Marpai(MRAI) - 2022 Q4 - Annual Report

PART I Business Overview Marpai Inc. is a technology-driven healthcare payer utilizing AI and data analytics to reduce costs and improve outcomes for self-insured employers and their employees Our Business Marpai is a technology-driven healthcare payer using AI and data analytics to lower healthcare costs and improve outcomes - Marpai is a technology-driven healthcare payer using AI and data analytics to lower healthcare costs and improve outcomes for self-insured employers, employees, and providers[14] - The company provides administrative services (TPA) to over 200 small and medium-sized clients, serving over 73,000 members in 44 states and D.C.[14] - As of December 31, 2022, no single client represents more than 6.2% of annual revenue[14] Industry Trends in the Healthcare Payer U.S. healthcare expenditures are rising, driving self-insurance and the adoption of AI and value-based care models - U.S. healthcare expenditures grew from 5% of GDP in 1960 to 18.3% in 2021, driving an increase in self-insured companies[18] - Advancements in AI and medical foundation models enable higher prediction accuracy for applications like identifying 'high cost bloomers' and forecasting patient risk[18] - Value-based care (VBC) is an increasingly popular reimbursement model, expected to grow from 40-45 million in 2022 to 70-80 million in 2027[18] - Chronic diseases account for 75% of U.S. aggregate healthcare spending, and waste (e.g., care coordination, delivery failure, pricing) can be up to 30% of medical spending[17][20] Market Opportunities Marpai estimates a total addressable market of up to $63 billion, driven by employer-sponsored self-funded health plans and new service offerings - Marpai estimates its total addressable market (TAM) to be up to $63 billion[22] - The total spending on healthcare via employer-sponsored self-funded health plans is estimated at $1.4 trillion, covering 65% of American workers[21] - Recently acquired products from Maestro Health are expected to complement traditional administrative fees and enhance revenue per employee, driving TAM expansion[22] Our Recent Acquisition of Maestro Health Marpai acquired Maestro Health to integrate TPA services, clinical care management, and cost containment, enhancing revenue per member - Marpai acquired Maestro Health on November 1, 2022, integrating a similar TPA business serving over 60 clients and 20,000 employees[23] - The acquisition brought in-house product lines including Clinical Care Management, Out of Network Claims Processing, and Pharmacy Cost Containment[24][26] - These value-added services are expected to increase revenue per member and will be marketed to Marpai's existing and new client base[25] Our Flagship Program – Marpai Cares Marpai Cares leverages AI and analytics to optimize self-funded health plans by identifying at-risk members and guiding them to high-value care - Marpai Cares aims to maximize self-funded health plan value by creating the healthiest member population within a client's budget, for a competitive administration fee[27] - The program uses AI and advanced analytics to analyze member data, identify at-risk 'cost bloomers,' connect members to clinical solutions, guide them to high-value providers, and promote preventive care[28][30][34] - The acquisition of Maestro Health brought in-house Clinical Care Management, complementing Marpai's approach to active care management for high-risk members[28][29] Our Products and Services Marpai generates revenue from health plan administration, in-house ancillary services, and third-party vendor services, without bearing claims risk - Marpai's revenues are derived from Health Plan Administration Services, in-house ancillary services, and third-party vendor services[32] - Health Plan Administration includes designing plans, providing network access (Aetna, Cigna), member support, claims adjudication, health promotion, and sourcing stop-loss insurance[33][43] - In-house ancillary services include Clinical Care Management (nurse-led guidance, 3x-9x ROI), Repricing Insights (out-of-network claims negotiation, up to 60% savings), Marpai PACCS (pharmacy cost containment, up to 75% savings), and MarpaiRx (transparent pharmacy benefit management)[38][39][40] - Marpai does not bear the financial risk for claims; this risk is borne by self-insured employers and stop-loss insurance companies[36] Our Strategy Marpai's strategy focuses on client base growth through brokers, upselling ancillary services, and significant AI R&D for a value-based ecosystem - Marpai primarily distributes services through healthcare brokers and focuses on competitive bids to grow its client base[42][46] - A key strategy post-Maestro Health acquisition is upselling ancillary services to existing and new customers[46] - Significant R&D investment is focused on AI to predict costly events, identify 'cost bloomers,' and create a value-based ecosystem by aggregating lives for best-in-class vendors[47][48][50] - The value-based ecosystem is expected to become commercial in 2023 and expand substantially in the coming years, generating revenue through participation in vendor fees[51] Marpai Captive, Inc. Marpai Captive, Inc. was founded in March 2022 to engage in the captive insurance market, commencing operations in Q1 2023 - Marpai Captive, Inc. was founded in March 2022 as a Delaware corporation[52] - It is intended to engage in the captive insurance market and commenced operations in the first quarter of 2023[52] Marpai Health, Inc. Marpai Health, Inc., with its Israeli R&D subsidiary, focuses on developing AI and healthcare technology to predict and prevent costly events - Marpai Health, Inc. was founded in February 2019, with its wholly owned Israeli subsidiary EYME Technologies, Ltd. (R&D center with eight employees)[53][55] - Its focus is on developing and marketing AI and healthcare technology to analyze data and predict/prevent costly healthcare events[53] - Acquired a software system and big data analytics platform in August 2019 for $3.25 million (cash, stock, convertible note)[54] Marpai Administrators, LLC (formerly Continental Benefits LLC) Marpai Administrators, founded in 2013, provides benefits outsourcing and TPA services, serving as Marpai Health's AI products design partner - Marpai Administrators was founded in November 2013, providing benefits outsourcing and TPA services supported by a customized technology platform and call center[58][59] - It served as Marpai Health's AI products design partner since December 2019[60] - Acquired by Marpai, Inc. on April 1, 2021, as part of an integrated transaction, valued at $8.5 million on a cash-free and debt-free basis[60][62][64] Marpai, Inc.'s Acquisition of Marpai Health and Marpai Administrators (formerly Continental Benefits) Marpai, Inc. acquired Marpai Health and Marpai Administrators in a tax-free reorganization on April 1, 2021, involving stock exchanges and liability agreements - On April 1, 2021, Marpai, Inc. acquired Marpai Health and Marpai Administrators in a tax-free reorganization[62][63][68] - The acquisition involved exchanging ownership interests for Marpai, Inc. Class A and Class B common stock, assuming options and warrants, and issuing new notes for outstanding convertible notes[65] - The seller (WellEnterprises USA, LLC and HillCour, Inc.) agreed to be exclusively responsible for certain pre-closing liabilities of Marpai Administrators[70] Class B Conversion Certain founding shareholders converted Class B common stock to Class A common stock on June 28, 2021, eliminating the authorized Class B stock - On June 28, 2021, certain founding shareholders converted 927,817 shares of Class B common stock into 4,226,968 shares of Class A common stock[73] - This conversion led to the elimination of the authorized Class B common stock[73] Power of Attorney and Proxy The HillCour Founding Group granted the Grays Founding Group a proxy to vote Class A shares, maintaining equal voting power on key corporate matters - The HillCour Founding Group granted the Grays Founding Group the right to vote 1,560,237 Class A shares on key corporate matters (e.g., board composition, asset sales, CEO replacement)[74] - The agreement aims to maintain equal voting power between the HillCour and Grays Founding Groups[74] - This Power of Attorney and Proxy is irrevocable under certain conditions, such as the consummation of an asset sale or acquisition, or if the Grays Founding Group's ownership falls below a specified threshold[75] Directors and Executive Officers The board was fixed at seven members post-acquisition, including executives and independent directors, with a current management team in place - Following the Marpai Administrators acquisition, the board was fixed at seven members, including two former Marpai Health executives, four independent directors, and Damien Lamendola[76] - Current Management Team | Name | Combined Company Position(s) | Position(s) at Marpai Health | | :-------------- | :------------------------------------- | :------------------------------------ | | Edmundo Gonzalez | Chief Executive Officer, Secretary, and Director | Co-founder, CEO, and Director of Marpai Health | - Other key executive officers include Yoram Bibring (CFO), Gonen Antebi (COO), and Lutz Finger (President, Product and Development)[373][374][376] Marpai Inc.'s acquisition of Maestro Health, LLC Marpai acquired Maestro Health on November 1, 2022, for $19.9 million, integrating its TPA business with care management and cost containment solutions - Marpai acquired Maestro Health on November 1, 2022, for an aggregate purchase price of $19.9 million, payable by April 1, 2024, with interest, totaling $22.1 million[78][80] - Maestro Health is a TPA offering an end-to-end health plan solution, integrating care management and cost containment[79] - Maestro Health's services include self-funded insurance administration, benefits administration, enrollment, ACA compliance, consumer directed health care account administration, medical management, consolidated billing, Out of Network Repricing Solution, and Rx Patient Assistance Program[84] Government Regulation Marpai operates in a highly regulated healthcare industry, subject to extensive federal and state laws governing privacy, fraud, and TPA licensing - Marpai operates in a highly regulated healthcare industry, subject to extensive federal, state, and local laws, including health care reform (ACA), reimbursement policies, fraud and abuse laws, and privacy/data security laws[86][88][94][102] - Key regulations include the federal Anti-Kickback Law, Stark Law, False Claims Act, and HIPAA/HITECH, which govern patient information and financial transactions[95][97][98][102] - Marpai believes its business does not involve the corporate practice of medicine or fee-splitting, as its call center staff provides general information, not medical advice, and it must maintain TPA licenses in all relevant states[108][111] Employees As of December 31, 2022, Marpai had 303 full-time employees, with no labor agreements or union representation - As of December 31, 2022, Marpai had a total of 303 full-time employees, with 15 located in Tel Aviv, Israel[112] - None of the employees are parties to any labor agreements or represented by a labor union[112] Competition Marpai faces intense competition from nearly 1,000 TPAs, large health insurers, and new technology-driven players in the healthcare market - Marpai operates in a highly competitive market, competing with almost 1,000 TPAs and large health insurance companies like Aetna, Cigna, and United Healthcare[114][115] - New technology-driven players such as Collective Health, Bind Health Insurance, Bright Health Group, Oscar Health, and Centivo also pursue similar strategies[115] - Marpai differentiates its solution through AI-enabled predictions that steer members to appropriate healthcare providers sooner, aiming to reduce long-term healthcare spending while improving quality[116] Impact of COVID-19 and Macroeconomic Conditions Marpai monitors COVID-19 and macroeconomic impacts, which could negatively affect employer participation, client payments, and strategic plans - Marpai monitors the effects of the COVID-19 pandemic and global macroeconomic environment, including inflationary pressures, supply chain disruptions, and geopolitical tensions[117] - Potential negative impacts include a decline in self-insured employers, reduced client willingness to pay for services, difficulties in timely payments, and disruptions to strategic plans and workforce[172][173] Available Information Additional company information, including SEC filings and corporate governance documents, is available on Marpai's investor relations website and the SEC's website - Additional information, including SEC filings (10-K, 10-Q, 8-K) and corporate governance documents (Code of Ethics, Board Committee Charters), is available on Marpai's investor relations website (www.marpaihealth.com) and the SEC's website (www.sec.gov)[118](index=118&type=chunk) Risk Factors Investing in Marpai's Class A common stock involves high risk, including going concern doubts, integration challenges, AI reliance, high attrition, and regulatory complexities Summary Risk Factors Marpai faces going concern doubts, integration risks, AI inaccuracies, high customer attrition, intense competition, and geopolitical instability in Israel - The independent auditor's report contains an explanatory paragraph regarding substantial doubt about Marpai's ability to continue as a going concern due to operating losses and the need for additional capital[120] - Success depends on effectively integrating Marpai Health, Marpai Administrators, and Maestro Health, and managing the combined company[122] - Risks associated with AI include potential inaccuracies in the TopCare® program, leading to low customer satisfaction, and reputational harm or liability from flawed algorithms or biased data[122][141][143] - Marpai Administrators has a historically high annual customer attrition rate (32.9% in 2022, 25.0% in 2021), which could materially adversely affect financial conditions and operating results[136] - The company operates in a highly competitive market with nearly 1,000 TPAs and large health insurance companies, and relies heavily on healthcare brokers as its principal sales channel[115][150] - Geopolitical instability in Israel, where R&D facilities are located, may adversely affect operations and results[123][177] Risks Related to Managing and Growing Our TPA Business Marpai faces risks from limited AI program experience, capital needs, high customer attrition, talent acquisition, and data security breaches - Marpai has limited experience with its AI-powered TopCare® program, and initial results may not be indicative of future performance or cost savings[126][142] - The company projects a need for additional capital to fund operations and investments; failure to raise funds could lead to scaling back operations or asset divestment[128][130][134] - High customer attrition rates (32.9% in 2022) and ongoing lawsuits pose significant threats to financial stability and growth[136][137] - Success depends on continuous innovation and access to limited AI talent, especially in deep learning, to remain competitive[156][159] - Security breaches or unauthorized access to client data could lead to litigation, reputational damage, and significant liabilities[163][164] Risk Related to the Company's Acquisition of Maestro Health, LLC Integrating Maestro Health poses risks of unexpected difficulties, higher costs, unknown liabilities, and inaccurate acquisition assumptions - Integrating Maestro's business may be more difficult, costly, or time-consuming than expected, potentially preventing the realization of anticipated benefits like cost savings and synergies[174] - Maestro may have unknown or contingent liabilities that were not discovered during due diligence, which could adversely affect Marpai's business and financial condition[175] - Assumptions made during the Maestro acquisition, such as expected revenue growth rates or operating costs, may prove materially inaccurate[176] Risks Related to Managing Our Research and Development Operations in Israel Geopolitical instability in Israel, workforce disruptions, currency fluctuations, and legal enforcement challenges pose risks to R&D operations - Political, economic, and military instability in Israel, where R&D facilities are located, may disrupt operations, hinder capital raising, and affect business relationships[177][180] - The obligation of Israeli citizens to perform military service could lead to workforce disruptions[182] - Currency fluctuations (e.g., NIS/USD) and inflation can harm results, as a portion of operating expenses are incurred in NIS[183][184] - Difficulties in enforcing Israeli employment contracts and U.S. judgments in Israel pose additional legal and financial risks[186][188] Risks Related to Protecting Our Technology and Intellectual Property Reliance on third-party infrastructure, service interruptions, intellectual property infringement, and open-source software compliance pose significant technology risks - Reliance on third-party providers like Amazon Web Services for computing infrastructure and network connectivity creates risks of service disruptions, which could adversely affect business and subject Marpai to liability[194][195][196] - Any failure or interruption in Internet infrastructure, bandwidth providers, data center providers, or Marpai's own systems could expose the company to litigation, require issuing credits, and negatively impact relationships with members or clients[197][199][201] - Failure to protect intellectual property rights (patents, trade secrets) could impair the ability to protect proprietary technology and brand, especially against foreign piracy, and may lead to costly litigation or loss of competitive advantage[208][209][210][211] - Marpai may be sued by third parties for alleged infringement of their proprietary rights or misappropriation of intellectual property, leading to significant expenses, damages, or required re-engineering of its platform[213] - The use of open-source software in the TopCare® program carries risks; failure to comply with licenses could require public release of proprietary source code or other adverse impacts on the business[214][215] Risks Related to Conducting our Business Under a Complex and Evolving Set of Governmental Regulations Marpai faces risks from complex healthcare regulations, non-compliance penalties, potential FDA medical device classification, and TPA licensing requirements - The healthcare industry's complex and evolving regulatory framework, including federal and state laws, can create unexpected liabilities, increase costs, and restrict operations[216][217][234] - Non-compliance with fraud and abuse laws (False Claims, Anti-Kickback, Stark Law) or health data privacy laws (HIPAA, HITECH, state laws) could result in significant civil/criminal penalties, reputational damage, and operational changes[217][225][226][235][236] - There is a risk that Marpai's AI software could be regulated as a medical device by the FDA, subjecting it to extensive requirements for registration, pre-market approval, and quality assurance[230][231][232] - Failure to maintain active TPA licenses in all required states or adapt to changes in Internet-related laws and regulations could materially adversely affect operations[242][244][245] Unresolved Staff Comments This item is not applicable to Marpai Inc. for the reporting period - Not Applicable[282] Properties Marpai leases multiple office spaces across the U.S. and Israel, with total net lease expense of $1,117,193 for fiscal year 2022 - Marpai leases its principal executive and administrative offices in Tampa, Florida (32,842 sq ft), with a lease expiring in November 2023[283] - An additional 4,133 sq ft corporate office space in Tel Aviv, Israel, houses the R&D team, with a lease expiring in April 2024[284] - Through the Maestro Health acquisition, Marpai acquired additional corporate office spaces in Charlotte, NC (31,475 sq ft, expiring Aug 2030), Chicago, IL (5,820 sq ft, expiring Sep 2028), and Southfield, MI (10,019 sq ft, expiring Jul 2023)[286][287] - Net lease expense for the fiscal year ended December 31, 2022, amounted to $1,117,193[288] Legal Proceedings Marpai is subject to ordinary course litigation, with no current proceedings deemed material, though a CMS/Zelis litigation is under review - Marpai is subject to litigation in the ordinary course of its TPA business, but no current legal proceedings are considered material[290] - A CMS/Zelis litigation involves a complaint that Marpai Administrators uses a clearinghouse charging percentage-based fees for EFT transactions, potentially violating HIPAA[291] - CMS is investigating this industry-wide concern, and the complaint remains open but is not escalating or requiring additional information from Marpai Administrators at this time[292] Mine Safety Disclosures This item is not applicable to Marpai Inc. for the reporting period - Not applicable[293] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Marpai's common shares are listed on the Nasdaq Capital Market under the symbol MRAI. As of March 21, 2023, there were 21,412,580 common shares issued and outstanding, held by 40 record holders - Marpai's shares trade on the Nasdaq Capital Market under the symbol MRAI[296] - As of March 21, 2023, there were 21,412,580 common shares issued and outstanding[297] - There were 40 holders of record for common shares as of March 21, 2023[297] Reserved This item is reserved and contains no information - This item is reserved[298] Management's Discussion and Analysis of Financial Condition and Results of Operations Marpai Inc. aims to be the 'Payer of the Future' by combining technology and TPA services, with recent acquisitions and captive operations enhancing capacity Overview Marpai Inc. combines technology and TPA services to lower healthcare costs, with recent acquisitions and captive operations expanding its capabilities - Marpai Inc. was formed to combine Marpai Health (technology) and Marpai Administrators (TPA services) to create the 'Payer of the Future,' leveraging technology to lower healthcare costs and improve outcomes[300][301] - The acquisition of Maestro Health in November 2022 increased capacity, and Marpai Captive commenced operations in Q1 2023[300][301] - Marpai's call center staff provides general, non-medical information to comply with corporate practice of medicine laws, focusing on guiding members to lower-cost, high-quality providers for high-cost events[302][303] - Integration of Marpai Administrators and Maestro Health is expected to be completed in 2023[304] Representation in the Financial Statements of Marpai, Inc. Marpai Inc.'s consolidated financial statements include Marpai Health, Marpai Administrators (since April 2021), and Maestro Health (since November 2022) - Marpai Inc.'s consolidated financial statements include Marpai Health (and EYME) for all periods, Marpai Administrators since its acquisition on April 1, 2021, and Maestro Health since its acquisition on November 1, 2022[306] Results of Operations – Comparison of the Years ended December 31, 2022 and 2021 Marpai experienced significant revenue growth and increased operating losses in 2022 due to acquisitions and higher expenses, while loss per share decreased - Financial Performance (Years Ended December 31) | Metric | 2022 ($) | 2021 ($) | Change ($) | Change (%) | | :---------------------------------------- | :------------ | :------------ | :------------ | :--------- | | Revenue | 24,341,874 | 14,226,794 | 10,115,080 | 71.1% | | Cost of revenue (exclusive of D&A) | 17,136,330 | 10,289,578 | 6,846,752 | 66.5% | | Research and development | 3,708,068 | 1,733,964 | 1,974,104 | 113.8% | | General and administrative | 12,318,529 | 8,055,572 | 4,262,957 | 52.9% | | Sales and marketing | 6,938,513 | 4,965,209 | 1,973,304 | 39.7% | | Information technology | 6,372,795 | 2,492,060 | 3,880,735 | 155.7% | | Facilities | 1,012,827 | 589,926 | 422,901 | 71.7% | | Loss on disposal of asset | 273,430 | — | 273,430 | 100% | | Depreciation and amortization | 3,538,237 | 1,961,733 | 1,576,504 | 80.4% | | Total Costs and Expenses | 51,298,729 | 30,088,042 | 21,210,687 | 70.5% | | Operating Loss | (26,956,855) | (15,861,248) | (11,095,607) | 70.0% | | Net Loss | (26,468,389) | (15,984,835) | (10,483,554) | 65.6% | | Net loss per share, basic and fully diluted | (1.31) | (1.59) | 0.28 | -17.6% | | Weighted average common shares | 20,239,837 | 10,076,494 | 10,163,343 | 100.9% | - Revenue increased by 71.1% ($10.1 million) in 2022, primarily due to the inclusion of Marpai Administrators' revenues (since April 1, 2021) and Maestro Health's revenues (since November 1, 2022)[308] - Total costs and expenses increased by 70.5% ($21.2 million) in 2022, driven by higher cost of revenue and significant increases across R&D, G&A, sales & marketing, and IT expenses due to acquisitions and increased personnel/platform costs[310][313][314][315][316][317] - Net loss increased by 65.6% ($10.5 million) in 2022, while loss per share decreased by 17.6% ($0.28) due to a substantial increase in the weighted average number of shares outstanding[319][320] Liquidity and Capital Resources Marpai faces substantial doubt about its going concern ability due to operating losses and capital needs, despite cash from the Maestro Health acquisition - Financial Position (as of December 31, 2022) | Metric | Amount | | :------------------------ | :------------- | | Accumulated Deficit | $(48.0) million | | Debt | $20.2 million | | Unrestricted Cash | $13.8 million | | Working Capital | $9.2 million | | Operating Losses (2022) | $(26.5) million | | Negative Cash Flow from Operations (2022) | $(35.2) million | - Marpai's liquidity condition raises substantial doubt about its ability to continue as a going concern through the next twelve months, as noted by management and the independent auditor[326][500][537] - The company has historically relied on proceeds from convertible notes, warrants, and its IPO to fund operations and expects to need additional capital through equity, debt, strategic partners, or asset sales[322][324][534][535] - The Maestro Health acquisition brought $15.79 million in cash reserves, and its integration is expected to improve operating results over the next year[323] Cash Flows Net cash used in operating activities significantly increased in 2022, while investing cash flow rose due to acquisitions, and financing cash flow decreased post-IPO - Cash Flow Summary (Years Ended December 31) | Activity | 2022 ($) | 2021 ($) | Change ($) | | :------------------------------------------------ | :------------ | :------------ | :------------ | | Net cash used in operating activities | (35,239,299) | (10,795,252) | (24,444,047) | | Net cash provided by investing activities | 32,422,576 | 9,643,740 | 22,778,836 | | Net cash provided by financing activities | 196 | 25,267,223 | (25,267,027) | | Net (decrease) increase in cash, cash equivalents and restricted cash | (2,816,527) | 24,115,711 | (26,932,238) | - Net cash used in operating activities increased significantly by $24.4 million in 2022, driven by the net loss[329] - Net cash provided by investing activities increased by $22.8 million in 2022, primarily due to cash and restricted cash acquired from the Maestro acquisition[330] - Net cash provided by financing activities decreased substantially by $25.3 million in 2022, as 2021 included significant proceeds from the IPO, while 2022 only saw minor proceeds from option exercises[331] Critical Accounting Estimates Marpai's financial statements rely on critical accounting estimates for share-based compensation, capitalized software, goodwill, income taxes, and revenue recognition - Marpai's financial statements rely on critical accounting estimates for share-based compensation, capitalized software, goodwill, income taxes, and revenue recognition[332][333][540] - Internally developed software costs are capitalized during the development stage and amortized over 3-5 years; goodwill is tested annually for impairment, with no impairment recorded in 2022 or 2021[334][335][556][557] - Income taxes are accounted for using an asset and liability approach, with a valuation allowance established based on the realizability of deferred tax assets; revenue is recognized over time based on fixed per-employee-per-month (PEPM) fees[336][339][559][561] Recently Issued and Adopted Accounting Pronouncements Marpai adopted ASU 2020-06 with no material impact and is evaluating ASU 2021-08, while monitoring other pronouncements not expected to be material - Marpai adopted ASU 2020-06 (Convertible Instruments) in 2021 with no material impact, as all convertible debt was converted or repaid[588][589] - The company is monitoring ASU 2020-04/2022-06 (Reference Rate Reform) and ASU 2022-04 (Supplier Finance Programs), neither of which is expected to have a material impact[590][591] - Marpai is currently evaluating the impact of ASU 2021-08 (Accounting for Contract Assets and Contract Liabilities from Contracts with Customers) on its consolidated financial statements[592] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to Marpai Inc. for the reporting period - Not applicable[350] Financial Statements and Supplementary Data Marpai's consolidated financial statements, including the balance sheets, statements of operations, changes in stockholders' equity, cash flows, and accompanying notes, along with the report of UHY LLP, its independent registered public accounting firm, are presented in this Annual Report - The consolidated financial statements and notes, along with the report of UHY LLP, are included in this Annual Report[351] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Marpai Inc. reports no changes in or disagreements with its accountants on accounting and financial disclosure matters for the reporting period - None[352] Controls and Procedures Marpai's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2022. A previously identified material weakness in internal control over financial reporting, related to complex transactions and staffing, was remediated in 2022 through additional personnel and enhanced monitoring. As a smaller reporting company, Marpai's management report on internal control over financial reporting was not subject to attestation by its registered public accounting firm - Marpai's CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2022[353][356] - A previously identified material weakness in internal control over financial reporting, related to inadequate formal accounting policies for complex transactions and insufficient staffing, was remediated in 2022[358][359][361] - Management's report on internal control over financial reporting was not subject to attestation by the registered public accounting firm, as permitted for a smaller reporting company[362] - No other material changes in internal control over financial reporting occurred during the fourth quarter of fiscal year 2022[363] Other Information This item is not applicable to Marpai Inc. for the reporting period - Not applicable[364] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Marpai Inc. for the reporting period - Not applicable[365] PART III Directors, Executive Officers and Corporate Governance Marpai's leadership team includes Edmundo Gonzalez (CEO), Yoram Bibring (CFO), Gonen Antebi (COO), and Lutz Finger (President, Product and Development). The Board of Directors, with seven members and four independent directors, is chaired by Yaron Eitan. The company has an Audit Committee (chaired by Sagiv Shiv) and a Compensation Committee (chaired by Colleen DiClaudio), both operating under approved charters. An advisory board assists with AI and healthcare business opportunities. Marpai has a Code of Ethics and reports timely Section 16(a) filings Directors and Executive Officers Marpai's leadership team comprises key executive officers and a board of directors, with no family relationships among them - Marpai Inc. Directors and Executive Officers | Name | Age | Position | Date First Elected or Appointed | | :-------------- | :-- | :--------------------------------- | :------------------------------ | | Edmundo Gonzalez | 49 | Chief Executive Officer, Secretary, and Director | April 1, 2021 | | Yoram Bibring | 65 | Chief Financial Officer | September 1, 2021 | | Gonen Antebi | 49 | Chief Operating Officer | February 1, 2023 | | Lutz Finger | 51 | President, Product and Development | February 28, 2022 | | Yaron Eitan | 65 | Chairman of the Board of Directors | April 1, 2021 | | Damien Lamendola | 66 | Director | April 1, 2021 | | Sagiv Shiv | 66 | Director | February 1, 2023 | | Mohsen Moazami | 62 | Director | March 30, 2022 | | Vincent Kane | 49 | Director | October 28, 2021 | | Colleen DiClaudio | 44 | Director | October 28, 2021 | - There are no family relationships between any of the directors or officers[390] Business Experience Key executives and directors bring extensive experience in technology, healthcare, finance, and deep learning to Marpai's leadership team - Edmundo Gonzalez (CEO) is a technology entrepreneur and investor with over 20 years of experience, co-founder of Marpai Health and 340Basics Technologies[370][371][372] - Lutz Finger (President, Product and Development) previously led population health at Google Health and was Director of Product Analytics at Snap Inc., also a senior lecturer at Cornell University[376] - Yaron Eitan (Chairman) is a technology entrepreneur and investor with over 30 years of experience, specializing in deep learning companies[377][378][379] - Damien Lamendola (Director) founded Marpai Administrators and leads strategic operations for multiple healthcare companies[380][381] - Sagiv Shiv (Director) brings financial expertise and capital markets experience as Managing Director and Head of M&A and Advisory Services at Aldwych Capital Partners[388][389] Number and Terms of Office of Officers and Directors Marpai's Board of Directors has seven members, with officers appointed at the Board's discretion rather than for fixed terms - Marpai's Board of Directors has seven members, with four deemed 'independent' under SEC and Nasdaq rules[391][392] - Officers are appointed by the Board and serve at its discretion, rather than for specific terms of office[391] Director Independence A majority of Marpai's Board members are independent, as defined by Nasdaq and SEC rules, and hold separate meetings for independent directors - A majority of Marpai's Board is independent, as defined by Nasdaq's listing standards and applicable SEC rules[392] - Sagiv Shiv, Vincent Kane, Mohsen Moazami, and Colleen DiClaudio are identified as independent directors[392] - Independent directors hold regularly scheduled meetings at which only independent directors are present[392] Committees of the Board Marpai's Board has an Audit Committee and a Compensation Committee, both operating under approved charters to oversee financial and executive compensation matters - Marpai's Board has two standing committees: an Audit Committee and a Compensation Committee, both operating under approved charters[393] - The Audit Committee members are Sagiv Shiv (Chairman and financial expert), Colleen DiClaudio, and Vincent Kane, responsible for overseeing audits, compliance, and related party transactions[394][395][396] - The Compensation Committee members are Colleen DiClaudio (Chairman), Sagiv Shiv, and Vincent Kane, responsible for reviewing and approving executive compensation and implementing incentive plans[398][400] Director Nominations Marpai's Board, with a majority of independent directors, recommends nominees based on diverse qualifications, and stockholders can also propose candidates - Marpai does not have a standing nominating committee but intends to form one as required by law or Nasdaq rules; currently, a majority of independent directors recommend nominees[403] - The Board considers educational background, diversity of professional experience, business knowledge, integrity, professional reputation, independence, wisdom, and ability to represent stockholders when evaluating nominees[405] - Stockholders can recommend director candidates by following the procedures set forth in the company's bylaws[404] Compensation Committee Interlocks and Insider Participation None of Marpai's executive officers serve on the compensation committee of any entity with executives on Marpai's Board - None of Marpai's executive officers currently serve, or in the past year have served, as a member of the compensation committee of any entity that has one or more executive officers serving on Marpai's Board[406] Advisory Board Marpai's advisory board assists management with AI and healthcare business opportunities and market strategies, receiving stock options but no cash compensation - Marpai's advisory board assists the management team with sourcing and evaluating AI and healthcare business opportunities and devising market strategies[407] - Advisors are reimbursed for out-of-pocket expenses and are eligible for stock option awards, but they do not receive cash compensation and have no fiduciary obligations to present business opportunities[407] - Key advisory board members include Michael Paas (life sciences), Winston Churchill (investor/venture capital), and Ariel Zamir (AI/deep learning)[408][409][412] Code of Ethics Marpai has adopted a Code of Ethics for directors, officers, and employees, with amendments or waivers disclosed via Form 8-K and the company website - Marpai has adopted a Code of Ethics applicable to its directors, officers, and employees, requiring the avoidance of conflicts of interest[413] - Any amendments to or waivers of certain provisions of the Code of Ethics will be disclosed in a Current Report on Form 8-K and on the company's website[413][468] Delinquent Section 16(a) Reports Marpai believes all Section 16(a) filings by its executive officers, directors, and beneficial owners were timely during the past fiscal year - Marpai believes that all Section 16(a) filings by its executive officers, directors, and 10% beneficial owners were filed on a timely basis during the past fiscal year[415] Executive Compensation Marpai's executive compensation includes base salaries, potential bonuses, and significant equity awards for its named executive officers. Independent directors receive an annual fee. The company maintains a 401(k) plan with a company match and a 2021 Global Stock Incentive Plan for equity-based awards, which was expanded in 2022. Employment agreements detail specific compensation, equity vesting, and severance terms for key executives Summary Compensation Table Executive compensation for named officers includes salaries, bonuses, and substantial stock awards, with notable increases for new or transitioning roles - Named Executive Officer Compensation (Years Ended December 31) | Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | All Other Compensation ($) | Total ($) | | :-------------------------------------- | :--- | :--------- | :-------- | :--------------- | :------------------------- | :---------- | | Edmundo Gonzalez, CEO and Director | 2022 | 363,464 | — | 212,618 | — | 576,082 | | Edmundo Gonzalez, CEO and Director | 2021 | 218,139 | — | — | 69,667 | 287,806 | | Lutz Finger, President, Product and Development | 2022 | 275,002 | — | 1,494,231 | 450,001 | 2,219,234 | | Lutz Finger, President, Product and Development | 2021 | — | — | — | — | — | | Yoram Bibring, Chief Financial Officer | 2022 | 264,810 | 50,000 | 137,935 | — | 452,745 | | Yoram Bibring, Chief Financial Officer | 2021 | 76,500 | 50,000 | — | — | 126,500 | - Lutz Finger's 2022 compensation includes significant stock awards (1,346,154 Restricted Stock Units with a fair value of $1.11 per share) and a sign-on bonus[419][442] - Edmundo Gonzalez's salary increased from 2021 to 2022, reflecting his transition from consultant to Marpai employee on April 1, 2022[419][430] Director Compensation Independent directors receive an annual fee of $50,000, paid quarterly, and are reimbursed for reasonable travel and out-of-pocket expenses - Effective March 30, 2022, independent directors' compensation was set at an annual fee of $50,000, payable quarterly[418] - Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred for Board meetings[420] - No other director received or accrued compensation for services as a director in Fiscal Year 2022, beyond the approved annual fee[421] Benefit Plans Marpai offers a 401(k) plan with a 5% company match for full-time employees but does not sponsor pension or deferred compensation plans - Marpai maintains a 401(k) plan for full-time employees, allowing pre-tax deferrals up to statutory limits, with a 5% company contribution match[422] - The company does not sponsor any qualified or non-qualified pension benefit plans, nor any non-qualified defined contribution or deferred compensation plans[423] 2021 Global Stock Incentive Plan The 2021 Global Stock Incentive Plan, amended in 2022, authorizes 7,803,421 shares for equity awards to employees, directors, and consultants - The 2021 Global Stock Incentive Plan was approved in May 2021 and amended in May 2022 to increase the total number of shares available for awards to 7,803,421[424][425] - As of December 31, 2022, 3,935,368 stock options and 1,427,404 RSUs had been approved for grant under the plan, with specific vesting schedules extending through 2026[426] - The plan allows for the grant of incentive stock options, restricted stocks, restricted stock units, and other equity-based awards to employees, directors, and consultants, and is set to expire in May 2031[424] Director and Officer Liability Insurance Marpai maintains director and officer liability insurance, including employment practices liability, to protect its leadership against lawsuits - Marpai maintains director and officer liability insurance to provide financial protection for its directors and officers against lawsuits related to their services[427] - The insurance also includes employment practices liability coverage for harassment and discrimination suits[427] Employment Agreements Employment agreements for key executives detail base salaries, potential bonuses, equity awards, and severance provisions based on their roles and tenure - Edmundo Gonzalez (CEO) has an at-will employment agreement with a base salary of $350,000/year and severance provisions based on tenure[430][431] - Yoram Bibring (CFO) has an at-will agreement with a $255,000/year base salary, potential 50% annual bonus, 125,000 stock options, and severance of 6-12 months salary/bonus/benefits[432][433] - Gonen Antebi (COO) has a one-year renewable agreement with a $325,000/year base salary, up to 75% bonus, $50,000 sign-on bonus, and options for 300,000 shares (Initial Award) plus another 300,000 (Additional Award) if renewed[434][435][436][437] - Lutz Finger (President, Product and Development) has an at-will agreement with a $325,000/year base salary, up to 50% bonus, $250,000 sign-on bonus (cash/shares), and initial/additional grants of $2,000,000 in Class A common stock[442] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 28, 2023, Marpai's directors and executive officers collectively owned 50.5% of common shares, with Damien Lamendola as the largest beneficial owner - Beneficial Ownership (as of March 28, 2023) | Name of Beneficial Owner | Beneficial Number of Shares | Percentage Of Shares Beneficially Owned | | :------------------------------------------------ | :-------------------------- | :-------------------------------------- | | Edmundo Gonzalez | 1,849,128 | 8.4% | | Yaron Eitan | 1,267,478 | 5.8% | | Yoram Bibring | 87,389 | * | | Gonen Antebi | 92,361 | * | | Damien Lamendola | 6,970,255 | 31.9% | | Sagiv Shiv | — | — | | Colleen DiClaudio | 92,361 | * | | Lutz Finger | 1,339,087 | 6.1% | | Vincent Kane | 134,676 | * | | Mohsen Moazami | 126,388 | * | | All Directors and Executive Officers as a Group (10 Persons) | 11,959,123 | 50.5% | - The total number of common shares issued and outstanding as of March 28, 2023, was 21,412,580[449] - Beneficial ownership includes shares subject to options, warrants, or rights to purchase/convertible within 60 days[449] Certain Relationships and Related Transactions, and Director Independence Marpai has engaged in related party transactions, including acquisitions and financial support from entities tied to key directors and shareholders, and is a 'controlled company' Purchase and Reorganization Agreement Marpai's 2021 acquisition of Marpai Health and Marpai Administrators involved key directors and shareholders, with Damien Lamendola becoming a majority beneficial owner - On April 1, 2021, Marpai acquired Marpai Health and Marpai Administrators, involving key directors and shareholders like Edmundo Gonzalez, Yaron Eitan, and Damien Lamendola[453] - Damien Lamendola, the indirect majority owner of WellEnterprises USA, LLC and HillCour, beneficially owns approximately 51.7% of Marpai, Inc.'s outstanding capital stock post-conversion[453] Power of Attorney and Proxy A proxy agreement grants significant voting control to founding groups, classifying Marpai as a 'controlled company' under Nasdaq rules - The HillCour Founding Group granted the Grays Founding Group a proxy to vote 1,560,237 Class A common shares on critical corporate matters, aiming to maintain equal voting power between the two founding groups[454] - This agreement classifies Marpai as a 'controlled company' under Nasdaq rules, as the Co-Founders collectively hold over 70% of the voting power[457] Transition Services Agreement Marpai entered a Transition Services Agreement with WellEnterprises and HillCour post-acquisition to provide administrative support to Marpai Administrators - On April 1, 2021, Marpai entered into a Transition Services Agreement with WellEnterprises, LLC and HillCour, LLC to provide transitional services to Marpai Administrators post-acquisition[458] - Services, including treasury and banking, were provided on a cost-incurred basis until July 1, 2021, with a total cost of $18,000 for the year ended December 31, 2021[458][647] HillCour's Financial Support HillCour provided financial support to Marpai, including funding operating expenses and a $3 million promissory note with warrants - HillCour provided financial support letters to Marpai, Inc., agreeing to fund operating expenses if sufficient capital was not raised, with support extended to September 2022[459][460][461] - Marpai, Inc. issued a $3,000,000 promissory note to HillCour Investment Fund LLC on July 29, 2021, accruing 6% interest, along with warrants to purchase 225,000 Class A common stock[462] Consulting Agreement Marpai Health had a consulting agreement with BrightMark Consulting for marketing services, which was terminated but services continued as needed - Marpai Health had a consulting agreement with BrightMark Consulting, LLC (whose CEO was a former Board member) for marketing and branding services[463] - The agreement was terminated in March 2021, with services continuing on an as-needed basis; total payments to BrightMark were $2,309,000 as of December 31, 2022[463] Consulting Fees Marpai received consulting services from various shareholders and directors, including Edmundo Gonzalez and Yaron Eitan - Marpai received consulting services from various shareholders and directors, including Edmundo Gonzalez and Yaron Eitan[464] - Total consulting costs were approximately $208,000 in 2022 and $1,100,000 in 2021[464] - Yaron Eitan received a monthly retainer of $15,000, which increased to $22,750 per month from April 21, 2021, until March 31, 2022[465] Sublease Marpai had a sublease agreement with Emporus Technologies, an affiliate of Chairman Yaron Eitan, which ended on January 1, 2022 - Marpai had a sublease agreement with Emporus Technologies, Ltd., where Yaron Eitan (Chairman) serves as chairman[466] - The sublease ended on January 1, 2022, generating approximately $69,000 in income for the year ended December 31, 2021[466] Policy for Approval of Related Party Transactions Marpai's Code of Ethics requires avoiding conflicts of interest, with the Audit Committee reviewing and approving related party transactions above specified thresholds - Marpai's Board adopted a Code of Ethics requiring the avoidance of conflicts of interest[467] - The Audit Committee reviews and approves related party transactions exceeding $120,000 or 1% of average total assets, with interested committee members abstaining from voting[469] Principal Accountant Fees and Services Marpai paid its independent registered public accounting firm, UHY LLP, $326,800 in total fees for services in 2022, down from $443,170 in 2021. These fees covered audit, audit-related (401(k) plan), and tax services, all of which were pre-approved by the audit committee - Fees Paid to UHY LLP (Years Ended December 31) | Fee Type | 2022 ($) | 2021 ($) | | :----------------- | :------- | :------- | | Audit Fees | 263,250 | 443,170 | | Audit-Related Fees | 12,300 | None | | Tax Fees | 51,250 | None | | All Other Fees | None | None | | Total Fees | 326,800 | 443,170 | - Audit fees covered professional services for the annual consolidated financial statements audit and quarterly reviews[473] - Audit-related fees were for professional services in connection with the annual 401(k) plan audit[474] - All services provided by the independent registered public accounting firm were pre-approved by the audit committee[476] PART IV Exhibit and Financial Statement Schedules This section lists all exhibits filed as part of the 10-K report, including various agreements (e.g., Equity Interest Purchase, Employment), corporate documents (Certificate of Incorporation, Bylaws), warrants, promissory notes, and certifications. It also includes the consolidated financial statements and XBRL data - The exhibits include Equity Interest Purchase and Reorganization Agreements, corporate governance documents (Certificate of Incorporation, Bylaws), and various financial instruments such as warrants and convertible promissory notes[480][482][484][488] - Employment agreements, transition servic