months ended September 30, 2024 and 2023, our total revenue was $7.0 million and $8.7 million, respectively, representing a decrease in revenue of $1.7 million. The decline is primarily due to customer turnover. The market is evolving, and we are adapting our approach to better serve our customers’ needs. While we have seen some customer turnover, we are confident that our new initiatives will lead to long-term revenue growth.
During the nine months ended September 30, 2024 and 2023, our total revenue was $21.6 million and $28.4 million, respectively, representing a decrease in revenue of $6.9 million. The decline is primarily due to customer turnover. The market is evolving, and we are adapting our approach to better serve our customers’ needs. While we have seen some customer turnover, we are confident that our new initiatives will lead to long-term revenue growth.
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, 2024 and 2023, our cost of revenue exclusive of depreciation and amortization was $5.0 million and $5.7 million, respectively, representing a decrease of $658 thousand, in line with the decrease in revenue.
During the nine months ended September 30, 2024 and 2023, our cost of revenue exclusive of depreciation and amortization was $15.1 million and $18.5 million, respectively, representing a decrease of $3.5 million, in line with the decrease in revenue.
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.
20
General and Administrative Expenses
We incurred $2.8 million of general and administrative expenses for the three months ended September 30, 2024 compared to $5.0 million for the three months ended September 30, 2023, a decrease of $2.2 million. The reason for the decrease is due to (i) the actions taken throughout 2023 and the first nine months of 2024 to aligning the two TPA companies into one amounting to approximately $2.2 million in savings and (ii) the elimination of non value-added services amounting to approximately $640 thousand in savings.
We incurred $10.0 million of general and administrative expenses for the nine months ended September 30, 2024 compared to $15.9 million for the nine months ended September 30, 2023, a decrease of $6.0 million. The reason for the decrease is due to (i) the actions taken throughout 2023 and the first nine months of 2024 to aligning the two TPA companies into one amounting to approximately $4.7 million in savings and (ii) the elimination of non value-added services amounting to approximately $1.4 million in savings.
Sales and Marketing Expenses
We incurred $345 thousand of sales and marketing expenses for the three months ended September 30, 2024 compared to $1.8 million for the three months ended September 30, 2023, a decrease of $1.5 million. The reason for the decrease is due to the actions taken throughout 2023 and the first nine months of 2024 to align the two TPA companies into one amounting to approximately $1.5 million in savings.
We incurred $1.4 million of sales and marketing expenses for the nine months ended September 30, 2024 compared to $5.5 million for the nine months ended September 30, 2023, a decrease of $4.1 million. The reason for the decrease is due to the actions taken throughout 2023 and the first nine months of 2024 to align the two TPA companies into one amounting to approximately $4.1 million in savings.
Information Technology Expenses
We incurred $1.3 million of information technology expenses for the three months ended September 30, 2024 compared to $1.3 million for the three months ended September 30, 2023, an increase of $4 thousand.
We incurred $3.6 million of information technology expenses for the nine months ended September 30, 2024 compared to $4.8 million for the nine months ended September 30, 2023, a decrease of $1.2 million. The reason for the decrease is due to the actions taken throughout 2023 and the first nine months of 2024 to align the two TPA companies into one amounting to approximately $1.2 million in savings.
Research and Development Expenses
We incurred $7 thousand of research and development expenses for the three months ended September 30, 2024 compared to $267 thousand for the three months ended September 30, 2023, a decrease of $260 thousand. The decrease is attributable to focusing our efforts and eliminating certain development projects amounting to approximately $260 thousand.
We incurred $22 thousand of research and development expenses for the nine months ended September 30, 2024 compared to $1.3 million for the nine months ended September 30, 2023, a decrease of $1.3 million. The decrease is attributable to focusing our efforts and eliminating certain development projects amounting to approximately $1.3 million.
Depreciation and Amortization
We incurred $213 thousand of depreciation and amortization expenses for the three months ended September 30, 2024 compared to $927 thousand for the three months ended September 30, 2023, a decrease of $714 thousand. This decrease was primarily due to the impairment of intangibles in September of 2024 of $273 thousand and a reduction due to software amortization by approximately $434 thousand.
We incurred $2.1 million of depreciation and amortization expenses for the nine months ended September 30, 2024 compared to $3.0 million for the nine months ended September 30, 2023, a decrease of $896 thousand. This decrease was primarily due to a reduction by approximately $203 thousand in the depreciation of assets that were disposed of during the prior year, the impairment of intangibles in September of 2024 of $273 thousand and software becoming fully amortized in 2024 amounting to approximately $470 thousand, partially offset by the new patents placed into service during 2024 amounting to approximately $65 thousand.
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Impairment of Goodwill and Intangible Assets
The Company conducts an annual impairment test of goodwill and intangible assets at December 31st or if events or circumstances exist that would indicate that the Company’s goodwill may be impaired. As circumstances changed during the three months ended June 30, 2024, that would, more likely than not, reduce the Company’s fair value below its net equity value, the Company performed qualitative and quantitative analyses of the potential impairment of its goodwill and intangible assets, specifically evaluating trends in market capitalization, current and future cash flows, revenue growth rates, and the impact of macroeconomic conditions on the Company and its performance. Based on the analysis performed, the Company determined that its goodwill and intangible assets were fully impaired in June 2024 due to the continuation of revenues being below management’s expectations, continued operating losses and negative operating cash flows, reductions in the Company’s stock price and market capitalization, and the delisting from the Nasdaq and subsequent transition to the OTCQX market in the second quarter of 2024 where the Company’s common stock has been thinly traded. As a result, the Company recorded a goodwill and intangible asset impairment charge in the amount of $7.6 million in June 2024, which is reflected in the nine months ended September 30, 2024.
Interest Expense, net
We incurred $620 thousand of interest expense for the three months ended September 30, 2024 compared to $383 thousand for the three months ended September 30, 2023, an increase of $237 thousand. Interest expense increased primarily due to the debt to Libertas Funding LLC (“Libertas”) and JGB Collateral LLC (“JGB”) which was partially offset by the decrease in interest due to AXA S.A., a French société anonyme (“AXA”) for the acquisition of Maestro being partially paid down in 2023.
We incurred $1.9 million of interest expense for the nine months ended September 30, 2024 compared to $1.1 million for the nine months ended September 30, 2023, an increase of $788 thousand. Interest expense increased primarily due to the debt to and JGB which was partially offset by the decrease in interest due to AXA for the acquisition of Maestro being partially paid down in 2023.
Liquidity and Capital Resources
As of September 30, 2024, we had an accumulated deficit of approximately $97.7 million, unrestricted cash and cash equivalents of approximately $830 thousand and negative working capital of approximately $3.3 million. For the nine months ended September 30, 2024, we recognized a net loss of approximately $20.9 million and negative cash flows from operations of approximately $10.3 million.
We have spent most of our cash resources on funding our operating activities. Through September 30, 2024, we have financed our operations primarily with the proceeds from loans, the issuance of convertible promissory notes and warrants, and sales of our equity securities.
On January 16, 2024, we entered into a securities purchase agreement (the “Second SPA”) with certain Company insiders consisting of HillCour Investment Fund, LLC (“HillCour”), an entity controlled by our Chief Executive Officer, our Chairman, and one of our directors, pursuant to which we agreed to issue and sell 1,322,100 shares of Common Stock in a private placement, at a purchase price of $0.9201 per share (or the consolidated closing bid price of our Common Stock on Nasdaq as of January 16, 2024).
On April 15, 2024, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of the purchasers that are parties thereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB. Pursuant to the terms of the Purchase Agreement, on April 15, 2024, the Company issued the Senior Secured Convertible Debentures (the “Debentures”) due on April 15, 2027, for a principal sum of $11.83 million, subject to the redemption of $5 million at the Company’s election. In accordance with the Purchase Agreement JGB purchased an aggregate of $6.35 million in principal amount of the Debentures. On June 21, 2024, the Company elected not to redeem an additional $5 million of the Debentures with JGB.
On August 28, 2024, we entered into a securities purchase agreement with two investors, including HillCour, pursuant to which we agreed to issue and sell an aggregate of 2,702,702 shares of its Common Stock (of which HillCour purchased 1,351,351 shares of Common Stock) in a private placement, at a purchase price of $0.481 per share (or the closing bid price of the Company’s Common Stock on OTCQX as of August 28, 2024).
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 our 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. The 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.
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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, 2024 and 2023:
Comparison of the Nine Months Ended September 30, 2024 and 2023
(in thousands)
| Nine months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (10,251 | ) | $ | (15,324 | ) | ||
| Net cash provided by investing activities | — | 27 | ||||||
| Net cash provided by financing activities | 8,567 | 6,432 | ||||||
| Net decrease in cash and cash equivalents and restricted cash | $ | (1,684 | ) | $ | (8,865 | ) | ||
Net Cash Used in Operating Activities
Net cash used in operating activities totaled $10.3 million for the nine months ended September 30, 2024, a decrease of $5.0 million as compared to $15.3 million for the nine months ended September 30, 2023. The primary reason for the decrease was the reduction in our net loss from the prior year. Net cash used in operating activities was primarily driven by our net loss for the period of $20.9 million, net of (i) non-cash items totaling $14.1 million and (ii) a decrease in net working capital items amounting to $3.4 million.
Net Cash Provided by Investing Activities
A total of $0 was provided by investing activities in the nine months ended September 30, 2024 a decrease of $27 thousand as compared to $27 thousand for the nine months ended September 30, 2023. The primary reason for the decrease was no disposal of property and equipment.
Net Cash Provided by Financing Activities
A total of $8.6 million was received from financing activities during the nine months ended September 30, 2024, an increase of $2.1 million compared to $6.4 million for the nine months ended September 30, 2023. The net proceeds for 2024 were provided from private offerings of common stock of $4.0 million, net proceeds from the Debentures of $5.5 million, proceeds from the sale of future cash receipts on accounts receivable of $1.5 million partially offset by the repayment of the AXA loan of $631 thousand, and payments to the buyer of receivables of $1.8 million. The net proceeds for 2023 were provided from the public offering of common stock of $6.4 million.
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.
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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, 2024. 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 $830 thousand and $1.1 million on September 30, 2024 and December 31, 2023, 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, 2024.
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, 2024. 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, 2024 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.
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PART II – OTHER INFORMATION
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed below and in Part I, “Item 1A. Risk Factors” in our 2023 Annual Report, which could materially affect our business, financial condition or future results.
Currently, our revenues are concentrated with one major customer and our revenues may decrease significantly if we were to lose our major customer.
Due to our limited operating history, we have a limited customer base and have depended on a major customer for a significant portion of our revenue. For the three month periods ended September 30, 2024 and 2023, we had one customer that accounted for 14.6% and 11.3% of total revenue, respectively. For the nine month periods ended September 30, 2024 and 2023, we had one customer that had 15.4% and 10.9% of total revenue, respectively. At September 30, 2024, two customers accounted for 51.4%, and 11.3% of accounts receivable. At December 31, 2023, two customers accounted for 16.6% and 14.0% of accounts receivable.
If our major customers were to terminate their agreement with us, or if we fail to adequately perform under our agreement, and if we are unable to diversify our customer base, our revenue could decline, and our results of operations could be adversely affected.
We are reviewing strategic alternatives and there can be no assurance that we will be successful in identifying or completing any strategic transaction, that any such strategic transaction will result in additional value for our stockholders or that the process will not have an adverse impact on our business.
The process of reviewing strategic alternatives may be costly, time consuming and disruptive to our business operations and, if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We may incur significant costs associated with identifying, evaluating and negotiating potential strategic alternatives, such as legal, financial advisor and accounting fees and expenses and other related charges. We may also incur additional unanticipated expenses in connection with this process. A considerable portion of these costs will be incurred regardless of whether any such course of action is implemented or transaction is completed, decreasing cash available for use in our business.
There can be no assurance that any potential transaction, or series of transactions, or other strategic alternative, if found and if consummated, will provide greater value to our stockholders than that reflected in the current price of our common stock. Until the review process is concluded, perceived uncertainties related to our future may impact our business performance and volatility in the market price of our common stock and may make it more difficult for us to attract and retain qualified personnel and key employees. Our Board has not set a timetable for the conclusion of this review, nor has it made any definitive decisions related to taking any further actions or potential strategic options at this time or at all.
ITEM 6. Exhibits.
| Exhibit No. | Description | |
| 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 herewith. |
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SIGNATURES
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.
| MARPAI, INC. | ||
| Date: November 12, 2024 | /s/ Damien Lamendola | |
| Name: | Damien Lamendola | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| /s/ Steve Johnson | ||
| Name: | Steve Johnson | |
| Title | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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