Marpai(MRAI) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Marpai, Inc.'s unaudited condensed consolidated financial statements and management's discussion of financial condition and results of operations Item 1. Unaudited Condensed Consolidated Financial Statements This section presents Marpai, Inc.'s unaudited condensed consolidated financial statements, highlighting significant decreases in assets and equity due to net losses and negative operating cash flows, with accompanying notes detailing key financial aspects and liquidity concerns Condensed Consolidated Balance Sheets The balance sheets show a significant decline in cash, total assets, and stockholders' equity, alongside an increased accumulated deficit | Metric | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | Change | | :--------------------------------- | :----------------------- | :------------- | :----- | | Cash and cash equivalents | $4,747,951 | $19,183,044 | $(14,435,093) | | Total current assets | $10,345,059 | $26,992,007 | $(16,646,948) | | Total assets | $25,412,411 | $44,201,640 | $(18,789,229) | | Total current liabilities | $8,650,198 | $11,145,388 | $(2,495,190) | | Total liabilities | $11,424,646 | $14,493,228 | $(3,068,582) | | Accumulated deficit | $(39,460,016) | $(21,525,710) | $(17,934,306) | | Total stockholders' equity | $13,987,765 | $29,708,412 | $(15,720,647) | Condensed Consolidated Statements of Operations The statements of operations reveal significant increases in revenue and costs, leading to a substantial rise in operating and net losses for both the three and nine-month periods | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :------- | | Revenue | $16,713,420 | $8,330,763 | $8,382,657 | 100.6% | | Cost of revenue | $12,323,770 | $6,063,679 | $6,260,091 | 103.2% | | Total costs and expenses | $34,730,415 | $18,442,689 | $16,287,726 | 88.3% | | Operating loss | $(18,016,995) | $(10,111,926) | $(7,905,069) | 78.2% | | Net loss | $(17,934,306) | $(10,256,167) | $(7,528,139) | 73.4% | | Net loss per share (basic & diluted) | $(0.90) | $(1.31) | $(0.22) | 16.8% | | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change | % Change | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :------- | | Revenue | $4,938,105 | $4,799,251 | $138,854 | 2.9% | | Cost of revenue | $3,625,415 | $3,343,196 | $282,219 | 8.4% | | Total costs and expenses | $10,752,561 | $9,535,008 | $1,217,553 | 12.8% | | Operating loss | $(5,814,456) | $(4,735,757) | $(1,078,699) | 22.8% | | Net loss | $(5,779,860) | $(4,792,579) | $(987,281) | 20.6% | | Net loss per share (basic & diluted) | $(0.28) | $(0.47) | $(0.19) | 40.4% | Condensed Consolidated Statements of Changes in Stockholders' Equity These statements detail changes in equity components, showing a substantial decrease in total stockholders' equity primarily due to an increased accumulated deficit | Metric | Jan 1, 2022 | Sep 30, 2022 (Unaudited) | Change | | :--------------------------------- | :---------- | :----------------------- | :----- | | Common stock | $2,030 | $2,094 | $64 | | Additional paid-in capital | $51,232,092 | $53,445,687 | $2,213,595 | | Accumulated deficit | $(21,525,710) | $(39,460,016) | $(17,934,306) | | Total stockholders' equity | $29,708,412 | $13,987,765 | $(15,720,647) | - Share-based compensation for the nine months ended September 30, 2022, was $2,182,696, contributing to the increase in additional paid-in capital[14] Condensed Consolidated Statements of Cash Flows The cash flow statements indicate a significant increase in cash used in operating activities and a shift from cash provided to cash used in investing activities | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | | :----------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(15,339,217) | $(5,526,568) | $(9,812,649) | | Net cash (used in) provided by investing activities | $(880,032) | $10,105,907 | $(10,985,939) | | Net cash provided by financing activities | $0 | $2,603,382 | $(2,603,382) | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(16,219,249) | $7,182,721 | $(23,401,970) | | Cash, cash equivalents and restricted cash at end of period | $9,714,394 | $9,000,653 | $713,741 | Notes to Condensed Consolidated Financial Statements These notes provide crucial details on the company's formation, accounting policies, liquidity concerns, the Maestro Health acquisition, share-based compensation, tax rates, and the impact of recent legislation - Marpai, Inc. was formed in January 2021 to facilitate an IPO and carry on the business of Marpai Health and Continental Benefits (now Marpai Administrators), focusing on AI-driven healthcare administration for self-insured employers[19][25][26] - The company has an accumulated deficit of $39.5 million and negative cash flows from operations of $15.3 million for the nine months ended September 30, 2022, raising substantial doubt about its ability to continue as a going concern, though management believes current liquid assets and the Maestro acquisition cash are sufficient through December 31, 2023[38][41][168][173] - On November 1, 2022, the company closed the acquisition of Maestro Health, LLC, a third-party administrator, for a purchase price of $19.9 million (accruing to $22.1 million by April 1, 2024), with no cash payment until April 1, 2024, and Maestro bringing $15.79 million in free cash reserves[39][118][119][123][171] - The company recognized $2,432,758 in share-based compensation expense for the nine months ended September 30, 2022, and has $1,474,384 of unrecognized stock compensation expense related to non-vested stock options[17][86] - The effective tax rate was 0% for the nine months ended September 30, 2022, primarily due to a full valuation allowance on deferred tax assets[112] - The Inflation Reduction Act of 2022, enacted on August 16, 2022, introduces changes to the U.S. corporate income tax system, including a 15% minimum tax and a 1% excise tax on stock repurchases, which the company is currently evaluating[116][182] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Marpai, Inc.'s financial condition and operational results, detailing the company's AI-driven healthcare mission, the Maestro Health acquisition, revenue and expense trends, liquidity, cash flow, and critical accounting policies Overview This overview outlines Marpai's mission to transform healthcare for self-insured employers through AI and technology, combining R&D with TPA services to lower costs and improve outcomes - Marpai's mission is to positively change healthcare for self-insured employers, employees, and providers by creating a "Payer of the Future" through AI and technology[130] - The company combines Marpai Health (AI-focused R&D in Israel) and Marpai Administrators (healthcare TPA services in the U.S.) to deliver technology-driven services that aim to lower healthcare costs and improve outcomes[132] - Marpai's AI-powered TopCare program, launched in January 2021, uses predictive analytics to identify members at risk of chronic conditions or high-cost events, guiding them to appropriate, cost-effective care[133][135][136] Maestro Health Acquisition This section details Marpai's acquisition of Maestro Health, LLC, including the purchase price, payment terms, and the significant cash reserves brought by the acquired entity - Marpai acquired Maestro Health, LLC, a third-party administrator, on November 1, 2022[118][119][137] - The purchase price is $19.9 million, payable by April 1, 2024, accruing to $22.1 million with interest, with no cash payment due until April 1, 2024[123][140] - Maestro Health brings $15.79 million in free cash reserves, which will be available to fund Marpai's operations post-closing[39][171] Results of Operations This section analyzes the company's financial performance, detailing trends in revenues, cost of revenue, and various operating expenses for the reported periods Revenues and Cost of Revenue Revenue and cost of revenue both significantly increased for the nine-month period, driven by the inclusion of Marpai Administrators and a large new client | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :----------------- | :-------------------------- | :-------------------------- | :-------------------------- | :------- | | Revenue | $16,713,420 | $8,330,763 | $8,382,657 | 100.6% | | Cost of revenue | $12,323,770 | $6,063,679 | $6,260,091 | 103.2% | - The increase in nine-month revenue was due to the inclusion of Marpai Administrators' revenues (approx. $6.2 million) and a large new client (approx. $3.9 million)[149] - The increase in nine-month cost of revenue was due to Marpai Administrators' costs (approx. $4.5 million) and a large new client (approx. $2.9 million)[152] Research and Development Expenses Research and development expenses significantly increased for the nine-month period, primarily due to higher consultant fees, decreased capitalized costs, and new personnel compensation | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :------- | | R&D Expenses | $2,684,014 | $1,118,191 | $1,565,823 | 140.0% | - Increase due to higher R&D consultants at EYME (approx. $500,726), a decrease in capitalized R&D costs (approx. $393,578), and compensation for a new President of Product and Development (approx. $449,125)[155] General and Administrative Expenses General and administrative expenses rose for the nine-month period, driven by Marpai Administrators' expenses, increased staffing, and acquisition costs | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :------- | | G&A Expenses | $7,940,014 | $5,044,759 | $2,895,255 | 57.4% | - Nine-month increase due to Marpai Administrators' G&A expenses (approx. $997,972), increased general and administrative staffing compensation (approx. $575,000), and compensation for a new President of Product and Development (approx. $449,125)[158] - For the three months ended September 30, 2022, G&A expenses increased by $488,096, including $150,569 in Maestro Health acquisition costs and $195,162 in post-IPO liability insurance[157] Sales and Marketing Expenses Sales and marketing expenses increased for the nine-month period due to Marpai Administrators' costs, product development, and trade shows, but decreased for the three-month period | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :------- | | S&M Expenses | $4,829,718 | $3,032,766 | $1,796,952 | 59.3% | - Nine-month increase due to Marpai Administrators' S&M expenses (approx. $442,261), product development team and platform costs (approx. $600,000), and trade show costs (approx. $310,971)[160] - Three-month decrease of $535,167 due to reduction in trade conference costs (approx. $283,200) and other S&M expenses[159] Information Technology Expenses Information technology expenses significantly increased for the nine-month period, driven by Marpai Administrators' IT costs, increased staffing, and technology spending | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :------- | | IT Expenses | $3,862,142 | $1,501,354 | $2,360,788 | 157.2% | - Nine-month increase due to Marpai Administrators' IT expenses (approx. $1,134,273), increased IT staffing and tech spend (approx. $621,000), and compensation for a new President of Product and Development (approx. $449,125)[162] Depreciation and Amortization Depreciation and amortization expenses nearly doubled for the nine-month period, primarily due to Marpai Administrators' expenses and increased software amortization | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :------- | | D&A Expenses | $2,443,856 | $1,223,207 | $1,220,649 | 99.8% | - Increase primarily due to Marpai Administrators' D&A expenses (approx. $381,846) and software amortization (approx. $900,783)[164] Interest Expense, net Net interest expense significantly decreased for the nine-month period, primarily due to the repayment or conversion of all company debt in late 2021 | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :------- | | Interest Expense | $(7,415) | $(384,564) | $377,149 | (98.1)% | - The decrease in interest expense was due to the repayment or conversion of all company debt in Q4 2021[166] Liquidity and Capital Resources This section discusses the company's financial position, highlighting its accumulated deficit, cash balances, working capital, and management's assessment of sufficient funds post-acquisition - As of September 30, 2022, the company had an accumulated deficit of $39.5 million, unrestricted cash of $4.7 million, and working capital of $1.7 million[168] - For the nine months ended September 30, 2022, the company reported a net loss of $17.9 million and negative cash flows from operations of $15.3 million[168] - Management believes current liquid assets and $15.79 million cash from the Maestro Health acquisition are sufficient to fund operations and capital expenditures through at least December 31, 2023[171][173] Cash Flows This section analyzes the company's cash flow activities, detailing significant increases in cash used in operations and a shift in investing activities, with no financing activities in 2022 | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | | :----------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(15,339,217) | $(5,526,568) | $(9,812,649) | | Net cash (used in) provided by investing activities | $(880,032) | $10,105,907 | $(10,985,939) | | Net cash provided by financing activities | $0 | $2,603,382 | $(2,603,382) | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(16,219,249) | $7,182,721 | $(23,401,970) | - Net cash used in operating activities increased by $9.8 million, primarily due to the net loss of $17.9 million, partially offset by non-cash items and a decrease in net working capital[176] - Investing activities shifted from providing $10.1 million in 2021 (due to Continental Benefits acquisition cash) to using $0.88 million in 2022 (primarily for capitalized software)[177] - No financing activities occurred in 2022, compared to $2.6 million provided in 2021 from convertible notes and warrants[178] Critical Accounting Policies and Estimates This section highlights the significant management judgments and estimates required for financial statement preparation, including share-based compensation, asset valuations, and income tax accruals - Preparation of financial statements requires significant management judgment and estimates for items such as share-based compensation, valuation of common stock and warrants, useful lives of internally developed software, fair values of acquired assets, goodwill, intangible assets, and income tax accruals[43][179] New Accounting Pronouncements The company does not anticipate a material impact from recent accounting pronouncements but is evaluating the effects of the Inflation Reduction Act of 2022 - The company does not expect a material impact from recently issued accounting pronouncements[181] - The company is evaluating the potential effects of the Inflation Reduction Act of 2022 on its financial statements[182] Item 3. Quantitative and Qualitative Disclosures about Market Risk Marpai faces foreign exchange risk from Israeli operations and inflation's impact on labor costs, but neither, nor interest rate risk, is currently deemed material - The company faces foreign exchange risk from NIS-denominated expenses in Israel, but a hypothetical 10% change in NIS/USD exchange rate is not considered material[183] - Interest rate risk is not viewed as significant given current cash and cash equivalents balances[184] - Inflation primarily impacts labor costs, but no material effect on business, financial condition, or results of operations was observed for the nine months ended September 30, 2022[185] Item 4. Controls and Procedures The company's disclosure controls and procedures were ineffective as of September 30, 2022, due to a material weakness in internal control over financial reporting, stemming from inadequate policies, processes, and staffing, for which remediation measures are underway - Disclosure controls and procedures were not effective as of September 30, 2022, due to a material weakness in internal control over financial reporting[186] - The material weakness is related to inadequate formal accounting policies, processes, and controls for complex transactions, and insufficient staffing leading to a lack of appropriate segregation of duties[188] - Remediation plans include engaging additional accounting and financial reporting personnel, developing an accounting policy manual, and establishing effective monitoring and oversight controls for complex transactions[189] PART II. OTHER INFORMATION This section provides additional information, including details on unregistered sales of equity securities and a list of exhibits filed with the report Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2022, Marpai issued 7,500 common shares to service providers as compensation, exempt from registration under Section 4(a)(2) of the Securities Act - In Q3 2022, 7,500 shares of common stock were issued to service providers as compensation, exempt from registration under Section 4(a)(2) of the Securities Act[195] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Maestro Health, LLC Purchase Agreement and CEO/CFO certification statements - Key exhibits include the Purchase Agreement for Maestro Health, LLC (Exhibit 10.1), and CEO/CFO certification statements (Exhibits 31.1, 31.2, 32.1, 32.2)[196] SIGNATURES This section contains the official signatures certifying the submission of the report in accordance with the Securities Exchange Act of 1934 Signatures The report was signed by Edmundo Gonzales (CEO) and Yoram Bibring (CFO) on November 9, 2022, certifying its submission in accordance with the Securities Exchange Act of 1934 - The report was signed by Edmundo Gonzales (CEO) and Yoram Bibring (CFO) on November 9, 2022[201]