S-1 1 tm215661d4_s1.htm FORM S-1

 

As filed with the United States Securities and Exchange Commission on July 19, 2021.

 

Registration No. 333-

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

  MARPAI, INC.  
  (Exact Name of Registrant as Specified in Its Charter)  

 

Delaware   6411   86-1916231
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

5701 East Hillsborough Avenue, Suite 1417
Tampa, Florida 33610-5428
(646) 303-3483

 

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Edmundo Gonzalez
Chief Executive Officer
Marpai, Inc.
5701 East Hillsborough Ave., Suite 1417
Tampa, Florida 33610-5428
(646) 303-3483

 

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

Copies to:

 

Mitchell Nussbaum, Esq.

Angela Dowd, Esq.
Jane Tam, Esq.

Loeb & Loeb LLP

345 Park Avenue

New York, New York 10154

Phone: (212) 407-4000

Fax: (212) 407-4990

Brad L. Shiffman, Esq.

Blank Rome LLP

The Chrysler Building

405 Lexington Ave,

New York, NY 10174

Phone: (212) 885-5000
Fax: (212) 885-5001

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x Smaller reporting company x
  Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Security Being Registered     Proposed
Maximum
Aggregate
offering
Price(1)(2)
      Amount of
Registration
Fee(3)
 
Class A common stock, $0.0001 par value (2)   $ 28,750,000      $ 3,136.63   
Representative’s Warrants                
Common stock issuable upon exercise of Representative’s Warrants     1,796,875        196.04   
Total   $  30,546,875     $ 3,332.67   

 

(1) Includes shares of Class A common stock that the underwriters have an option to purchase to cover over-allotments.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the registrant and includes the offering price of shares of common stock that the underwriters have an option to purchase to cover over-allotments, if any.
(4) No fee required pursuant to Rule 457(g).
(5)

We have agreed to issue to the representative of the underwriters warrants to purchase the number of shares of our common stock (the “Representative’s Warrants”) in the aggregate equal to five percent (5%) of the shares of our common stock to be issued and sold in this offering (excluding shares issuable upon exercise of the over-allotment option described herein). The Representative’s Warrants are exercisable for a price per share equal to 125% of the public offering price. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g), the proposed maximum aggregate offering price of the Representative’s Warrants is $1,796,875 , which is equal to 125% of $ 1,437,500 (5% of $ 28,750,000).

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED JULY 19, 2021

 

             Shares

Class A Common Stock

 

 

 

 

 

Marpai, Inc.

 

 

 

This is a firm commitment initial public offering of shares of Class A common stock of Marpai, Inc. We are offering shares of our Class A common stock. We anticipate that the initial public offering price of our shares will be between $            and $             per share.

 

Prior to this offering, there has been no public market for our Class A common stock. We have applied to list our shares of Class A common stock on The Nasdaq Capital Market under the symbol “MRAI.” No assurance can be given that our application will be approved.

 

We are an “emerging growth company” and a “smaller reporting company,” each as defined under the federal securities laws and, as such, have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings. See the section titled “Implications of Being an Emerging Growth Company and a Smaller Reporting Company.”

 

Investing in our Class A common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 32 of this prospectus for a discussion of factors you should consider before buying shares of our Class A common stock.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

    Per Share     Total  
Public offering price   $       $    
Underwriting discounts and commissions(1)   $       $    
Proceeds, before expenses, to us   $       $    

 

(1) See “Underwriting” for a description of the compensation payable to the underwriters We refer you to “Underwriting” beginning on page 122 of this prospectus for additional information regarding underwriters’ compensation.

 

We have granted a 45-day option to the representative of the underwriters to purchase up to additional shares of Class A common stock from us solely to cover over-allotments, if any, at the public offering price, less underwriting discounts and commissions.

 

The underwriter expects to deliver the shares of our Class A common stock against payment therefor on or about         , 2021, subject to customary closing conditions.

 

ThinkEquity

a division of Fordham Financial Management, Inc.

 

The date of this prospectus is           , 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY 1
THE OFFERING 12
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA OF MARPAI HEALTH PRE-ACQUISITION 14
SUMMARY SELECTED FINANCIAL AND OTHER DATA OF CONTINENTAL BENEFITS, INC. 15
COMPARATIVE SHARE INFORMATION 29
RISK FACTORS 32
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 63
USE OF PROCEEDS 65
DIVIDEND POLICY 66
CAPITALIZATION 67
DILUTION 69
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MARPAI HEALTH PRE- ACQUISITION 71
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CONTINENTAL BENEFITS PRE- ACQUISITION 72
BUSINESS 81
MANAGEMENT 100
EXECUTIVE COMPENSATION 108
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 111
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 114
DESCRIPTION OF CAPITAL STOCK 116
SHARES ELIGIBLE FOR FUTURE SALE 120
UNDERWRITING 122
LEGAL MATTERS 126
EXPERTS 126
WHERE YOU CAN FIND ADDITIONAL INFORMATION 126
INDEX TO FINANCIAL STATEMENTS 127

 

i 

 

 

We and the underwriters have not authorized anyone to provide you any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you, and you should rely only on the information contained in this prospectus or in any such free writing prospectus. We and underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are not making an offer to sell nor a solicitation of any offer to buy these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

For investors outside of the United States: we have not and the underwriters have not taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside of the United States.

 

Our logo and some of our trademarks and tradenames are used in this prospectus. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, trademarks, tradenames and service marks referred to in this prospectus may appear without the ®, TM and SM symbols, but those references are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensor to these trademarks, tradenames and service marks.

 

We obtained the statistical data, market data and other industry data and forecasts described in this prospectus from market research, publicly available information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical data, industry data and forecasts and market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information. We have not sought the consent of the sources to refer to their reports appearing or incorporated by reference in this prospectus.

 

ii 

 

 

PROSPECTUS SUMMARY

 

This summary only highlights the more detailed information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under “Risk Factors” and our financial statements and the related notes included elsewhere in this prospectus, before investing. Pursuant to the Amended and Restated Equity Interest Purchase and Reorganization Agreement (the “Purchase and Reorganization Agreement”), Marpai, Inc., a Delaware corporation, has acquired all equity interests of Marpai Health and Continental Benefits. As used in this prospectus, unless the context indicates or otherwise requires, the “Company,” “our Company,” “we,” “us,” and “our” refer to Marpai, Inc., the combined company of Marpai Health, Inc. and its wholly-owned subsidiary EYME Technologies Ltd. and Continental Benefits, LLC and its wholly-owned subsidiary, WellSystems, LLC.

 

Our Company

 

Overview

 

Marpai Inc.’s mission is to positively change healthcare for the benefit of (i) our clients who are self-insured employers that pay for their employees’ healthcare benefits and engage us to administer the latter’s healthcare claims, and we refer to them as our “Clients”; (ii) employees 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 are creating the healthcare payer of the future for self-insured employers in the U.S., what we refer to as the “Payer of the Future.” Through the use of the latest technology and artificial intelligence or “A.I.,” we believe we have the ability to predict costly events, such as who is likely to develop a chronic disease or require a costly operation over the next twelve months. With this knowledge, we aim to optimize care so that employers can save money, while employees can have access to high-quality care and enjoy good healthcare outcomes.

 

Our company is the combination of Marpai Health, Inc. and Continental Benefits LLC. Marpai Health is our A.I.-focused subsidiary, with a research and development team in Tel Aviv, Israel. Continental Benefits is our healthcare payer subsidiary that provides administration services to self-insured employer groups across the United States. It acts as a third-party administrator or “TPA” handling all administrative aspects of providing healthcare to self-insured employer groups. We have combined these two businesses to create what we believe to be the Payer of the Future, which has not only the licenses, processes and know-how of a payer but also the latest A.I. technology. This combination allows us to differentiate in the TPA market by delivering something new – a technology-driven service that we believe can lower the overall cost of healthcare while maintaining or improving healthcare outcomes.

 

Since December 2019, Marpai Health and Continental Benefits have been working together on information exchange and joint development of A.I. models to predict the onset of chronic conditions and up-coming high-cost events such as expensive imaging or orthopedic surgeries. We believe early detection would lead some portion of Continental Benefits’ Members to avoid, delay or better manage their disease. This matters in both cost terms to the employers and in wellbeing for the Members. By recommending our Members to seek appropriate medical consultation with effective providers, we believe our technology can help mitigate the financial and wellbeing costs for employers and Members.

 

Many states have enacted laws prohibiting physicians from practicing medicine in partnership with non-physicians, such as business corporations. In some states, including New York, these take the form of laws or regulations prohibiting splitting of physician fees with non-physicians or others. As we do not engage in the practice of medicine or fee-splitting with any medical professionals, we do not believe these laws restrict our business. Our activities involve only monitoring and analyzing historical claims data, including our Members’ interactions with licensed healthcare professionals, and recommend the most suitable healthcare providers and/or sources of treatment. We do not provide medical prognosis or healthcare. In accordance with various states’ corporate practice of medicine laws and states’ laws and regulations which define the practice of medicine, our call center staff are prohibited from providing Members with any evaluation of any medical condition, diagnosis, prescription, care and/or treatment. Rather, our call center staff can only provide Members with general and publicly available information that is non-specific to the Members’ medical conditions and statistical information about the prevalence of medical conditions within certain populations or under certain circumstances. Our call center staff do not discuss Members’ individual medical conditions and are prohibited from asking Members for any additional protected health information (PHI) as such term is defined under the Health Insurance Portability and Accountability Act (HIPAA). Our call center staff have been trained and instructed to always inform Members that they are not licensed medical professionals, are not providing medical advice, and that Members should reach out to their medical provider for any medical advice.

 

In the area of high-cost events, like a high-cost image or a surgery, our data show large variations in cost for the same procedure, even given the same geography. For example, the median cost of an MRI of the brain may be approximately $1,000 in a given geography, but a significant amount of procedures priced above the median cost 3-5 times the median. By predicting which Members are on trajectories to have high-cost tests or surgeries, we can help guide them to lower cost, but high-quality providers. This saves money for employers, while ensuring Members get the best care.

 

1

 

 

After having worked together for over a year to identify and collaboratively develop A.I. solutions tailored to the self-insured employer market, Marpai Health started to implement its A.I.-enabled prediction tools as part of Continental Benefits’ patent-pending TopCare program®. In January 2021, our A.I.-powered TopCare program® became live, making it possible for us to offer our Members care management with high-impact predictions. Although our A.I. technology has not yet been integrated with any of our TPA business’ core systems, other than TopCare, to date, we plan to use A.I. in virtually every part of our TPA business. Since the Acquisition on April 1, 2021, Marpai Health and Continental Benefits have been operating as one company under the “Marpai” brand.

 

Building Blocks for the Payer of the Future

 

Our vision for the Payer of the Future places the Member at the center of the healthcare experience. We plan to use proprietary technology to innovate and improve operations at every level of a self-insured payer. Our management believes that by placing the latest advancements in user experience and behavioral science at the heart of our offering, we can create a truly personalized and seamless healthcare experience that engages Members and guides them to pathways that lower costs while improving healthcare outcomes.

 

 

 

  Data, technology and A.I. – We plan to incorporate leading technology and A.I. throughout our business and in all of our building blocks. We will apply A.I. and other custom technologies to improve internal operations and to power solutions that we believe can directly lead to improved care and lower cost of claims. We have invested significantly in these capabilities and believe they are a key competitive advantage.

 

  Foundation – The foundation of a TPA includes claims adjudication, benefits design and working with channel partners, like benefits brokers. We plan to leverage technology in all aspects of these foundational building blocks to lower our own costs. These efficiencies will make us more competitive.

 

  Levers – We will combine the foundational elements of a TPA with A.I.-generated alerts, enriched member engagement, care management and telemedicine. This is how we plan to reduce the growth of long-term healthcare spending while also improving the quality of healthcare, which is commonly known as “bending the cost curve” in our industry.

 

  Better Value/Better Healthcare Outcomes – We plan to monetize our role in the TPA market as the Payer of the Future by capturing a greater share of the TPA value chain, including a greater share of per employee per month (PEPM) fees charged to our Clients while delivering lower overall costs and quality healthcare outcomes for our Members.

 

2

 

 

Our Industry Opportunity

 

Rising healthcare costs have been a major trend affecting all participants of the healthcare ecosystem, including employers and their employees. In the United States, per capita healthcare expenditures are expected to more than double from $5,801 in 1990 to $12,000 in 2020, according to our analysis based on the Health System Tracker of the Peterson Center on Healthcare and Kaiser Family Foundation. As a share of GDP, healthcare expenditures grew from 5% of GDP in 1960 to 18% of GDP in 2019, according to Statista, a market and consumer data company.

 

These increases in healthcare cost have been driven by an increase in chronic diseases and various forms of waste in the system. Overall, it means that healthcare patients now pay more and are often less healthy than they were years ago. At the same time, patients today have adopted the latest online services and consumer electronics, which has led to consumer expectation for fast, quality service.

 

The growing healthcare costs and expectations for better service represent a significant challenge for companies that “self-insure,” or pay for their employee’s healthcare benefits directly as opposed to buying health insurance for them. According to the Employee Benefit Research Institute, approximately 80% of U.S. companies with 500 or more employees offered self-insured plans in 2018. According to the Everest Group, a research firm, the TPA market is highly fragmented, with the top 10 TPAs in the U.S. commanding just a 3-5% market share and lagging behind in technology adoption, despite technology being a key enabler of differentiation. Several of the largest insurance providers have their own internal claims processing operations. The industry refers to the big 4 as “BUCAs”: Blue Cross and Blue Shield/Anthem, United Health Group, Cigna, and Aetna. While the Company remains to be one of the largest national independent TPAs, we have network agreements with two of the largest health networks offering greater flexibility and choice.

 

Another major trend is the explosion of data, especially healthcare data. In 2020, approximately 2,413 exabytes of healthcare data will be generated, or 15x more than the 153 exabytes generated in 2013, according to Statista. The expansive volume of data and the latest breakthroughs in A.I., especially in the field of deep learning, are beginning to impact healthcare. Together with consumer-centric design, A.I. can enable more personalized healthcare and improved outcomes.

 

We aim to be the Payer of the Future for self-insured employers in the U.S. by deploying our A.I. solutions to curb the rising healthcare costs of our Clients and improve the health outcome of our Members.

 

Our Strategy

 

Our strategy is to create a proprietary technology platform enabling rapid growth in the healthcare payer market. With the use of A.I., we believe we can achieve our dual goals of lowering the cost of claims for Clients, while maintaining high quality healthcare outcomes for Members.

 

Today, we have already developed six A.I. modules to predict the following chronic conditions:

 

  Type 2 Diabetes;
  Cardio-vascular disease;
  Kidney disease;
  Chronic obstructive pulmonary disease (COPD);
  High-cost imaging of knee; and
  Knee replacement.

 

These modules allow us to identify which members to enroll in care management. In January 2021, our A.I.-powered TopCare program® became live, making it possible for us to offer care management with high-impact predictions. Eleven Clients have signed up to use this enhanced product offering on a trial basis as a prototype as of July 2021. We plan to continue to develop our technology, expand the number of A.I. modules TopCare® will incorporate as well as other functionalities, and sign up as many Clients who will pay a premium price for this enhanced product offering as possible.

  

3

 

 

Although our A.I. technology has not yet been integrated with any of our TPA business’ core systems, other than TopCare, to date, we plan to use A.I. in virtually every part of our TPA business by the end of 2022 as follows:

 

  Claims management that will enable accurate auto-adjudication of most claims, which we believe will lower our operating costs and increase our operating efficiency. This will also include detecting and flagging suspicious claims before final adjudication.

 

  Member engagement and self-service options via an intuitive and easy-to-use application, which we believe will also lower the cost to serve Clients and allow Members to interact with us as often as they wish. We will seek to present the best providers in terms of quality and costs, in a manner that is centered around a Member’s needs and geography.

 

  Continuous Provider quality tracking that will enable us to identify the best Providers and also the usual and customary practices and their related costs.

 

  Smart plan design including cost optimization, performance monitoring and risk prediction.

 

We plan to use a significant amount of the proceeds from this offering to expand our research and development efforts, build technology infrastructure, and greatly expand our A.I. research. We believe that these enhancements are necessary in creating a Payer of the Future in the TPA market, which can expand both organically and through acquisitions.

 

Our Products and Services

 

We are a technology-driven healthcare payer focused on providing services to the self-insured employer market. We do not provide medical prognosis and are not engaged in the practice of medicine of any sort.

 

Our current core product and service offering includes handling all aspects of administration related to a healthcare plan. We typically design for our Client a healthcare benefit plan which precisely outlines the coverage the Client would like to provide to its employees.

 

We then manage the plan for the Client by providing the following services:

 

  Providing a Client’s employees access to a Provider network via relationships with Aetna, Cigna, and regional networks;

 

  Concierge type services to help Members find Providers and care management as well as to answer questions, such as on claims and benefits;

 

  Validating and adjudicating claims from Clients’ employees, including automated adjudication;

 

  Promoting health and use of high-quality Providers to the Member population across Clients;

 

  Paying claims on behalf of our Clients; and

 

  Stop-loss insurance via one or several A rated carriers.

 

We do not bear the financial risk with respect to the cost of the claims for any employer. Instead, the self-insured employers and stop-loss insurance companies, if the self-insured employers purchase stop-loss insurance policies to protect themselves from having higher than planned healthcare costs, bear the risk arising from the cost of claims. We also sell a comprehensive offering of ancillary services such as care management, case management, actuarial services, health savings account administration and cost containment services. Our margin on these partner products varies greatly, but each added service makes the overall package for our Clients more robust and increases the likelihood of Client retention.

 

4

 

 

Our TopCare® Program

 

Use of A.I. to make predictions about Members’ health provides us a competitive advantage and differentiates us from other TPAs in the market. Since January 2021, our A.I.-powered TopCare program® became live, making it possible for us to offer care management with high-impact predictions. Using our innovative technology, TopCare® allows us to help self-insured employers manage their employees’ healthcare needs proactively. Our A.I. technology is able to process, analyze and store myriad types of data in large scale. Our A.I. models recognize patterns and detect anomalies, giving us greater insights on a patient’s medical trajectory, although we do not provide medical prognosis, and are not engaged in the practice of medicine of any sort. Alerts generated by our system based on that trajectory allow our call center staff to start outreaching and recommend the best care to an at-risk Member, whether that is a visit to a primary care physician or to a specialist, for a root cause or drill down analysis. With a full disclaimer to the Member that our system does not provide medical advice or prognosis, our call center staff encourages the Member to develop an actionable healthcare plan with licensed medical professionals.

 

The key components of our TopCare® program include:

 

  Deep Member Profile – We understand Members’ health based on their medical history, demographic information, historical claims, and in some cases, what they have shared with us as their own health risk assessments. All this data is fed through various deep learning modules and automatically processed;

 

  Claims Trajectory – Our A.I. models have studied millions of claims and have mapped out an expected trajectory for Members. The predictions are based on all data on each Member available to us. Currently, the data includes structured data, such as demographic information, historical claims, laboratory test data when available. In the future, we anticipate that the data will include unstructured data, such as medical images, text-based assessments and other types of health records. All of this data is fed into deep learning models for each data type, and subsequently fed into a unified deep learning model which finds patterns and insights across all data and data types available for the Member; and

 

  Alerts – Our A.I. models come to life via alerts, which are triggered by an event such as a particular claim. Each alert is a new data point for each Member, invoking the entire model to update its predictions. Deep learning models are especially superior for finding non-linear patterns and correlations. For example, a new data point X that apparently is completely unrelated to prediction Y, may actually affect the prediction through complex non-linear patterns, which are very difficult for humans and traditional A.I. to find. Deep learning models, however, are capable of finding those patterns, which trigger new actionable alerts. These alerts allow the TopCare® team to begin outreach to an at-risk Member.

 

Our A.I.-enabled predictions help both Members and their Providers to be proactive and get in front of costly events, so they can predict, prevent, and plan around them. Management believes that our services provide not only lower costs, but also better value for the money spent on healthcare, and therefore greatly reducing any waste related to care coordination and care delivery.

 

Our Technology

 

Our technology infrastructure and expertise are core building blocks of our vision to become the Payer of the Future. The Marpai System is our proprietary big data analytics system that provides advanced deep learning capabilities. Management expects to generate and collect troves of data from all aspects of our business including healthcare claims, member engagement, internal operations and customer experience and systematically apply intelligent automation and artificial intelligence to delight our end users, improve healthcare outcomes and lower costs.

 

5

 

 

The Marpai System

 

 

 

  Mass Scale Data Fusion – Our system fuses massive amounts of data from various sources in many formats into a single environment for analysis.

 

  Data – Our system includes a unified healthcare schema that can ingest and make useful any healthcare data type including claims, social determinants of health and psychographic data, blood test results and pathology and radiology images.

 

  Data Lake – Our system includes a massive data lake with our unified schema that stores and structures healthcare data in order to enable analysis.

 

  A.I. Models – Our system automatically applies our A.I. models to healthcare data to enable pattern recognition, advanced querying and anomaly detection.

 

  Marpai Product – Our system is fully integrated with our user platform and can automatically deliver alerts to our internal staff and, in the future, to Members and other stakeholders.

 

Growth Opportunities

 

We have two key drivers of growth: acquisitive growth and organic growth.

 

  Acquisitive growth – We plan to grow by acquiring other TPAs with limited technology, and we will view them as books of business. Acquisitions will allow us to quickly fuel our near-term growth. However, we will be disciplined in that we will expect all acquired TPAs to adopt our technology platform and be fully integrated into our operations.

 

  Organic growth – We believe we will grow organically by providing a highly differentiated TPA solution to employer groups.

 

Corporate Information

 

We were incorporated in Delaware in January 2021. We maintain our principal executive offices at 5701 E. Hillsborough Ave., Suite 1417, Tampa, FL 33610. We also maintain an office in Tel Aviv, Israel. Our telephone number is (646) 303-3483. Our website address is www.MarpaiHealth.com. Information contained on our website is not incorporated by reference into this prospectus, and it should not be considered to be part of this prospectus.

 

6

 

 

Acquisition of Marpai Health, Inc. and Continental Benefits LLC

 

On April 1, 2021, we entered into the Amended and Restated Equity Interest Purchase and Reorganization Agreement (the “Purchase and Reorganization Agreement”) with all the then stockholders of Marpai Health (including holders of shares underlying convertible notes held by certain current directors and officers of Marpai, Inc. that, at the time, were holders of Marpai Health’s convertible promissory notes in an aggregate principal amount of $3,800,000 (the “Original MH Notes”)), Continental Benefits, WellEnterprises USA, LLC, and for the sole purposes of a joinder in connection with Guaranteed Obligations (defined below), HillCour. As part of the Acquisition, approximately $3,800,000 of the Marpai Health’s convertible promissory notes were exchanged for shares of common stock of Marpai Inc. immediately prior to the Acquisition. On May 7, 2021, parties entered into an addendum to the Purchase and Reorganization Agreement to correct the interest calculations on certain Original MH Notes. Pursuant to the terms of the Purchase and Reorganization Agreement, the stockholders of Marpai Health and the sole member of Continental Benefits contributed their respective securities and ownership interests in Marpai Health and Continental Benefits to Marpai, Inc.  for a combination of shares of Class A common stock and Class B common stock (collectively, “Common Stock”) of Marpai, Inc. (the “Acquisition”). Options to purchase 225,558 shares of Marpai Health common stock and warrants to purchase 300,000 shares of Marpai Health common stock were exchanged, on a one to one basis, for options and warrants to purchase shares of our Class A common stock.  In addition, pursuant to a Note Exchange Agreement, we issued convertible promissory notes in the aggregate principal amount of $2,198,459 (the “New Notes”) in exchange for certain then outstanding convertible promissory notes of Marpai Health of equivalent amount of outstanding principal and accrued but unpaid interest. The New Notes carry a simple interest rate of 8% per annum over a two-year term and are expected to convert upon the closing of this offering, at a price that is 70% of the per share public offering price in this offering. The SQN Convertible Note (defined below) in the aggregate principal amount of $2.93 million remains outstanding.

 

The Purchase and Reorganization Agreement required Continental Benefits to not have less than $4.762 million of cash on hand, and to have no debt at the time of closing of the Acquisition.

 

Pursuant to the Purchase and Reorganization Agreement, Continental Benefits was valued solely for purposes of the Acquisition, on a cash-free and debt-free basis, at $8.5 million. Including the $4.762 million of cash on Continental Benefits’ balance sheet, equity totaled $13.26 million. In addition, pursuant to Purchase and Reorganization Agreement, Marpai Health was valued solely for purposes of the Acquisition, at an assumed pre-money valuation of $35 million.

 

See “Business - Marpai, Inc.’s Acquisition of Marpai Health and Continental Benefits” for a full description of the Acquisition.

 

Class B Conversion; Second Amended and Restated Charter

 

On June 28, 2021, Eli David, Yaron Eitan, Edmundo Gonzalez, Grays West Ventures LLC, HillCour Investment Fund, LLC, and WellEnterprises USA, LLC voluntarily converted an aggregate of 927,817 shares of the Company’s Class B common stock they held into 927,817 shares of Class A common stock on a 1:1 basis (“Class B Conversion”). On July 8, 2021, the Company filed its Second Amended and Restated Certificate of Incorporation (“Second Amended and Restated Charter”), under which, the share capital of the Company was revised to include solely shares of Class A common stock. Until such filing of the Company’s Second Amended and Restated Charter, the Company was authorized to issue two classes of common stock, Class A common stock and Class B common stock. The issued and outstanding shares of Class B common stock have been converted into Class A common stock as described above, and the authorized class of Class B common stock was eliminated with the filing of the Second Amended and Restated Charter.

 

Controlled Company

 

Concurrently with the Class B Conversion, the Company, (i) HillCour Investment Fund, LLC and WellEnterprises USA, LLC (together, the “HillCour Founding Group”) and (ii) Eli David, Yaron Eitan, Edmundo Gonzalez and Grays West Ventures LLC (collectively, the “Grays Founding Group,” and together with the HillCour Founding Group, the “Co-Founders”) entered into an Agreement Relating to Voting Power Between Co-Founders of Marpai, Inc. and Grant of a Power of Attorney and Proxy (“Power of Attorney and Proxy”). Pursuant to the Power of Attorney and Proxy, the HillCour Founding Group granted the Grays Founding Group the right to vote 342,471 shares of the Company’s Class A common stock it held (“Proxy Shares”) on all matters relating to any of the following: (i) change to the composition of the Company’s Board of Directors; (ii) sale of all or substantially all of the Company’s assets or capital stock, or a merger involving the Company; (iii) replacement of the Company’s CEO or other C-level officers; (iv) amendment or approval of any corporate documents or agreements in connection with the Company’s corporate structure or capital raising activities; (v) approval of the Company’s annual budget and business plan; and (vi) the Company’s acquisition, joint venture or other collaborative agreements. Consequently, the HillCour Founding Group and the Grays Founding Group currently have the right to vote 858,960 and 858,959 shares of the Company’s capital stock, respectively. The Power of Attorney and Proxy also provides that the number of Proxy Shares is subject to adjustment from time to time so as to maintain as much as possible, equal voting power in the Company between the HillCour Founding Group on the one hand and the Grays Founding Group on the other, subject to certain exceptions related to transfer of shares by the parties. The Power of Attorney and Proxy is irrevocable and will remain in full force and effect until the earlier of (i) consummation of the sale of all or substantially all of the Company’s assets, or the acquisition of the Company by a third party (by way of stock acquisition, merger, recapitalization or otherwise), or (ii) the time when the Grays Founding Group collectively owns fewer than 413,190 shares of the Company’s capital stock. For as long as this Power of Attorney and Proxy remains in effect, the HillCour Founding Group and the Grays Founding Group are therefore deemed to be a “group” under Rule 13d-5(d) of the Exchange Act.

 

Pursuant to this Power of Attorney and Proxy, the Co-Founders have also agreed to vote all their shares for the election of (a) Damien Lamendola (or another nominee of the HillCour Founding Group), (b) Edmundo Gonzalez; and (c) Yaron Eitan (or up to two other nominees of the Grays Founding Group) as the Company’s directors. Pursuant to this Power of Attorney and Proxy, the Co-Founders collectively hold an aggregate of more than 70% of the voting power of the Company’s common stock and therefore, the Company is eligible to be classified as a “controlled company” under the rules of the Nasdaq Stock Market and the Company will be eligible to utilize certain exemptions from the corporate governance requirements of the Nasdaq Stock Market. We do not currently intend to avail ourselves of these exemptions.

 

7

 

 

 

Organizational Chart of the Company

 

 

 

Implications of Being an Emerging Growth Company and a Smaller Reporting Company

 

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. As an “emerging growth company,” we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include, but are not limited to:

 

•             requiring only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s discussion and analysis of financial condition and results of operations” in our Securities Act of 1933, as amended, or the Securities Act, filings;

 

•              reduced disclosure about our executive compensation arrangements;

 

•              no non-binding advisory votes on executive compensation or golden parachute arrangements; and

 

•             exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes Oxley Act of 2002, or SOX.

 

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an “emerging growth company.” We will continue to remain an “emerging growth company” until the earliest of the following: (i) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering; (ii) the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1.07 billion; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, or the SEC.

 

We are also a “smaller reporting company” as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act, and have elected to take advantage of certain of the scaled disclosures available to smaller reporting companies. To the extent that we continue to qualify as a “smaller reporting company” as such term is defined in Rule 12b-2 under the Exchange Act, after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an “emerging growth company” may continue to be available to us as a “smaller reporting company,” including exemption from compliance with the auditor attestation requirements pursuant to SOX and reduced disclosure about our executive compensation arrangements. We will continue to be a “smaller reporting company” until we have $250 million or more in public float (based on our Class A common stock) measured as of the last business day of our most recently completed second fiscal quarter or, in the event we have no public float (based on our Class A common stock) or a public float (based on our Class A common stock) that is less than $700 million, annual revenues of $100 million or more during the most recently completed fiscal year.

 

8

 

 

We may choose to take advantage of some, but not all, of these exemptions. We have taken advantage of reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different from the information you receive from other public companies in which you hold stock. In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to avail ourselves of the extended transition period for complying with new or revised financial accounting standards. As a result of this accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult.

 

Summary Risk Factors

 

Our business is subject to numerous risks and uncertainties that you should consider before investing in our company. You should carefully consider the risks described more fully in the section titled “Risk Factors” in this prospectus beginning on page 32, before making a decision to invest in our Class A common stock. If any of these risks actually occurs, our business, financial condition and results of operations would likely be materially adversely affected. These risks, include, but are not limited to, the following:

 

We and Marpai Health are development stage companies with no operating history and no revenues.
   
Continental Benefits has had a history of operating losses, and we may not be able to generate sufficient revenue to achieve profitability.
   
The loss, termination, or renegotiation of any contract with Continental Benefits’ current Clients could materially adversely affect our financial conditions and operating results.
   
Continental Benefits is party to a number of disputes and lawsuits, and we may be subject to liabilities arisen from these and similar disputes in the future.
   
Continental Benefits may be subject to penalties from the Internal Revenue Services.
   
Our success will largely depend on our ability to integrate Marpai Health and Continental Benefits, and effectively manage the combined company.
   
If our TopCare® program fails to provide accurate and timely predictions, or if it is associated with wasteful visits to Providers or unhelpful recommendations for Members, then this could lead to low customer satisfaction, which could adversely affect our results of operations.
   
Issues in the use of A.I., including deep learning in our platform and modules, could result in reputational harm or liability.
   
If the markets for our A.I. modules and TopCare® program fail to grow as we expect, or if self–insured employers fail to adopt our TopCare® program and A.I. modules, our business, operating results, and financial condition could be adversely affected.
   
We rely on healthcare benefits brokers and consultants as our principal sales channel, and some of these companies are large and have no allegiance to us. If we do not satisfy their employer clients, they may steer not only an unsatisfied client, but others as well, to other TPAs.

 

9

 

 

Our pricing may change over time and our ability to efficiently price our services will affect our results of operations and our ability to attract or retain Clients.
   
Our sales cycles can be long and unpredictable, and our sales efforts require a considerable investment of time and expense. If our sales cycle lengthens or we invest substantial resources pursuing unsuccessful sales opportunities, our results of operations and growth would be harmed.
   
Because Continental Benefits generally recognizes technology and professional services revenue ratably over the term of the contract for our services, a significant downturn in its business may not be reflected immediately in our results of operations, which increases the difficulty of evaluating our future financial performance.
   
Continental Benefits has a high annual customer attrition rate historically. The loss, termination, or renegotiation of any contract with Continental Benefits’ current Clients could have a material adverse effect on our financial conditions and operating results.
   
If we do not have access to A.I. talent or fail to expand our A.I. models, we may not remain competitive, and our revenue and results of operations could suffer.
   
Failure by our Clients to obtain proper permissions and waivers may result in claims against us or may limit or prevent our use of data, which could harm our business.
   
Absence of change of control and/or assignment provisions in Continental Benefits’ data privacy policy and Non-Disclosure Agreements with regard to the sharing of confidential information could adversely affect our business.
   
If our security measures are breached or unauthorized access to client data is otherwise obtained, our product and service offerings may be perceived as not being secure, Clients may reduce the use of or stop using our services, and we may incur significant liabilities.
   
Global or regional health pandemics or epidemics, including COVID-19, could negatively impact our business operations, financial performance and results of operations.
   
Potential political, economic and military instability in the State of Israel, where our research and development facilities are located, may adversely affect our results of operations.
   
Our operations may be disrupted as a result of the obligation of Israeli citizens to perform military service.
   
Because a certain portion of our expenses is incurred in currencies other than the US Dollar, our results of operations may be harmed by currency fluctuations and inflation.
   
Employment and other material contracts we have with our Israeli employees are governed by Israeli laws. Our inability to enforce or obtain a remedy under these agreements could adversely affect our business and financial condition.
   
Investors may have difficulties enforcing a U.S. judgment, including judgments based upon the civil liability provisions of the U.S. federal securities laws against one of our directors or asserting U.S. securities laws claims in Israel.
   
Unanticipated changes in our effective tax rate and additional tax liabilities, including as a result of our international operations or implementation of new tax rules, could harm our future results.
   
We rely on third-party providers, including Amazon Web Services, for computing infrastructure, network connectivity, and other technology-related services needed to deliver our service offerings. Any disruption in the services provided by such third-party providers could adversely affect our business and subject us to liability.
   
We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties, and our own systems for providing services to our users, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation, potentially require us to issue credits to our Clients, and negatively impact our relationships with Members or Clients, adversely affecting our brand and our business.

 

10

 

 

We employ third-party licensed software and software components for use in or with our TopCare® program, and the inability to maintain these licenses or the presence of errors in the software we license could limit the functionality of our TopCare® program and result in increased costs or reduced service levels, which would adversely affect our business.
   
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
   
We may not be able to adequately defend against piracy of intellectual property in foreign jurisdictions.
   
We may be sued by third parties for alleged infringement of their proprietary rights or misappropriation of intellectual property.
   
Our TopCare® program utilizes open-source software, and any failure to comply with the terms of one or more of these open-source licenses could adversely affect our business.
   
Government regulation of healthcare creates risks and challenges with respect to our compliance efforts and our business strategies.
   
Our business could be adversely impacted by changes in laws and regulations related to the Internet or changes in access to the Internet generally.
   
As a “controlled company” under the rules of the Nasdaq Capital Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders.
   
Certain of our founding shareholders will continue to own a significant percentage of our Class A common stock and will be able to exert significant control over matters subject to shareholder approval.
   
An active trading market may not develop for our securities, and you may not be able to sell your Class A common stock at or above the offering price per share.

 

11

 

The Offering

 

Class A common stock offered by us shares (or        shares if the underwriters exercise in full their option to purchase additional shares to cover over-allotments, if any).  
   
Class A common stock to be outstanding after this offering shares (or         shares if the underwriters exercise in full their option to purchase additional shares to cover over-allotments, if any)
   
Option to purchase additional shares We have granted the underwriters a 45-day option to purchase up to                 additional shares of our Class A common stock from us at the public offering price, less underwriting discounts and commissions.
   
Representative’s Warrants  We will issue to the representative of the underwriters as compensation, upon closing of this offering, the Representative’s  Warrants entitling the representative to purchase a number of shares of Class A common stock equal to 5% of the aggregate number of shares of Class A common stock issued in this offering, including shares of Class A  issued pursuant to the exercise of the over-allotment option at an exercise price of $__ per share. The Representative’s’ Warrants will have a term of five years and may be exercised at any time and from time to time, in whole or in part, during the four and one half year period commencing 180 days from the effective date of the registration statement of which this prospectus is a part. This prospectus also relates to the offering of the ____ shares of Class A common stock issuable upon exercise of the Representative’s Warrants.

 

Use of proceeds We estimate that the net proceeds from this offering will be approximately $           million, or approximately $           million if the underwriters exercise their option to purchase additional shares to cover over-allotments, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We plan to use approximately 50% of the net proceeds from this offering to fund our research and development.  This includes not only hiring new A.I. scientists, but also acquiring data from third parties.  If the holder of the SQN Convertible Note (as defined below) chooses not to convert the SQN Convertible Note in full into shares of Class A common stock at the closing of the offering, we intend to use up to approximately $1.5 million from the net proceeds of this offering to repay a portion of the principal amount plus accrued interest on the SQN Convertible Note over the next 24 months. We intend to use the remaining proceeds for this offering for working capital and general corporate purposes. See “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering.
   
Risk factors Investing in our securities involves a high degree of risk and purchasers may lose their entire investment. You should read the “Risk Factors” section of this prospectus beginning on page 32 for a discussion of certain factors to consider carefully before deciding to purchase any shares of our Class A common stock.
   
Proposed NASDAQ Capital Market Symbol We intend to apply to list our Class A common stock on the Nasdaq Capital Market under the symbol “MRAI.” No assurance can be given that our shares of Class A common stock will be approved for listing on NASDAQ.
   
Transfer Agent and Registrar The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company LLC.

 

12

 

 

The number of shares of our Class A common stock to be outstanding after this offering is based on the shares of Class A common stock to be outstanding as of the date of this prospectus and excludes the following:

 

  shares of Class A common stock issuable upon the exercise of outstanding stock options, at a weighted average exercise price of $         per share;
     
  shares of Class A common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $          per share;
     
  330,000 shares of Class A common stock reserved for future issuance under our 2021 Global Stock Incentive Plan; and
     
  shares of Class A common stock issuable upon the exercise of the Representative’s Warrants.

 

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

  no exercise of outstanding options or warrants;

 

  no exercise by the underwriters of their option to purchase up to                 additional shares of our Class A common stock from us to cover over-allotments, if any; and

 

  the issuance of                shares of Class A common stock upon conversion of the (i) New Notes and (ii) the convertible notes in the aggregate principal amount of $300,000 issued in June 2021 (the “June 2021 Notes”) upon the consummation of this offering.

 

13

 

 

 

 

SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA OF
MARPAI HEALTH PRE-ACQUISITION

 

The following table summarizes Marpai Health’s consolidated financial data. We have derived the following statements of operations data for the year ended December 31, 2020 and balance sheet data as of December 31, 2020 from Marpai Health’s audited consolidated financial statements and the statements of operations data for the three months ended March 31, 2021 and 2020 and balance sheet data as of March 31, 2021 from Marpai Health’s unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Marpai Health Pre-Acquisition” and our unaudited and audited consolidated financial statements and related notes included elsewhere in this prospectus. Amounts (excluding share data) in the following tables are in U.S. dollars.

 

STATEMENTS OF OPERATIONS DATA:

 

   For the Year Ended December 31,   For the Three Months Ended
March 31,
 
   2020   2021   2020 
Net revenue  $-   $-   $- 
Cost of revenue   -    -    - 
General and administrative   1,499,376    801,837    523,093 
Research and development   1,840,772    282,165    430,822 
Sales and marketing   27,583    321,120    123 
Other expense   (500,253)   (186,492)   (103,578)
Loss from operations   (3,867,984)   (1,591,614)   (1,057,616)
Income tax provision   -    -    - 
Net loss  $(3,867,984)  $(1,591,614)   (1,057,616)
                
Net loss per ordinary share attributable to the Marpai Health               
Basic and diluted  $(7.26)  $(2.50)   (2.18)
Weighted average ordinary share outstanding               
Basic and diluted   533,137    635,980    485,463 

 

BALANCE SHEET DATA:

 

   As of December 31, 2020   As of March 31, 2021 
Current assets  $2,180,181   $1,179,353 
Total assets   6,531,860    6,001,751 
Current liabilities   2,649,207    3,848,233 
Long term liabilities   7,379,152    6,960,320 
Common stock   3    3 
Total stockholders’ deficit  $(3,496,499)  $(4,806,802)

 

 

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SUMMARY SELECTED CONSOLIDATED DATA OF

CONTINENTAL BENEFITS, LLC PRE-ACQUISITION

 

The following table summarizes Continental Benefits’ consolidated financial data. We have derived the following statements of operations data for the year ended December 31, 2020 and balance sheet data as of December 31, 2020 from Continental Benefits’ audited consolidated financial statements and the statements of operations data for the three months ended March 31, 2021 and 2020 and balance sheet data as of March 31, 2021 from Continental Benefits’ unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

 

The historical results presented below are not necessarily indicative of the results to be expected for any future period. The following selected financial information should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Continental Benefits Pre-Acquisition” and Continental Benefits’ financial statements and related notes appearing elsewhere in this prospectus.

 

STATEMENTS OF OPERATIONS DATA:

 

   Year Ended         
   December 31,   Three Months Ended March 31, 
   2020   2021   2020 
Net sales  $18,388,192   $4,215,082   $5,274,224 
Cost of revenue               
Service fees   10,507,319    2,306,355    2,723,925 
Direct expense - claims   1,871,683    424,137    571,245 
Direct expense - member services   1,552,006    365,783    474,640 
Total cost of revenue   13,931,008    3,096,275    3,769,810 
Gross profit   4,457,184    1,118,807    1,504,414 
Operating expenses               
Administrative   8,700,352    1,045,397    1,889,382 
Information technology   4,223,350    865,966    1,342,691 
Sales and marketing   2,724,368    628,487    797,240 
Facilities   762,649    184,718    199,360 
Depreciation   596,152    162,373    144,709 
Total operating expenses   17,006,871    2,886,941    4,373,382 
Operating loss   (12,549,687)   (1,768,134)   (2,868,968)
Other non operating income               
Interest income   11,506    -    11,221 
Other income   -    16,004    - 
Total non operating income   11,506    16,004    11,221 
Net loss  $(12,538,181)  $(1,752,130)  $(2,857,747)

 

 

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BALANCE SHEET DATA:

 

   As of December 31, 2020   As of March 31, 2021 
Current assets  $14,143,967   $11,425,582 
Total assets   17,327,171    14,351,571 
Current liabilities   10,608,167    9,176,563 
Long term liabilities   1,281,362    1,176,042 
Total member's equity  $5,437,642   $3,998,966 

 

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

Introduction

 

The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X with respect to the financial aspects of the Acquisition, summarized below. For each of the periods presented, the unaudited pro forma condensed combined financial information reflects the combination of historical financial information of Marpai Health and Continental Benefits LLC (“Continental Benefits”), adjusted to give effect to the Acquisition, inclusive of the issuance of shares of common stock to Continental Benefits’ sole member. Hereinafter, Marpai Health and Continental Benefits are collectively referred to as the “Companies,” and the Companies, subsequent to the Acquisition, are referred to herein as the “Combined Company.”

 

The unaudited pro forma condensed combined balance sheet, which has been presented for the Combined Company as of March 31, 2021, gives effect to the transactions summarized below, as if they were consummated on March 31, 2021. The unaudited pro forma condensed combined statements of operations, which have been presented for the three months ended March 31, 2021 and the year ended December 31, 2020, give effect to the transactions summarized below, as if they had occurred on January 1, 2020. The unaudited pro forma condensed combined balance sheet does not purport to represent, and is not necessarily indicative of, what the actual financial condition of the Combined Company would have been had the Acquisition taken place on March 31, 2021, nor is it indicative of the financial condition of the Combined Company as of any future date. The unaudited pro forma condensed combined statements of operations do not purport to represent, and are not necessarily indicative of, what the actual results of operations of the Combined Company would have been had the Acquisition taken place on January 1, 2020, nor are they indicative of the results of operations of the Combined Company for any future period.

 

Description of the Transaction

 

On April 1, 2021, pursuant to the terms of the Amended and Restated Equity Interest Purchase and Reorganization Agreement, as was further amended on May 7, 2021 (collectively, the “Agreement”), the stockholders of Marpai Health and the sole member of Continental Benefits contributed their respective shares and ownership interests in Marpai Health and Continental Benefits to Marpai, Inc. in consideration for shares of Marpai Inc.’s Class A and Class B common stock. Additionally, options to purchase 225,558 shares of Marpai Health common stock and warrants to purchase 300,000 shares of Marpai Health common stock were exchanged, on a one to one basis, for options and warrants to purchase shares of Marpai Inc.’s common stock (the above transactions shall be referred to as the “Acquisition”). In connection with the Acquisition, approximately $3,800,000 of Marpai Health’s convertible promissory notes were exchanged for shares of common stock of Marpai Inc. immediately prior to the Acquisition. Until July 8, 2021, when the Company filed its Second Amended and Restated Certificate of Incorporation, each share of Marpai Inc.’s Class A common stock was entitled to one vote, and each share of Marpai Inc.’s Class B common stock was entitled to ten votes, voting together as one class. Each share of Class B common stock was convertible into one share of Class A common stock at any time by the holder. Shares of Class A common stock were not convertible into shares of Class B common stock. As part of the Acquisition, pursuant to a Note Exchange Agreement, Marpai, Inc. acquired Marpai Health’s certain outstanding convertible promissory notes, with aggregate outstanding principal and accrued but unpaid interest of $2,198,459, in exchange for the issuance of Marpai, Inc.’s convertible promissory notes of equivalent aggregate principal amount. The Agreement called for Continental Benefits to not have less than $4.762 million of cash on hand, and to have no debt at the time of closing of the Acquisition.

 

According to the Agreement, Continental Benefits was valued, on a cash-free and debt-free basis, at $8.5 million. Including $4.762 million of cash on Continental Benefits’ balance sheet, equity would total $13.26 million. In addition, pursuant to the Agreement, Marpai Health was valued at an assumed pre-money valuation of the last convertible note’s conversion price of $35 million.

 

 

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The following table summarizes the transaction:

 

Continental Benefits  valuation estimate  $8,500,000 
Add Net Cash  $4,762,000 
Total Continental Benefits Equity Value  $13,262,000 
Marpai Health Valuation  $35,000,000 
Combined Company Valuation  $48,262,000 

 

Continental Benefits’ legacy member (WellEnterprises USA LLC, which is wholly owned by HillCour, Inc. (“HillCour”) owned 33.4%, and Marpai Health’s legacy shareholders owned 66.6% (including 15.7% owned by HillCour), of the outstanding shares of Marpai, Inc., the Combined Company.

 

The following summarizes the ownership of the Combined Company at the closing of the Acquisition, including, those shares of Common Stock issuable upon exchange of the Continental Benefits’ sole member’s membership interests into Combined Company’s Common Stock and options and warrants outstanding at the Merger:

 

   Common
Stock
   %
ownership
   Options and
warrants
   Total   %
Ownership
fully diluted
 
Marpai Health shareholders   1,628,819    66.6%   530,000    2,158,819    72.5%
Continental Benefits sole member   818,007    33.4%   -    818,007    27.5%
Closing Shares   2,446,826    100.0%   530,000    2,976,826    100.0%

 

On June 28, 2021 all of the holders of Marpai Inc.’s Class B common stock voluntarily converted their shares of Class B common stock into shares of Class A common stock on a one to one basis. As of the date of this prospectus, all shares of Marpai Inc.’s Class B common stock which have been converted have been retired and no shares of Marpai Inc.’s Class B common stock are issued and outstanding.

 

Concurrently with the conversion of Class B common stock described above, Marpai Inc. and certain stockholders have entered into an Agreement Relating to Voting Power Between Co-Founders of Marpai, Inc. and Grant of a Power of and Attorney and Proxy (“Power of Attorney and Proxy”), under which WellEnterprises USA, LLC, Continental Benefits’ former sole member (“WellEnterprises”) and HillCour Investment Fund, LLC (“HillCour”) (together, “Proxy Grantors”) granted an irrevocable proxy to certain former Marpai Health shareholders (together, “Proxy Grantees”), to vote 342,471 shares of the Class A common stock of Marpai Inc. held by the Proxy Grantors (or any of them) (“Proxy Shares”) with respect to certain major corporate and commercial actions listed therein. As a result of this Power of Attorney and Proxy, the Proxy Grantors and the Proxy Grantees have the right to vote an aggregate of 858,960 and 858,959 shares of Marpai Inc.’s Class A common stock, respectively. Additionally, Proxy Grantors and Proxy Grantees have also agreed to vote their shares in Marpai Inc. to appoint two directors nominated by the Proxy Grantees and one director nominated by the Proxy Grantors.

 

Further, on July 8, 2021 the Company filed with the Secretary of state of the State of Delaware its Second Amended and Restated Certificate of incorporation (“Restated Charter”). Under the Restated Charter, the authorized share capital of the Company is comprised of 50,000,000 shares of Class A common stock, par value $0.0001 each. As of July 8, 2021, the Company’s share capital no longer includes shares of Class B common stock and therefore as of such date there are no issued, outstanding or authorized shares of Class B common stock of the Company.

 

The number of Proxy Shares may be adjusted from time to time based on changes in the issued and outstanding shares held by the Proxy Grantors and Proxy Grantees, maintaining as much as possible, equal voting power in Marpai, Inc. between the two groups.

 

 

18

 

 

 

The following summarizes the voting power of the Combined Company after the conversion of Class B common stock to Class A common stock and the Voting Agreement:

 

   Proxy Shares   Voting Power 
Proxy Grantees   859,959    35.1%
Other former Marpai Health shareholders   728,907    29.8%
Total former Marpai Health shareholders   1,587,866    64.9%
Proxy Grantors   858,960    35.1%
Total Proxy shares and voting   2,446,826    100.0%

 

Accounting for the Acquisition

 

The Acquisition is accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations (“ASC 805”). Under the acquisition method of accounting for purposes of the unaudited pro forma condensed combined financial information, management of Marpai Health has deemed Marpai Health to be the accounting acquirer and determined a preliminary estimated purchase price, calculated as described in Note 2. Purchase Price and Preliminary Purchase Price Allocation to the unaudited pro forma condensed combined financial information. The Continental Benefits assets acquired and liabilities assumed in connection with the Acquisition are recorded at their estimated acquisition date fair values. A final determination of these estimated fair values will be based on the actual net assets of Continental Benefits that existed as of April 1, 2021, the date of the Closing, upon the consummation of the purchase and sale of all outstanding capital stock of Marpai Health, equity interests in Continental Benefits and other interests pursuant to the Purchase and Reorganization Agreement (the “Closing”) of the Acquisition. Differences between these preliminary estimates and the final acquisition accounting may occur and these differences could be material.

 

The acquisition method of accounting is based on ASC 805 and uses the fair value concepts defined in ASC Topic 820, Fair Value Measurements (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, and sets forth a fair value hierarchy that prioritizes and ranks the level of observability of inputs used to develop the fair value measurements. Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for a non-financial asset assume the highest and best use by these market participants. Many of these fair value measurements can be highly subjective, and it is possible that other professionals applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

 

The historical combined financial information of the Companies has been adjusted to give effect to pro forma events that are (1) directly attributable to the Acquisition, (2) factually supportable, and (3) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial information. In addition, the unaudited pro forma condensed combined financial information was based on and should be read in conjunction with the:

 

  Unaudited condensed consolidated financial statements of Marpai Health as of March 31, 2021 and for the three months ended March 31, 2021 and year ended December 31, 2020 and the related notes, which are included elsewhere in this prospectus;

 

  Unaudited condensed consolidated financial statements of Continental Benefits as of March 31, 2021 and for the three months ended March 31, 2021 and the year ended December 31, 2020 and the related notes, which are included elsewhere in this prospectus;

 

 

19

 

 

 

  Disclosures and discussion in “Marpai Health’s Management’s Discussion and Analysis of Financial Condition and Results of Operations Pre-Acquisition” and “Continental Benefits’ Management’s Discussion and Analysis of Financial Condition and Results of Operations Pre-Acquisition” and other information relating to Marpai Health and Continental Benefits contained elsewhere in this prospectus.

 

The unaudited pro forma condensed combined financial information does not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies or revenue synergies that may result from the Acquisition.

 

The unaudited pro forma condensed combined financial information is based on the assumptions and adjustments that are described in the accompanying notes. The pro forma adjustments reflected in the unaudited pro forma condensed combined financial information are preliminary and based on estimates, subject to further revision as additional information becomes available and additional analyses are performed and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. Differences between these preliminary adjustments reflected in the unaudited pro forma condensed combined financial information as of March 31, 2021 and the final application of the accounting for the Acquisition, which is expected to be completed as soon as practicable, may occur and those differences could have a material impact on the accompanying unaudited pro forma condensed combined financial information and the Combined Company’s future results of operations and financial position. In addition, differences between the preliminary and final adjustments may occur, as well as other changes in assets and liabilities between March 31, 2021 and the closing of the Acquisition.

 

The unaudited pro forma condensed combined financial information has been prepared for illustrative purposes only and are not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Marpai Health and Continental Benefits been a combined company during the specified periods.

 

 

20

 

 

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

 

AS OF MARCH 31, 2021

 

   Marpai
Health (1)
(Historical)
   Continental
Benefits (2)
(Historical)
   Pro Forma
Adjustments
   Notes   Pro Forma
Combined
 
ASSETS:                         
Current assets:                         
Cash and cash equivalents  $862,835   $4,579,903   $182,097    (a)   $4,864,835 
              (760,000)   (b)      
                          
Restricted cash   61,102    6,622,035    -         6,683,137 
Accounts receivable   -    92,231    -         92,231 
Other receivables   99,658    -    -         99,658 
Prepaid expenses and other current assets   155,758    131,413              287,171 
Total current assets   1,179,353    11,425,582    (577,903)        12,027,032 
                          
Capitalized software   4,319,139    -    1,260,000    (c)    5,579,139 
Property and equipment, net   186,605    1,338,195    423,191    (d)    1,947,991 
Goodwill   -    -    156,006    (e)    156,006 
Trademarks   -    -    1,570,000    (f)    1,570,000 
Patents and patent applications   -    -    540,000    (g)    540,000 
Customer relationships   -    -    3,830,000    (h)    3,830,000 
Other intangible assets   -    -    900,000    (i)    900,000 
Operating lease right-of-use assets   316,654    1,532,925    -         1,849,579 
Security deposits   -    54,869    -         54,869 
Total assets  $6,001,751   $14,351,571   $8,101,294        $28,454,616 
                          
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT):                         
Current liabilities:                         
Accounts payable  $486,248   $925,608   $-        $1,411,856 
Accounts payable – related party   15,725    -    -         15,725 
Accrued expenses   9,830    1,987,883    -         1,997,713 
Accrued fiduciary obligations   -    4,070,908    -         4,070,908 
Employee and payroll accruals   226,959    -    -         226,959 
Current portion of operating lease liabilities   99,447    585,204    -         684,651 
Current portion of convertible notes payable   2,766,386         (2,324,389)   (j)    441,997 
Deferred revenue   -    1,606,960    (401,740)   (k)    1,205,220 
Due to related party   243,638    -    -         243,638 
Total current liabilities   3,848,233    9,176,563    (2,726,129)        10,298,667 
                          
Convertible notes payable   6,702,940    -    (1,765,531)   (j)    4,937,409 
Operating lease liabilities, less current portion   257,380    1,131,042    -         1,388,422 
Other long-term liabilities   -    45,000    -         45,000 
Total liabilities   10,808,553    10,352,605    (4,491,660)        16,669,498 
                          
STOCKHOLDERS’ EQUITY (DEFICIT)                         
General members interest   -    62,393,788    (62,393,788)   (m)    - 
Common stock   3    -    242    (l)    245 
Additional paid-in capital   2,325,684    -    8,500,000    (m)    19,677,362 
              4,762,000    (a)      
              4,089,920    (j)      
              (242)   (l)      
Accumulated deficit   (7,132,489)   (58,394,822)   (760,000)   (b)    (7,892,489)
              58,394,822    (m)      
Total stockholders’ equity (deficit)   (4,806,802)   3,998,966    12,592,954         11,785,118 
                          
Total liabilities and stockholders’ equity (deficit)  $6,001,751   $14,351,571   $8,101,294        $28,454,616 

 

  (1) Derived from Marpai Health’s unaudited condensed consolidated balance sheet as of March 31, 2021.
  (2) Derived from Continental Benefits’ unaudited condensed consolidated balance sheet as of March 31, 2021.

 

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information

 

 

21

 

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

 

THREE MONTHS ENDED MARCH 31, 2021

 

   Marpai
Health (3)
(Historical)
   Continental
Benefits (4)
 (Historical)
   Pro Forma
Adjustments
   Notes   Pro Forma
Combined
 
Net revenue  $-   $4,215,081   $-        $4,215,081 
Cost of revenue   -    (3,096,275)   -         (3,096,275)
Gross profit   -    1,118,806    -         1,118,806 
                          
Operating expenses                         
General and administrative   801,837    1,045,397    23,716    (d)    2,492,016 
              274,020    (n)      
              347,091    (o)(p)      
Information technology   -    865,966    -         865,966 
Research and development   282,165    -    -         282,165 
Sales and marketing   321,120    628,487    -         949,607 
Facilities   -    184,718    (184,718)   (o)    - 
Depreciation and amortization   -    162,373    (162,373)   (p)    - 
Total operating expenses   1,405,122    2,886,941    297,736         4,589,799 
                          
Operating loss   (1,405,122)   (1,768,135)   (297,736)        (3,470,993)
                          
Other expenses                         
Interest income (expense)   (183,439)   -    -         (183,439)
Other income   6,697    16,004    -         22,701 
Foreign exchange gain   (9,750)   -    -         (9,750)
Loss before provision for income taxes   (1,591,614)   (1,752,131)   (297,736)        (3,641,481)
                          
Income tax expense   -    -    -         - 
                          
Net loss   (1,591,614)   (1,752,131)   (297,736)        (3,641,481)
                          
Net loss per share, basic & fully diluted   (2.50)                  (1.49)
                          
Weighted average number of common shares   635,980              (q)    2,446,826 

 

  (3) Derived from Marpai Health’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2021.
  (4) Derived from Continental Benefits’ unaudited condensed consolidated statement of operations for the three months ended March 31, 2021.

 

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information

 

22

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

 

YEAR ENDED DECEMBER 31, 2020

 

    Marpai
Health
(5) (Historical)
    Continental
Benefits (6)
 (Historical)
    Pro Forma
Adjustments
    Notes   Pro Forma
Combined
 
Net revenue   $ -     $ 18,388,192     $ -         $ 18,388,192  
Cost of revenue     -       (13,931,008 )     -           (13,931,008 )
Gross profit     -       4,457,184       -           4,457,184  
                                     
Operating expenses                                    
General and administrative     1,499,376       8,700,352       94,866     (d)     12,749,476  
                      1,096,082     (n)        
                      1,358,801     (o)(p)        
Information technology     -       4,223,350       -           4,223,350  
Research and development     1,840,772       -       -           1,840,772  
Sales and marketing     27,583       2,724,368       -           2,751,951  
Facilities     -       762,649       (762,649 )   (o)     -  
Depreciation and amortization     -       596,152       (596,152 )   (p)     -  
Total operating expenses     3,367,731       17,006,871       1,190,947           21,565,549  
                                     
Operating loss     (3,367,731 )     (12,549,687 )     (1,190,947 )         (17,108,365 )
                                     
Other expenses                                    
Interest income (expense)     (521,140 )     11,506       -           (509,634 )
Other income     25,846       -       -           25,846  
Foreign exchange gain     (4,959 )     -       -           (4,959 )
Loss before provision for income taxes     (3,867,984 )     (12,538,181 )     (1,190,947 )         (17,597,112 )
                                     
Income tax expense     -       -       -           -  
                                     
Net loss     (3,867,984 )     (12,538,181 )     (1,190,947 )         (17,597,112 )
                                     
Net loss per share, basic & fully diluted     (7.26 )                         (7.19 )
                                     
Weighted average number of common shares     533,137                     (q)     2,446,826  

 

  (5) Derived from Marpai Health’s audited consolidated statement of operations for the year ended December 31, 2020.
  (6) Derived from Continental Benefits’ audited consolidated statement of operations for the year ended December 31, 2020.

 

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information

 

 

23

 

 

 

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

1. BASIS OF PRESENTATION AND DESCRIPTION OF THE ACQUISITION

 

On April 1, 2021, pursuant to the terms of the Purchase and Reorganization Agreement (the “Agreement”), Marpai, Inc. acquired all of the outstanding capital stock of Marpai Health and all of the outstanding membership interests of Continental Benefits. The stockholders of Marpai Health and Continental Benefits contributed their respective ownership interests in Marpai Health and Continental Benefits to Marpai, Inc. for shares of Common Stock of Marpai Inc. (the “Acquisition”). For further details on the Acquisition see the section titled Description of the Transaction.

 

The unaudited pro forma condensed combined financial information presents the pro forma condensed combined financial position and results of operations of the Combined Company based upon the historical financial statements of Marpai Health and Continental Benefits, after giving effect to the Acquisition and are intended to reflect the impact of such on the Combined Company’s consolidated financial statements.

 

The historical combined financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the Acquisition, (2) factually supportable, and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results.

 

The Acquisition is being accounted for as a business combination, with Marpai Health treated as the “acquirer” and Continental Benefits treated as the “acquired” company for financial reporting purposes. Under the acquisition method of accounting, the total estimated purchase price of an acquisition is allocated to the net tangible and intangible assets based on their estimated fair values. Such valuations are based on available information and certain assumptions that management of Marpai Health believe are reasonable. The preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed is based on various preliminary estimates. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing the unaudited pro forma condensed combined financial information. Differences between these preliminary estimates and the final acquisition accounting, which will be based on the actual net tangible and identifiable intangible assets that exist as of the closing of the Acquisition, may occur and these differences could be material. The differences, if any, could have a material impact on the accompanying unaudited pro forma condensed combined financial information and the Combined Company’s future results of operations and financial position.

 

The unaudited pro forma condensed combined statements of operations include certain reclassifications to align the historical financial statement presentation of Marpai Health and Continental Benefits. See Notes (o) and (p) in Note 3: Adjustments to Unaudited Pro Forma Condensed Combined Financial Information herein for additional information on the reclassifications.

 

The unaudited pro forma condensed combined statements of operations do not reflect the non-recurring expenses expected to be incurred in connection with the Acquisition, including fees to attorneys, accountants and other professional advisors, and other transaction-related costs that will not be capitalized. However, the impact of such expenses is reflected in the unaudited pro forma condensed combined balance sheet as a decrease to accumulated deficit and a corresponding decrease to cash.

 

In addition, the unaudited pro forma condensed combined financial information does not reflect the following:

 

  Income tax effects of the pro forma adjustments. The Combined Company’s management believes this unaudited pro forma condensed combined financial information to not be meaningful given the Combined Company incurred significant losses during the historical periods presented.

 

  Restructuring or integration activities that have yet to be determined or other costs that may be incurred to achieve cost or growth synergies of the Combined Company. As no assurance can be made that the costs will be incurred or the cost or growth synergies will be achieved, no adjustment has been made.

 

24

 

 

Further, the unaudited pro forma condensed combined financial information does not necessarily reflect what the Combined Company’s financial condition or results of operations would have been had the Acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the Combined Company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

 

For accounting purposes, the acquirer is the entity that has obtained control of another entity and, thus, consummated a business combination. Management has determined that Marpai Health is the accounting acquirer and Continental Benefits is deemed to be the acquired company for financial reporting purposes based on an evaluation of the following facts and circumstances:

 

1. Marpai Health’s existing stockholders hold a majority ownership and voting interest in the Combined Company;

 

2. Marpai Health’s existing senior management team comprise the senior management of the Combined Company; and

 

3. Directors appointed by Marpai Health hold a majority of board seats of the Combined Company.

 

Other factors were considered but they would not change the preponderance of factors indicating that Marpai Health was the accounting acquirer.

 

2. PURCHASE PRICE AND PRELIMINARY PURCHASE PRICE ALLOCATION

 

The pro forma adjustments include a preliminary allocation of the purchase price of Continental Benefits to the estimated fair values of assets acquired and liabilities assumed at the acquisition date. The final allocation of the purchase price could differ materially from the preliminary allocation primarily because market prices, interest rates and other valuation variables will fluctuate over time and be different at the time of completion of the Acquisition compared to the amounts assumed for the pro forma adjustments.

 

Purchase Price

 

The measurement of the consideration transferred by Marpai Health for its interest in Continental Benefits is based on the estimated fair value of the equity interest that Marpai, Inc. would have had to issue to give the Continental Benefits shareholders (WellEnterprises USA LLC, which is wholly owned by HillCour) the same percentage equity interest in the Combined Company, which is equal to approximately 27.5%, assuming conversion of outstanding warrants and options.

 

The Acquisition involved only the exchange of equity. The purchase price, net of cash acquired, is $8,500,000.

 

25

 

 

Preliminary purchase price allocation

 

The following is a summary of the preliminary purchase price allocation giving effect to the Acquisition as if it had been consummated on March 31, 2021:

 

Restricted cash  $6,622,035 
Accounts receivable   92,231 
Prepaid expenses and other current assets   131,413 
Property and equipment   1,761,386 
Other intangible assets   900,000 
Capitalized software   1,260,000 
Operating lease – right of use assets   1,532,925 
Goodwill   156,006 
Trademarks   1,570,000 
Patents and patent applications   540,000 
Customer relationships   3,830,000 
Security deposits   54,869 
Account payable   (925,608)
Accrued expenses   (1,987,883)
Accrued fiduciary obligations   (4,070,908)
Operating lease liabilities   (1,716,246)
Deferred revenue   (1,205,220)
Other long-term liabilities   (45,000)
Total consideration  $8,500,000 

 

This preliminary purchase price allocation has been used to prepare the pro forma adjustments in the unaudited pro forma condensed combined balance sheet and statements of operations. The final purchase price allocation will be determined when the Combined Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair values of property and equipment, (2) changes in allocations to intangible assets such as trademarks, patents and patent applications and customer relationships as well as goodwill and (3) other changes to assets and liabilities.

 

3. ADJUSTMENTS TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet

 

The adjustments included in the unaudited pro forma condensed combined balance sheet as of March 31, 2021 are as follows:

 

(a) Reflects the cash adjustment at the closing of the Acquisition:

 

Cash balance as of March 31, 2021  $4,579,903 
Cash adjustment   182,097 
Closing cash balance   4,762,000 

 

(b) Represents preliminary estimated direct transaction costs of $760,000 payable in cash, concurrent with the Acquisition.

 

(c) Capitalized software - To record the preliminary fair value of capitalized software (see Note 2).
   
(d) Property and equipment, net - To adjust property and equipment, net to fair value. Reflects the adjustment of $423,191 to increase the basis in the acquired property and equipment to estimated fair value of $1,761,386 (see Note 2). The following table summarizes the changes in the estimated depreciation expense:

 

   Three months
ended
March 31,
2021
   Year ended
December 31,
2020
 
Estimated depreciation expense  $186,089   $691,378 
Historical depreciation expense   162,373    596,512 
Pro forma adjustments to depreciation expense  $23,716   $94,866 

 

26

 

 

(e) Goodwill - To record the preliminary estimate of Goodwill (see Note 2).

 

(f) Trademarks – To record the preliminary fair value of trademarks (see Note 2).
   
(g) Patents and patent applications - To record the preliminary fair value of patents and patent applications (see Note 2).
   
(h) Customer relationships - To record the preliminary fair value of customer relationships (see Note 2).
   
(i) Other intangible assets - To record the preliminary fair value of noncompete covenants (see Note 2).

 

(j) Represents a conversion of convertible notes received in 2019, 2020, at the closing of the Acquisition. The following table provides the details of the notes converted at the Acquisition and the notes not converted at the Acquisition.

 

   Balance as of
March 31,
2021
   Notes not
converted
at
the
Acquisition
   Notes
converted
at
the
Acquisition
 
Principal  $8,880,000   $5,080,000   $3,800,000 
Accrued interest as of March 31, 2021   674,398    299,406    374,992 
Amortized debt issuance costs   (85,072)   -    (85,072)
Total  $9,469,326    5,379,406    4,089,920 

 

(k) Represents the estimated adjustment to decrease the assumed deferred revenue obligations to a fair value of $1,205,220, a $401,740 decrease from the carrying value (see Note 2). The calculation of fair value is preliminary and subject to change. The fair value was determined based on the estimated costs to fulfill the remaining performance obligations.

 

(l) Represents an additional par value of $242 and associated paid-in capital for a total of 2,446,826 Common Stock par value $0.0001 issued to shareholders detailed as follows:

 

   Convertible
Note
principal
   Common
Stock
upon
conversion
   Common
Stock as of
the
Acquisition
 
2019 and 2020 Convertible Promissory Notes  $3,800,000    676,170    676,170 
Continental Benefits sole shareholder             818,007 
Other Common Stockholders             952,648 
Total             2,446,826 

 

(m) Stockholders’ Equity - To record adjustments to stockholders’ equity as follows:

 

Purchase price   8,500,000 
Elimination of General Members Interest   (62,393,788)
Elimination of Continental Benefits Accumulated Deficit   58,394,822 

 

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Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations

 

The adjustments included in the unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2021 and year ended December 31, 2020 are as follows:

 

(n) The following table summarizes the estimated fair values of Continental Benefits’ identifiable intangible assets, their estimated useful lives and the amortization for presented periods:

 

   Estimated
Fair Value
   Estimated
Useful
Life in
Years
   Amortization
Three Months ended
March 31, 2021
   Amortization
Year ended
December 31, 2020
 
Trademarks  $1,570,000    10.00   $39,250   $157,000 
Patent and patent applications   540,000    19.06    7,083    28,332 
Customer relationships   3,830,000    8.00    119,687    578,750 
Capitalized software   1,260,000    5.00    63,000    252,000 
Intangible assets   900,000    5.00    45,000    180,000 
Total   8,100,000         274,020    1,096,082 
Pro forma adjustments to amortization expense            $274,020   $1,096,082 

 

(o) To reclassify facilities expenses to conform to Marpai Health’s presentation in general and administrative.
   
(p) To reclassify depreciation and amortization expenses to conform to Marpai Health’s presentation in general and administrative.
   
(q) Represents the weighted average shares in connection with the issuance of 2,446,826 common shares upon closing of the Acquisition.

 

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COMPARATIVE SHARE INFORMATION

 

The following table sets forth the historical comparative share information for Marpai Health and Continental Benefits on a stand-alone basis and the unaudited pro forma combined share information for the three months ended March 31, 2021 and year ended December 31, 2020, after giving effect to the Acquisition.

 

You should read the information in the following table in conjunction with the selected historical financial information summary and the historical financial statements of Marpai Health and Continental Benefits and related notes that are included elsewhere in this prospectus. The unaudited pro forma combined share information is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial statements and related notes included above.

 

The unaudited pro forma combined share information below does not purport to represent what the actual results of operations or the earnings per share would have been had the companies been combined during the periods presented, nor to project the Company’s results of operations or earnings per share for any future date or period. The unaudited pro forma combined stockholders’ equity per share information below does not purport to represent what the value of Marpai Health and Continental Benefits would have been had the companies been combined during the periods presented.

 

Unaudited Pro Forma Condensed Combined Statements of Operations Data

 

   For the
Three
Months
Ended
March 31,
2021
   For the
Year Ended
December 31,
2020
 
Revenue  $4,215,081   $18,388,192 
Cost of revenue   3,096,275    13,931,008 
General and administrative   2,492,061    12,749,476 
Information technology   865,966    4,223,350 
Research and development   282,165    1,840,772 
Sales and Marketing   949,607    2,751,951 
Total operating expenses   4,589,799    21,565,549 
Net loss attributable to common stockholders   (3,470,993)   (17,108,365)
Net loss per share, basic and diluted   (1.49)   (7.19)

 

Unaudited Pro Forma Condensed Combined Balance Sheet Data

 

   As of
March 31,
2021
 
Cash and cash equivalents  $4,864,835 
Working capital, net   1,728,365 
Total assets   28,454,616 
Accumulated deficit   (7,892,489)
Total stockholders’ equity   11,785,118 

 

Comparative Historical and Unaudited Pro Forma Per Share Data

 

The information below reflects the historical net loss and book value per share of Marpai Health common stock and the historical net loss and book value per share of Continental Benefits LLC membership interests in comparison with the unaudited pro forma net loss and book value per share after giving effect to the Pro Forma Events.

 

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You should read the tables below in conjunction with the audited and unaudited consolidated financial statements of Marpai Health and Continental Benefits LLC included in this prospectus and the related notes and the unaudited pro forma condensed combined financial information and notes related to such financial statements included elsewhere in this prospectus.

 

Marpai Health

 

   Three
Months
Ended
March 31,
2021
   Year
Ended
December 31,
2020
 
Historical Per Common Share Data:          
Basic and diluted net loss per share  $(2.50)  $(7.26)
Book value per share (1)  $(7.37)  $(5.57)

 

Continental Benefits

 

Limited Liability Company with no per share information

 

Combined company

 

   Three
Months
Ended
March 31,
2021
   Year
Ended
December 31,
2020
 
Pro Forma Per Common Share Data:          
Basic and diluted net loss per share  $(1.49)  $(7.19)
Book value per share (2)  $4.82   $NA 

 

Marpai Health

 

   Three
Months
Ended
March 31,
2021
   Year
Ended
December 31,
2020
 
Equivalent Pro Forma per Share Data (3):          
Basic and diluted net loss per share  $(1.49)  $(7.19)
Book value per share  $4.82   $NA 

 

(1) Historical book value per share is calculated by dividing total shareholders’ equity by total outstanding shares.

 

(2) Combined pro forma book value per share is calculated by dividing pro forma combined total shareholders’ equity by pro forma combined total outstanding shares.

 

(3) Marpai Health pro forma equivalent data per share is calculated by applying the Exchange Ratio of 1 to the unaudited pro forma combined per share data.

 

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   MARPAI
HEALTH (1)
   CONTINENTAL
BENEFITS (1)
   Combined
Pro
Forma (4)
 
Three Months ended March 31, 2021               
Net loss  $(1,591,614)  $(1,752,131)  $(3,641,481)
Weighted average shares outstanding – basic and diluted   635,980         2,446,826 
Basic and diluted net loss per share  $(2.50)  $    $(1.49)

 

   MARPAI
HEALTH (2)
   CONTINENTAL
BENEFITS (3)
   Combined
Pro
Forma (4)
 
Year ended December 31, 2020               
Net loss  $(3,867,984)  $(12,538,181)  $(17,597,112)
Weighted average shares outstanding – basic and diluted   533,137    -    2,446,826 
Basic and diluted net loss per share  $(7.26)  $-   $(7.19)

 

(1) Derived from each company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2021.

 

(2) Derived from Marpai Health’s audited consolidated statement of operations for the year ended December 31, 2020.

 

(3) Derived from Continental Benefits’ audited consolidated statement of operations for the year ended December 31, 2020.

 

(4) Includes Combined Company’s pro forma adjustments to the historical financial statements.

 

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RISK FACTORS

 

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, before making a decision to invest in our Class A common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, results of operations, financial condition and prospects could be harmed. In that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

 

Risks Related to Managing and Growing Our Combined TPA Business

 

We and Marpai Health are a development stage company with no operating history and no revenues.

 

On April 1, 2021, Marpai consummated its acquisition of Marpai Health and Continental Benefits.

 

Marpai Health, Inc. was formed in February 2019. Together with its wholly-owned subsidiary, EYME Technologies Ltd., an Israeli company (“EYME,”) Marpai Health is a development stage company with no operating history and has not yet generated any revenue. As of December 31, 2020 and March 31, 2021, it had an accumulated deficit of approximately $5.5 million, and $7.1 million, respectively, and working capital deficit of $469,026 and $2.7 million, respectively. At March 31, 2021, it had total debt of approximately $9.6 million. Since inception, Marpai Health has funded its capital needs from sale of convertible notes. On a pro forma basis, as of the acquisition date of April 1, 2021, Marpai’s working capital is $1,728,365 and stockholders’ equity is $28,454,616.

 

We expect to derive a significant portion of our revenue from the renewal of Continental Benefits’ existing Client contracts and sales of our added services to its existing Clients. Sale of products and services through Continental Benefits’ TopCare® program is key to our success. We believe that our A.I. models with deep learning functionality and predictive algorithms give us the ability to predict chronic conditions and costly medical procedures, and these factors differentiate us from other TPAs. However, implementing Marpai Health’s prediction tools as part of Continental Benefits’ TopCare® program is a new initiative. There can be no assurances as to how long it will take for our A.I.-enabled TopCare® program to resonate with Continental Benefits’ current Clients, or at all. Even with interested Clients, it will likely take some time for the TopCare® program to yield measurable results.

 

Continental Benefits had a history of operating losses, and we may not be able to generate sufficient revenue to achieve profitability.

 

Continental Benefits has suffered significant recurring losses and negative cash flows from operations, and historically has relied on periodic contributions from HillCour for the development of its product and funding of its operating expenses. It incurred net losses of $12.5 million and $11.5 million for the year ended December 31, 2020, and 2019, respectively. It had an accumulated deficit of $56.6 million and $58.4 million as of December 31, 2020 and March 31, 2021, respectively. Compared to the year ended December 31, 2019, Continental Benefits has experienced a decrease of 9.5% in revenue, or approximately $1.9 million. There are no assurances that we can reverse the trend.

 

In September 2020, FTI Consulting, Inc. (“FTI”), a global consulting firm, was retained to assist with Continental Benefits’ organizational restructuring with a view to reduce its operating expenses and achieve break-even or near-term profitability. In November 2020, FTI recommended an organizational re-design including reducing the ratio of managers to direct reports, eliminating the Program Management Office, counseling out employees due to performance issues and cuts in claims and customer service departments to bring the operating costs more in line with industry norms, which resulted in the elimination of a total of 56 positions. FTI also recommended a number of cost-cutting measures, including rationalizing the IT processes, cancelling IT contracts that were not used, and generally optimizing IT expenditures. We believe that these measures, which were implemented on a rolling-basis through March 2021 immediately prior to the Acquisition, will save us on an annualized basis, approximately $5.5 million in headcount-related expenses and approximately $1.5 million in non-headcount-related expenses. The implementation of the restructuring and other recommendations will continue after completion of this offering and may take longer than planned. It may also cause business disruptions which may adversely affect customer satisfaction and negatively impact revenues. There can be no assurances that the organizational restructuring and cost-cutting measures, even if fully implemented, will be effective to eliminate Continental Benefits’ operating losses.

 

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We also expect that our operating costs will increase over time as we continue to invest to grow our business and build relationships with Clients, develop our platform, develop new solutions, and operate as a public company. These efforts may prove to be more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition, and results of operations would be adversely affected.

 

The audited financial statements of both Continental Benefits and Marpai for the year ended December 31, 2020 included an explanatory paragraph relating to liquidity.

 

For the year ended December 30, 2020, Marpai Health had an accumulated deficit of approximately $5.5 million and working capital deficit of approximately $469,026. Since inception, Marpai Health has relied on the issuance of convertible notes to fund its operating expenses. Its cash requirements are generally for operating activities and debt repayments. Continental Benefits has suffered recurring losses and for the year ended December 31, 2020, it has an accumulated deficit of $56.6 million. It has historically met its cash needs through cash flows from operating activities and periodic contributions from HillCour. For the year ended December 30, 2020 and 2019, HillCour contributed to Continental Benefits approximately $8.8 million and $9.3 million, respectively. In March 2021, in connection with the audit of Marpai Health and Continental Benefits, HillCour gave a support letter (the “March Support Letters”) to each of (i) Marpai Health, agreeing to provide Marpai Health capital to fund its operating expenses until April 2022 if the Company is unable to complete this offering, or secure enough funding or revenue to fund Marpai Health’s operations, which was projected at the time to be approximately between $3.5 million and $4.5 million, and (ii) Continental Benefits, agreeing to provide Continental Benefits capital to fund its operations through April 30, 2022, which was projected at the time to be between $6.5 million and $8.0 million. In May 2021, the two March Support Letters were superseded by a HillCour letter (“May Support Letter”) which provides that if Marpai, Inc. fails to (i) complete this offering, (ii) raise sufficient capital through private rounds of financings, or (iii) secure sufficient operating cash to fund its operating expenses, HillCour, subject to such further conditions, and in a form to be mutually determined, will provide Marpai, Inc. funding and financial support necessary to pay for its operating expenses so Marpai, Inc. is able to continue to operate in its normal course of business through July 31, 2022. At the time the May Support Letter was executed, Marpai, Inc.’s un-funded operating expenses through July 31, 2022 was estimated to be between $8 million and $10 million. However, we do not know at this time under what terms the funding will be provided, or if the funding actually needed will exceed the maximum amount of the un-funded operating expenses projected at the time. If sales and profitability do not improve, the cash balances and cash generated from operations may not be sufficient to fund operations after December 31, 2021 without the proceeds from this offering. However, with the anticipated revenues generated from operations and the proceeds from this offering, we expect that we will have sufficient cash to fund operations through the next twelve months.

 

We will continue to seek to raise additional working capital through public equity, private equity or debt financings. If we fail to raise additional working capital, or do so on commercially unfavorable terms, it would materially and adversely affect our business, prospects, financial condition and results of operations, and we may be unable to continue as a going concern. Future reports from our independent registered public accounting firm may also contain statements expressing substantial doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms, if at all.

 

Continental Benefits has a high annual customer attrition rate historically. The loss, termination, or renegotiation of any contract with Continental Benefits’ current Clients could have a material adverse effect on our financial conditions and operating results.

 

Continental Benefits’ largest two Clients collectively represented approximately 9.2% and 8.3% of its total gross revenue in 2020 and 2019, respectively. For the twelve months ended December 31, 2020 and 2019, its customer attrition rates were approximately 33.8% and 24.2%, respectively. We believe many Clients left due to poor customer service. Although we believe many root causes driving customer attrition have been identified, remedial actions are still in process, and not all of them will be fully implemented in the first six months of 2021. If we fail to reverse the upward trend of Continental’s customer attrition rate, our future revenue growth will suffer, and we may encounter difficulty in recruiting new clients due to erosion of customer confidence. Some Clients with renewal dates during the summer of 2021 may opt to leave as they may have had a sub-optimal experience pre-acquisition. If this happens, our revenue will decrease and our results of operations will be adversely affected. Besides, there can be no assurances that all Clients will like the cost-cutting measures taken as part of Continental Benefits’ corporate restructuring efforts. If Continental Benefits’ existing Clients do not continue or renew their contracts with us or decide to renew at lower fee levels or decline to purchase additional products and services from us, it could have a material adverse effect on our business, financial condition, and results of operations. The loss, termination, or renegotiation of any contract with Continental Benefits’ current Clients could have a material adverse effect on our financial condition and operating results.

 

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Continental Benefits is party to a number of disputes and lawsuits, and we may be subject to liabilities arisen from these and similar disputes in the future.

 

In the normal course of the claims administration services business, we expect to be named from time to time as a defendant in lawsuits by the insureds or claimants contesting decisions by us or our Clients with respect to the settlement of their healthcare claims. Continental Benefits’ Clients have brought claims for indemnification on the basis of alleged actions on its part or on the part of its agents or employees in rendering services to Clients. We are subject to a number of disputes and lawsuits of which Continental Benefits is currently a subject. Any future lawsuits against us can be disruptive to our business. The defense of the lawsuits will be time-consuming and require attention of our senior management and financial resources, and there can be no assurances that the resolution of any such litigation will not have a material adverse effect on our business, financial condition and results of operations. See section titled, “Business - Legal Proceedings.”

 

Even though pursuant to the Purchase and Reorganization Agreement, WellEnterprises USA, LLC, has agreed to assume all liabilities of Continental Benefits that relate to benefits claims in excess of $50,000 or that have been outstanding in excess of 180 days, in each case as of April 1, 2021, Continental Benefits will ultimately be responsible for any damages that may arise from these lawsuits. To the extent that WellEnterprises USA, LLC is unable or unwilling to satisfy any such liabilities, we will be required to do so. One of our directors, Mr. Damien Lamendola is the majority shareholder of HillCour Holding Corporation, which owns HillCour.

 

Pursuant to the Purchase and Reorganization Agreement, $500,000 was deposited into an escrow account on April 30, 2021 to indemnify parties for fraud, breach of any representation or warranty, breach or non-performance of any post-closing covenant or agreement. However, there can be no assurances that future lawsuits may not arise. If we are exposed to liabilities in excess of the amount held in escrow, our financial condition can be materially adversely affected. See section titled “Business – Marpai, Inc.’s Acquisition of Marpai Health and Continental Benefits” below.

 

Continental Benefits may be subject to penalties from the Internal Revenue Service.

 

In September 2020, Continental Benefits received Notice 972CGs from the IRS regarding certain tax penalties related to prior year 1099 tax filings. Based on the opinion of Continental Benefits’ counsel, although Continental Benefits is in the process of appealing, the full amount of penalties and interest of $1,532,185 has been accrued as of December 31, 2020. The penalties were a result of Continental Benefits’ failure to list accurate taxpayer identification numbers for certain of its contractors. Continental Benefits disputed these assessments. The Company recently received a letter dated March 8, 2021 from the IRS that granted a $678,780 waiver for the full amount of the 1099 penalties the tax year 2018. In June 2021, the Company received written confirmation from the IRS that all outstanding penalties have been waived and that nothing is due to the IRS from the Company. The Company has not reversed the accrual as of March 31, 2021.

 

Even though under the Purchase and Reorganization Agreement, WellEnterprises, LLC has agreed to assume all Continental Benefits’ liabilities related to tax matters based upon facts and circumstances that occurred prior to the closing of the Acquisition, Continental Benefits shall ultimately be responsible for any damages that may arise from the Notice 972CG, as well as any other penalties the IRS may assess. To the extent that WellEnterprises, LLC is unable or unwilling to satisfy any such liabilities, we will be required to do so. See section titled, “Business – Legal Proceedings.”

 

 

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Our success will largely depend on our ability to integrate Marpai Health and Continental Benefits, and effectively manage the combined company.

 

Although Marpai Health and Continental Benefits have been working together on product design and development since the beginning of 2020, they have not operated as a combined company before April 1, 2021. We have no combined corporate culture or institutional knowledge prior to April 1, 2021. There are significant risks associated with our ability to integrate successfully the two companies and effectively manage the combined business. For instance, we are required to onboard most of Continental Benefits’ 105 employees and contractors, and adopt and implement new benefits programs for all of them. Setting up programs and processes as such can distract management from other business operations of the combined company. We must maintain active TPA licenses in all states that are not expressly exempt from requiring a TPA license where we conduct business.

 

We also may not achieve the anticipated benefits from the Acquisition due to a number of factors, including, but not limited to:

 

  inability to integrate or benefit from the technologies or services in a profitable manner;
     
  unanticipated costs or liabilities associated with the Acquisition;
     
  difficulty integrating the two companies’ accounting systems, operations, and personnel;
     
  difficulties and additional expenses associated with supporting Continental Benefits’ legacy technology platform and hosting infrastructure;
     
  difficulty converting Continental Benefits’ existing Clients onto our combined platform and contract terms; and
     
  failure to create one highly functioning corporate culture.

 

Because we lack an operating history as a combined company, you have no basis upon which to evaluate our ability to execute our business plan and strategies in an evolving industry. If our business prospects fail to materialize, we may never generate any operating revenues.

 

If our TopCare® program fails to provide accurate and timely predictions, or if it is associated with wasteful visits to Providers or unhelpful recommendations for Members, then this could lead to low customer satisfaction, which could adversely affect our results of operations.

 

When our A.I. models make a prediction, we advise the Member to reach out to his or her primary care physician or make suggestions to the Member on the best providers in the area via our TopCare® program since we do not provide medical prognosis. However, Members may not follow our advice or accept our suggestions. We believe that not taking our recommendations will lead to higher claims costs to our Clients. If claim costs remain the same or are not lower than those before we were hired, our Clients may be dissatisfied with our services, terminate or refuse to renew contracts with us.

 

In addition, our A.I. models may not always work as planned, and the predictions could have many false positives. These errors may lead to wasteful visits to the Providers, Clients’ dissatisfaction and attrition, which may lead to loss of revenue. Our economic models assume that the costs stemming from these false positives is a small fraction of the total savings that may be achieved by preventing or better managing chronic conditions and steering Members who will have high-cost medical procedures to high-quality, lower cost providers. This assumption, however, has yet to be proven. To date, we have no actual case data to support this assumption.

 

Issues in the use of A.I., including deep learning in our platform and modules could result in reputational harm or liability.

 

As with many developing technologies, A.I. presents risks and challenges that could affect its further development, adoption, and use, and therefore our business. A.I. algorithms may be flawed. Datasets may be insufficient, of poor quality, or contain biased information. Inappropriate or controversial data practices by data scientists, engineers, and end-users of our systems could impair the acceptance of A.I. solutions. If the recommendations, forecasts, or analyses that A.I. applications assist in producing are deficient or inaccurate, we could be subjected to competitive harm, potential legal liability, and brand or reputational harm. Some A.I. scenarios could present ethical issues. If we enable or offer A.I. solutions that are controversial because of their purported or real impact on human rights, privacy, employment, or other social issues, we may experience brand or reputational harm.

 

35

 

 

If the markets for our A.I. modules and TopCare® program fail to grow as we expect, or if self–insured employers fail to adopt our TopCare® program and A.I. modules, our business, operating results, and financial condition could be adversely affected.

 

It is difficult to predict self-insured employer adoption rates and demand for our A.I. modules and TopCare® program, the entry of competitive platforms, or the future growth rate and size of the healthcare technology and TPA markets. We expect that a significant portion of our revenue will come from our A.I. modules with deep learning functionality and predictive algorithms and our TopCare® program. Although demand for healthcare technology, deep learning (an advanced form of A.I.), and data analytics platforms and A.I. applications has grown in recent years, the market for these platforms and applications continues to evolve. There can be no assurances that this market will continue to grow or, even if it does grow, that Clients will choose our A.I. modules, TopCare® program, or platform. Our future success will depend largely on our ability to penetrate the existing market for healthcare technology driven by TPAs, as well as the continued growth and expansion of what we believe to be an emerging market for healthcare administration focused on A.I. platforms and applications that are faster, easier to adopt, and easier to use.

 

Our ability to penetrate the TPA market depends on a number of factors, including the cost, performance, and perceived value associated with our A.I. modules, as well as Clients’ willingness to adopt a different approach to data analysis. We plan to spend considerable resources to educate Clients about digital transformation, A.I., and deep learning in general and our A.I. modules in particular. However, there can be no assurances that these expenditures will help our A.I. modules and TopCare® program achieve widespread market acceptance. Furthermore, prospective Clients may have made significant investments in legacy healthcare analytics software systems and may be unwilling to invest in new platforms and applications. If the market fails to grow or grows more slowly than we currently expect or self-insured employers fail to adopt our A.I. modules and TopCare® program, our business, operating results, and financial condition could be adversely affected.

 

We operate in a highly competitive industry, and the size of our target market may not remain as large as we anticipate.

 

The market for healthcare solutions is very competitive. We compete with almost 1,000 TPAs, all of whom are vying for the same business - the management of healthcare benefits for self-insured employers. There is only one TPA at a time for every employer wanting to provide health benefits via a self-insured model, and an employer may remain with the same TPA for many years. This means that although the market is very large, not all of it is accessible by us in any one year.

 

We provide administrative services to only self-insured employers who provide healthcare benefits to their employees. These self-insured employers can always elect to abandon self-insurance and simply buy medical insurance from one of the large players such as, Aetna, Cigna, or United Healthcare. There can be no assurances that our Clients or prospective Clients will remain self-insured for any given period of time. If the number of employers which choose to self-insure declines, the size of our targeted market will shrink.

 

In addition to the very large health insurance companies, there are new players in the market such as, Collective Health, Clover Health, Bind Health Insurance and Centivo. These companies have raised hundreds of millions of dollars and have greater financial and personnel resources than we do and are pursuing a business strategy similar to ours and share our vision to use technology to transform the healthcare payer space. We believe that like us, Collective Health and Clover Health are also targeting at self-insured employers.

 

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We rely on healthcare benefits brokers and consultants as our principal sales channel, and some of these companies are large and have no allegiance to us. If we do not satisfy their employer clients, they may steer not only an unsatisfied client, but others as well, to other TPAs.

 

Brokers such as Lockton Companies, Inc., the world’s largest privately held insurance brokerage firm, are a key sales channel for us to reach the self-insured employer market. These brokers work with many insurance companies and TPAs at the same time. Brokers and consultants earn their fees by also charging employers on a per employee per month (“PEPM”) basis. As they often own the relationship with the employer, they may view our fees as competitive to how much they can earn. They may steer our Clients to another TPA if they believe doing so can maximize their own fees. If we do not deliver competitive pricing, quality customer service, and high member satisfaction, these brokers can take the business they brought us to another TPA anytime. Due to the brokers’ power to influence employer groups, the brokers play an outsized role in our industry, and may exert pressure on our pricing or influence the service levels we offer to our Clients, all of which can lead to lower price PEPM for us, or an increase in our customer service staffing and other operating costs.

 

Our pricing may change over time and our ability to efficiently price our services will affect our results of operations and our ability to attract or retain Clients.

 

Our current pricing model, like most in the industry, is based on a PEPM fee. In the future, we may change our pricing model to capture more market share. We may also enter different pricing schemes with Clients, including but not limited to shared savings. In a shared savings pricing model, we share the risk with the Client. For example, if the Clients’ claims cost is $10 million, we may estimate that we can bring that down to $9,000,000 with our service offering. Instead of charging a fixed PEPM fee, we would earn revenue from a share of the cost savings in a shared savings model. In the example above, if the share were 30% and we managed to achieve a reduction of $1 million, we would earn $300,000 as a shared savings fee.

 

Since there is no guarantee how much savings, if any, will actually be achieve, shared savings puts some of our revenue at risk. If cost savings are not achieved by many of our Clients, our revenue and results of operations will most likely suffer.

 

Our sales cycles can be long and unpredictable, and our sales efforts require a considerable investment of time and expense. If our sales cycle lengthens or we invest substantial resources pursuing unsuccessful sales opportunities, our results of operations and growth would be harmed.

 

Our sales process entails planning discussions with prospective Clients, analyzing their existing solutions and identifying how these prospective Clients can use and benefit from our services. The sales cycle for a new Client, from the time of prospect qualification to completion of the sale, may take as long as a year. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will result in the sale of our services.

 

In addition, our sales cycle and timing of sales can vary substantially from Client to Client because of various factors, including the discretionary nature of prospective Clients’ purchasing and budget decisions, the announcement or planned introduction of product and service offerings by us or our competitors, and the purchasing approval processes of prospective Clients. If our sales cycle lengthens or we invest substantial resources pursuing unsuccessful sales opportunities, our results of operations and growth would be harmed.

 

Because Continental Benefits generally recognizes technology and professional services revenue ratably over the term of the contract for our services, a significant downturn in its business may not be reflected immediately in our results of operations, which increases the difficulty of evaluating our future financial performance.

 

Continental Benefits generally recognizes technology and professional services revenue ratably over the term of a contract, which is typically one year. As a result, a substantial portion of Continental Benefits’ revenue is generated from contracts entered into during prior periods. Consequently, a decline in new contracts in any quarter may not affect our results of operations in that quarter but could reduce our revenue in future quarters. Additionally, the timing of renewals or non-renewals of a contract during any quarter may only affect our financial performance in future quarters. For example, the non-renewal of a subscription agreement late in a quarter will have minimal impact on revenue for that quarter but will reduce our revenue in future quarters. Accordingly, the effect of significant declines in sales may not be reflected in our short-term results of operations, which would make these reported results less indicative of our future financial results. By contrast, a non-renewal occurring early in a quarter may have a significant negative impact on revenue for that quarter and we may not be able to offset a decline in revenue due to non-renewal with revenue from new contracts entered into in the same quarter. In addition, we may be unable to quickly adjust our costs in response to reduced revenue.

 

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The success and growth of our business depends upon our ability to continuously innovate and develop new products and technologies.

 

Our solution is a technology-driven platform that relies on innovation to remain competitive. The process of developing new technologies and products is complex, and we develop our own A.I. and deep learning, healthcare technologies, and other tools to differentiate our platform and A.I. modules. In addition, our dedication to incorporating technological advancements into our platform requires significant financial and personnel resources and talent. Our development efforts with respect to these initiatives could distract management from current operations and could divert capital and other resources from other growth initiatives important to our business. We operate in an industry experiencing rapid technological change and frequent platform introductions. We may not be able to make technological improvements as quickly as demanded by self-insured employers and our Clients, which could harm our ability to attract new Clients and therefore, our market share. In addition, we may not be able to effectively implement new technology-driven products and services as projected.

 

If we do not have access to A.I. talent or fail to expand our A.I. models, we may not remain competitive, and our revenue and results of operations could suffer.

 

Our risks as a development stage company are compounded by our heavy dependence on emerging and sometimes unproven technologies such as A.I. and deep learning, which are characterized by extensive research efforts and rapid technological progress. If we fail to anticipate or respond adequately to technological developments, our ability to operate profitably could suffer. We cannot assure you that research and discoveries by other companies will not render our technologies or potential products or services uneconomical, or result in products superior to those we develop, or that any technologies, products or services we develop will be preferred to any existing or newly-developed technologies, products or services.

 

Our success depends on our ability to innovate and provide more tools that can help employers save healthcare claims costs while maintaining good healthcare outcomes for their employees and their families. However, access to A.I. talent, especially with respect to deep learning in healthcare, is very limited. The competition for talent is not so much from other payers in the healthcare space as it is from the big technology companies such as, Google, Amazon, and Facebook and technology start-ups. Our growth is highly dependent on our ability to access this limited pool of talent. Our Chief Science Advisor, Dr. Eli (Omid) David is a lecturer in deep learning at Bar-Ilan University in Israel and a leading researcher in A.I. We believe his university connection as well as his reputation and previous work experience with other technology companies will help attract key deep learning talent to us. However, there is no assurance that that will be enough. If the right talent pool is not readily available to us, it may impact our ability to innovate and differentiate ourselves in the market with new products and services, which could in turn adversely affect our revenue and results of operations.

 

Our product development relies heavily on access to large healthcare data sets. We have developed six A.I. modules to predict chronic conditions and high-cost medical procedures. Our ability to offer a comprehensive solution that helps employers save on healthcare claims costs is directly related to our ability to expand to other modules as well as to constantly make improvements on our existing modules. Access to certain data in healthcare in large scale can be challenging. Electronic health records, for example, are stored in myriad systems and there is no single standard for what one contains. Moreover, payers generally do not have access to electronic health records at scale, although they may have access to some limited data to support a claim. Our models currently rely heavily on claims data, which is the type of data that payers mostly have. We plan to improve our A.I. predictions by incorporating other data types in the future. However, there can be no assurances that we will be able to do so and our failure to incorporate other data types may limit our ability to compete in the market.

 

Failure by our Clients to obtain proper permissions and waivers may result in claims against us or may limit or prevent our use of data, which could harm our business.

 

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We require our Clients to provide necessary notices and to obtain necessary permissions and waivers for use and disclosure of the information that we receive, and we require contractual assurances from them that they have done so and will do so. If they do not obtain necessary permissions and waivers, then our use and disclosure of information that we receive from them or on their behalf may be restricted or prohibited by state, federal or international privacy or data protection laws, or other related privacy and data protection laws. This could impair our functions, processes, and databases that reflect, contain, or are based upon such data and may prevent the use of such data, including our ability to provide such data to third parties that are incorporated into our service offerings. Furthermore, this may cause us to breach obligations to third parties to whom we may provide such data, such as third-party service or technology providers that are incorporated into our service offerings. In addition, this could interfere with or prevent data sourcing, data analyses, or limit other data-driven activities that benefit us. Moreover, we may be subject to claims, civil and/or criminal liability or government or state attorneys general investigations for use or disclosure of information by reason of lack of valid notice, permission, or waiver. These claims, liabilities or government or state attorneys general investigations could subject us to unexpected costs and adversely affect our financial condition and results of operations.

 

If our security measures are breached or unauthorized access to client data is otherwise obtained, our product and service offerings may be perceived as not being secure, Clients may reduce the use of or stop using our services, and we may incur significant liabilities.

 

Our business involves the storage and transmission of our Members’ proprietary information, including personal or identifying information regarding members and their protected health information (“PHI”). As a result, unauthorized access or security breaches to our system or platform as a result of third-party action, employee error, malfeasance, or otherwise could result in the loss or inappropriate use of information, litigation, indemnity obligations, damage to our reputation, and other liability including but not limited to government or state Attorney General investigations. Because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until after they are launched against a target, we may not be able to anticipate these techniques or implement adequate preventative measures. Moreover, the detection, prevention, and remediation of known or unknown security vulnerabilities, including those arising from third-party hardware or software, may result in additional direct or indirect costs and management time.

 

Any or all of these issues could adversely affect our ability to attract new Clients, cause existing Clients to elect not to renew their contracts, result in reputational damage, or subject us to third-party lawsuits, regulatory fines, mandatory disclosures, or other action or liability, which could adversely affect our results of operations. Our general liability insurance may not be adequate to cover all potential claims to which we are exposed and may not be adequate to indemnify us for liability that may be imposed, or the losses associated with such events, and in any case, such insurance may not cover all of the specific costs, expenses, and losses we could incur in responding to and remediating a security breach. A security breach of another significant provider of cloud-based solutions may also negatively impact the demand for our product and service offerings.

 

If we are not able to enhance our reputation and brand recognition, we may not be able to execute our business strategy as planned.

 

We believe that enhancing our reputation and brand recognition is critical to maintaining our relationships with Continental Benefits’ existing Clients and to our ability to attract new Clients. The promotion of our Marpai brand may require us to make substantial investments and we anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and expensive. Our marketing activities may not be successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur and our results of operations could be harmed. In addition, any factor that diminishes our reputation or that of our management, including failing to meet the expectations of our Clients, or any adverse publicity surrounding one of our investors or Clients, could make it substantially more difficult for us to attract new Clients. If we do not successfully enhance our reputation and brand recognition, our business may not grow and we could lose our relationships with Continental Benefits’ existing clients, which would harm our business, results of operations, and financial condition.

 

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We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could have an adverse effect on our business, financial condition, and results of operations.

 

We may seek to acquire or invest in businesses, applications, and services, or technologies that we believe could complement or expand our product and service offerings, enhance our A.I. capabilities, or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. We may have difficulty integrating other technologies, other team members, or selling our TopCare® program to acquired Clients and we may not be able to achieve the intended benefits from any such acquisition.

 

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could adversely affect our results of operations.

 

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations. In addition, if an acquired business fails to meet our expectations, our business, financial condition, and results of operations may suffer.

 

Global or regional health pandemics or epidemics, including COVID-19, could negatively impact our business operations, financial performance and results of operations.

 

Our business and financial results could be negatively impacted by the recent outbreak of COVID-19 or other pandemics or epidemics. The severity, magnitude and duration of the current COVID-19 pandemic is uncertain, rapidly changing and hard to predict. During 2020, COVID-19 has significantly impacted economic activity and markets around the world, and it could negatively impact our business in numerous ways, including but not limited to those outlined below:

 

●          the number of employers who will choose to self-insure or remain to be self-insured may decline;

 

●          Clients and prospective Clients may be less willing to pay the added fees for our TopCare® program due to significant capital constraints as a result of COVID-19 and the macro-economic environment;

 

●          Clients may have difficulty gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us;

 

●          disruptions or uncertainties related to the COVID-19 outbreak for a sustained period of time could result in delays or modifications to our strategic plans and initiatives and hinder our ability to achieve our business objectives.

 

●          illness, travel restrictions or workforce disruptions could negatively affect our business processes.

 

●          government or regulatory responses to pandemics could negatively impact our business. Mandatory lockdowns or other restrictions could materially adversely impact our operations and results.

 

●          the COVID-19 outbreak has increased volatility and pricing in the capital markets and volatility is likely to continue which could have a material adverse effect on our ability to obtain debt or equity financing to fund operations. Economic uncertainties or downturns in the general economy or the healthcare industry in general could disproportionately affect the demand for our product and service offerings and materially adversely affect our results of operations.

 

The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by COVID-19, and the duration of such impact, may be difficult to assess or predict, the widespread pandemic has resulted in significant disruption of global financial markets, which could reduce our ability to access capital and negatively affect our future liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 and related government orders and restrictions could materially affect our business and the value of our Class A common stock. The COVID-19 pandemic continues to evolve rapidly. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems, or the global economy as a whole.

 

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These and other impacts of the COVID-19 or other global or regional health pandemics or epidemics could have the effect of heightening many of the other risks described in this “Risk Factors” section. We might not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. The ultimate impact of these disruptions also depends on events beyond our knowledge or control, including the duration and severity of any outbreak and actions taken by parties other than us to respond to them. Any of these disruptions could have a negative impact on our business operations, financial performance and results of operations, which impact could be material.

 

Risks Related to Managing Our Research and Development Operations in Israel

 

Potential political, economic and military instability in the State of Israel, where our research and development facilities are located, may adversely affect our results of operations.

 

Our executive office, where we conduct primarily all of our research and development activities, is located in Israel. Many of our software and A.I. engineers are residents of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our business and operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, Hamas (an Islamist militia and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon). Any hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our operations and results of operations and could make it more difficult for us to raise capital. To date, Israel faces political tension with respect to its relationships with Turkey, Iran and other Arab neighbor countries. In addition, recent political uprisings and social unrest in various countries in the Middle East and North Africa are affecting the political stability of those countries. This instability may lead to deterioration of the political relationships that exist between Israel and these countries and have raised concerns regarding security in the region and the potential for armed conflict. In Syria, a country bordering Israel, a civil war is taking place. In addition, there are concerns that Iran, which has previously threatened to attack Israel, may step up its efforts to achieve nuclear capability. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon, as well as a growing presence in Syria. Additionally, the Islamic State of Iraq and Levant, or ISIL, a violent jihadist group whose stated purpose is to take control of the Middle East, remains active. The tension between Israel and Iran and/or these groups may escalate in the future and turn violent. Any potential future conflict could also include missile strikes against parts of Israel, including our offices. Political events in Israel may significantly affect our business, assets or operations. On Israel’s domestic front, there is currently a level of unprecedented political instability, as evidenced by Israel’s fourth general election in two years which took place in March 2021. The Israeli Parliament, or the Knesset, has not approved a budget since 2019, and certain government ministries are without necessary resources and may not receive sufficient funding moving forward. Social unrest, acts of terrorism, regime changes, changes in laws and regulations, political upheaval, and policy changes or enactments could negatively impact our business. Any armed conflicts, terrorist activities or political instability in the region could adversely affect our research and development activities, ability to innovate, and results of operations.

 

The relationship between the United States and Israel could be subject to sudden fluctuation and periodic tension particularly in light of the change in the U.S. administration following the 2020 Presidential election. Changes in political conditions in Israel and changes in the state of U.S. relations with Israel are difficult to predict and could adversely affect our operations or cause potential target businesses or their goods and services to become less attractive.

 

Parties with whom we do business may be disinclined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.

 

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Our insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East or for any resulting disruption in our operations. Although the Israeli government has in the past covered the reinstatement value of direct damages that were caused by terrorist attacks or acts of war, we cannot be assured that this government coverage will be maintained or, if maintained, will be sufficient to compensate us fully for damages incurred and the government may cease providing such coverage or the coverage might not suffice to cover potential damages. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts, political instability, terrorism, cyberattacks or any other hostilities involving or threatening Israel would likely negatively affect business conditions generally and could harm our results of operations.

 

Our operations may be disrupted as a result of the obligation of Israeli citizens to perform military service.

 

Many Israeli citizens are obligated to perform one month, and in some cases more, of annual military reserve duty until they reach the age of 45 (or older, for reservists with certain occupations) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Any major escalation in hostilities in the region could result in a portion of our employees and service providers being called up to perform military duty for an extended period of time. Our operations could be disrupted by such call-ups. Such disruption could materially adversely affect our business, financial condition and results of operations.

 

Because a certain portion of our expenses is incurred in currencies other than the US Dollar, our results of operations may be harmed by currency fluctuations and inflation.

 

Our reporting and functional currency is the U.S. Dollar, but a portion of our operations expenses are denominated in the New Israeli Shekel (“NIS”) — ____41% or $1.4 million, in 2020. As a result, we are exposed to some currency fluctuation risks, largely derived from our current and future engagements for payroll and lease obligations in Israel. Fluctuation in the exchange rates of foreign currency has an influence on the cost of goods sold and our operating expenses. For instance, from the time Marpai Health was formed to now, the NIS has increased in value relative to U.S. dollars by over 12%, resulting in a significant increase in our operating expense. We may, in the future, decide to enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the currencies mentioned above in relation to the US Dollar. These measures, however, may not adequately protect us from adverse effects.

 

There are costs and difficulties inherent in managing cross-border business operations.

 

Managing a business, operations, personnel or assets in another country is challenging and costly. Any management that we may have (whether based abroad or in the United States) may be inexperienced in cross-border business practices and unaware of significant differences in accounting rules, legal regimes and labor practices. Even with a seasoned and experienced management team, the costs and difficulties inherent in managing cross-border business operations, personnel and assets can be significant (and much higher than in a purely domestic business) and may negatively impact our financial and operational performance.

 

Employment and other material contracts we have with our Israeli employees are governed by Israeli laws. Our inability to enforce or obtain a remedy under these agreements could adversely affect our business and financial condition.

 

All employees were asked to sign employment agreements that contain confidentiality, non-compete and assignment of intellectual property provisions. The employment agreements between EYME and its employees in Israel are governed by Israeli laws. The system of laws and the enforcement of existing laws and contracts in Israel may not be as certain in implementation and interpretation as in the United States, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Our inability to enforce or obtain a remedy under any of these or future agreements could adversely affect our business and financial condition. Delay with respect to the enforcement of particular rules and regulations, including those relating to intellectual property, customs, tax, and labor, could also cause serious disruption to operations abroad and negatively impact our results.

 

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Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished.

 

Pursuant to Israel’s Severance Pay Law, Israeli employees are entitled to severance pay equal to one month’s salary for each year of employment, or a portion thereof. All of the employees of EYME elected to be included under section 14 of the Severance Pay Law, 1963 (“Section 14”) pursuant to which these employees are entitled only to monthly deposits, at a rate of 8.33% of their monthly salary, made in their name with insurance companies. Total expenses related to severance pay amounted to approximately $80,000 for the year ended December 31, 2020.

 

Investors may have difficulties enforcing a U.S. judgment, including judgments based upon the civil liability provisions of the U.S. federal securities laws against one of our directors or asserting U.S. securities laws claims in Israel.

 

One director of ours is not a U.S. citizen and many of our intellectual property assets are located outside the United States. Service of process upon one of our directors and enforcement of judgments obtained in the United States against one of our directors may be difficult to obtain within the United States. We have been informed by our legal counsel in Israel that it may be difficult to assert claims under U.S. securities laws in original actions instituted in Israel or obtain a judgment based on the civil liability provisions of U.S. federal securities laws. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws against a director of ours because Israel may not be the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above. Israeli courts might not enforce judgments rendered outside Israel, which may make it difficult to collect on judgments rendered against one of our directors.

 

Moreover, among other reasons, including but not limited to, fraud, a lack of due process, a judgment which is at variance with another judgment that was given in the same matter and if a suit in the same matter between the same parties was pending before a court or tribunal in Israel, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of Israel.

 

Unanticipated changes in our effective tax rate and additional tax liabilities, including as a result of our international operations or implementation of new tax rules, could harm our future results.

 

We are subject to income taxes in the United States and Israel. Our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions and complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Tax rates in the jurisdictions in which we operate may change as a result of factors outside of our control or relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. In addition, changes in tax and trade laws, treaties or regulations, or their interpretation or enforcement, have become more unpredictable and may become more stringent, which could materially adversely affect our tax position.

 

Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual effective tax rate. Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses, the valuation of deferred tax assets and liabilities, adjustments to income taxes upon finalization of tax returns, changes in available tax attributes, decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes, and changes in federal, state, or international tax laws and accounting principles.

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Finally, we may be subject to income tax audits throughout the world. An adverse resolution of one or more uncertain tax positions in any period could have a material impact on our results of operations or financial condition for that period.

 

Risks Related to Protecting Our Technology and Intellectual Property

 

We rely on third-party providers, including Amazon Web Services, for computing infrastructure, network connectivity, and other technology-related services needed to deliver our service offerings. Any disruption in the services provided by such third-party providers could adversely affect our business and subject us to liability.

 

Our TopCare® program is hosted from and use computing infrastructure provided by third parties, including Amazon Web Services, and other computing infrastructure service providers. Our computing infrastructure service providers have no obligation to renew their agreements with us on commercially reasonable terms or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our computing infrastructure service providers is acquired, we may be required to transition to a new provider and we may incur significant costs and possible service interruption in connection with doing so.

 

Problems faced by our computing infrastructure service providers, including those operated by Amazon Web Services, could adversely affect the experience of our Clients. Amazon Web Services has also had and may in the future experience significant service outages. Additionally, if our computing infrastructure service providers are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. For example, a rapid expansion of our business could affect our service levels or cause our third-party hosted systems to fail. Our agreements with third-party computing infrastructure service providers may not entitle us to service level credits that correspond with those we offer to our Clients.

 

Any changes in third-party service levels at our computing infrastructure service providers, or any related disruptions or performance problems with our product and service offering, could adversely affect our reputation and may damage our clients’ stored files, result in lengthy interruptions in our services, or result in potential losses of client data. Interruptions in our services might reduce our revenue, cause us to issue refunds to clients for prepaid and unused subscriptions, subject us to service level credit claims and potential liability, allow our clients to terminate their contracts with us, or adversely affect our renewal rates.

 

We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties, and our own systems for providing services to our users, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation, potentially require us to issue credits to our Clients, and negatively impact our relationships with Members or Clients, adversely affecting our brand and our business.

 

In addition to the services we provide from our offices, we serve our Clients primarily from third-party data-hosting facilities. These facilities are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures, and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism, and similar misconduct. Their systems and servers could also be subject to hacking, spamming, ransomware, computer viruses or other malicious software, denial of service attacks, service disruptions, including the inability to process certain transactions, phishing attacks and unauthorized access attempts, including third parties gaining access to Members’ accounts using stolen or inferred credentials or other means, and may use such access to prevent use of Members’ accounts. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice, or other unanticipated problems at two or more of the facilities could result in lengthy interruptions in our services. Even with our disaster recovery arrangements, our services could be interrupted.

 

Our ability to deliver our Internet- and telecommunications-based services is dependent on the development and maintenance of the infrastructure of the Internet and other telecommunications services by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, and security for providing reliable Internet access and services and reliable mobile device, telephone, facsimile, and pager systems, all at a predictable and reasonable cost. We have experienced and expect that we will experience interruptions and delays in services and availability from time to time.

 

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We rely on internal systems as well as third-party vendors, including data center, bandwidth, and telecommunications equipment or service providers, to provide our services. We do not maintain redundant systems or facilities for some of these services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our relationship with users or clients. To operate without interruption, both we and our service providers must guard against:

 

damage from fire, power loss, and other natural disasters;
communications failures;
security breaches, computer viruses, ransomware, and similar disruptive problems; and
other potential interruptions.

 

Any disruption in the network access, telecommunications, or co-location services provided by these third-party providers or any failure of or by these third-party providers or our own systems to handle the current or higher volume of use could significantly harm our business. We exercise limited control over these third-party vendors, which increases our vulnerability to problems with the services they provide.

 

Any errors, failures, interruptions, or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with users and clients, adversely affect our brands and business, and expose us to third-party liabilities. The insurance coverage under our policies may not be adequate to compensate us for all losses that may occur. In addition, we cannot provide assurance that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.

 

The reliability and performance of the Internet may be harmed by increased usage or by denial-of-service attacks. The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the availability of the Internet to us for delivery of our Internet-based services.

 

We typically provide service level commitments under our client contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face contract terminations, which could adversely affect our results of operations.

 

Finally, recent changes in law could impact the cost and availability of necessary Internet infrastructure. Increased costs and/or decreased availability would negatively affect our results of operations.

 

We employ third-party licensed software and software components for use in or with our TopCare® program, and the inability to maintain these licenses or the presence of errors in the software we license could limit the functionality of our TopCare® program and result in increased costs or reduced service levels, which would adversely affect our business.

 

Our software applications might incorporate or interact with certain third-party software and software components (other than open-source software), such as claims processing software, obtained under licenses from other companies. We pay these third parties a license fee or royalty payment. We anticipate that we will continue to use such third-party software in the future.

 

Although we believe that there are commercially reasonable alternatives to the third-party software we currently make available, this may not always be the case, or it may be difficult or costly to replace. Furthermore, these third parties may increase the price for licensing their software, which could negatively impact our results of operations. Our use of additional or alternative third-party software could require clients to enter into license agreements with third parties. In addition, if the third-party software we make available has errors or otherwise malfunctions, or if the third-party terminates its agreement with us, the functionality of our TopCare® program may be negatively impacted and our business may suffer.

 

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Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

 

Our success and ability to compete depend largely upon our intellectual property. To date, we have three patent applications pending in the U.S. We take reasonable steps to protect our intellectual property, especially when working with third parties. However, the steps we take to protect our intellectual property rights may be inadequate. For example, other parties, including our competitors, may independently develop similar technology, duplicate our services, or design around our intellectual property and, in such cases, we may not be able to assert our intellectual property rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our confidential information, and we may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.

 

We make business decisions about when to seek patent protection for a particular technology and when to rely upon trade secret protection, and the approach we select may ultimately prove to be inadequate. Even in cases where we seek patent protection, there is no assurance that the resulting patents will effectively protect every significant feature of our model, technology, or proprietary information, or provide us with any competitive advantages. Moreover, we cannot guarantee that any of our pending patent application will issue or be approved. The United States Patent and Trademark Office and various foreign governmental patent agencies also require compliance with a number of procedural, documentary, fee payment, and other similar provisions during the patent application process and after a patent has issued. There are situations in which noncompliance can result in abandonment or lapse of the patent, or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If this occurs, our competitors might be able to enter the market, which would have a material adverse effect on our business. Effective trademark, copyright, patent, and trade secret protection may not be available in every country in which we conduct business. Further, intellectual property law, including statutory and case law, particularly in the United States, is constantly developing, and any changes in the law could make it harder for us to enforce our rights.

 

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our Class A common stock. Negative publicity related to a decision by us to initiate such enforcement actions against a client or former client, regardless of its accuracy, may adversely impact our other client relationships or prospective client relationships, harm our brand and business, and could cause the market price of our Class A common stock to decline. Our failure to secure, protect, and enforce our intellectual property rights could adversely affect our brand and our business.

 

We may not be able to adequately defend against piracy of intellectual property in foreign jurisdictions.

 

Considerable research in A.I. is being performed in countries outside of the United States, and a number of potential competitors are located in these countries. The laws protecting intellectual property in some of those countries may not provide adequate protection to prevent our competitors from misappropriating our intellectual property. Several of these potential competitors may be further along in the process of product development and also operate large, company-funded research and development programs. As a result, our competitors may develop more competitive or affordable products, or achieve earlier patent protection or product commercialization than we are able to achieve. Competitive products may render any products or product candidates that we develop obsolete.

 

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We may be sued by third parties for alleged infringement of their proprietary rights or misappropriation of intellectual property.

 

There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, including so-called non-practicing entities (“NPEs”), may own or claim to own intellectual property relating to our TopCare® program. Not all employees and contractors of Continental Benefits have signed non-compete and non-disclosure agreements with the Company. From time to time, third parties may claim that we are infringing upon their intellectual property rights or that we have misappropriated their intellectual property. For example, in some cases, very broad patents are granted that may be interpreted as covering a wide field of healthcare data storage and analytics solutions or machine learning and predictive modeling methods in healthcare. As competition in our market grows, the possibility of patent infringement, trademark infringement, and other intellectual property claims against us increases. In the future, we expect others to claim that our TopCare® program and underlying technology infringe or violate their intellectual property rights. In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents. However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof. We may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Because patent applications can take years to issue and are often afforded confidentiality for some period of time there may currently be pending applications, unknown to us, that later result in issued patents that could cover one or more aspects of our technology and services. Any claims or litigation could cause us to incur significant expenses and, whether or not successfully asserted against us, could require that we pay substantial damages, ongoing royalty or license payments, or settlement fees, prevent us from offering our TopCare® program or using certain technologies, require us to re-engineer all or a portion of our platform, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our clients or business partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications, or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

 

Our TopCare® program utilizes open-source software, and any failure to comply with the terms of one or more of these open-source licenses could adversely affect our business.

 

We use software modules licensed to us by third-party authors under “open-source” licenses in our TopCare® program. Some open-source licenses contain affirmative obligations or restrictive terms that could adversely impact our business, such as restrictions on commercialization or obligations to make available modified or derivative works of certain open-source code. If we were to combine our proprietary software with certain open-source software subject to these licenses in a certain manner, we could, under certain open-source licenses, be required to release or otherwise make available the source code to our proprietary software to the public. This would allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of sales for us.

 

Although we employ practices designed to manage our compliance with open-source licenses and protect our proprietary source code, we may inadvertently use open-source software in a manner we do not intend and that could expose us to claims for breach of contract and intellectual property infringement. If we are held to have breached the terms of an open-source software license, we could be required to, among other things, seek licenses from third parties to continue offering our products on terms that are not economically feasible, pay damages to third parties, to re-engineer our products, to discontinue the sale of our products if re-engineering cannot be accomplished on a timely basis, or to make generally available, in source code form, a portion of our proprietary code, any of which could adversely affect our business, results of operations, and financial condition. The terms of many open-source licenses have not been interpreted by U.S. courts, and, as a result, there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our TopCare® program.

 

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Risks Related to Conducting our Business Under a Complex and Evolving Set of Governmental Regulations

 

Government regulation of healthcare creates risks and challenges with respect to our compliance efforts and our business strategies.

 

The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory, and other influences. Existing and new laws and regulations affecting the healthcare industry, or changes to existing laws and regulations, including the potential amendment or repeal of all or parts of the Affordable Care Act (“ACA”), including the effects of court challenges or additional changes to its implementation, the possible enactment of additional federal or state health care reforms and possible changes to other federal, state or local laws or regulations affecting the health care industry, including expanding government-funded healthcare insurance options or implementing a single-payer proposal (often referred to as “Medicare for All”), and also including any such laws or governmental regulations which are adopted in response to the COVID-19 pandemic, could create unexpected liabilities for us, cause us to incur additional costs, and restrict our operations. Reforming the healthcare industry has been a priority for U.S. politicians, and key members of the legislative and executive branches have proposed a wide variety of potential changes and policy goals. Certain changes to laws impacting our industry, or perceived intentions to do so, could affect our business and results of operations.

 

Many healthcare laws are complex, and their application to specific services and relationships may not be clear. In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the data analytics and improvement services that we provide, and these laws and regulations may be applied to our product and service offerings in ways that we do not anticipate, particularly as we develop and release new and more sophisticated solutions. Our failure to accurately anticipate the application of these laws and regulations, or our other failure to comply with them, could create significant liability for us, result in adverse publicity, and negatively affect our business. Some of the risks we face from healthcare regulation are described below:

 

False Claims Laws. There are numerous federal and state laws that prohibit submission of false information, or the failure to disclose information, in connection with submission and payment of physician claims for reimbursement. For example, the federal civil False Claims Act prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, to the U.S. federal government, claims for payment or approval that are false or fraudulent, or knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim. In addition, the government may assert that a claim including items and services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act. If our advisory services to clients are associated with action by clients that is determined or alleged to be in violation of these laws and regulations, it is possible that an enforcement agency would also try to hold us accountable. Any determination by a court or regulatory agency that we have violated these laws could subject us to significant civil or criminal penalties, invalidate all or portions of some of our client contracts, require us to change or terminate some portions of our business, require us to refund portions of our services fees, subject us to additional reporting requirements and oversight under a corporate integrity agreement or similar agreement to resolve allegations of noncompliance with these laws, cause us to be disqualified from serving clients doing business with government payors, and have an adverse effect on our business. Our Clients’ failure to comply with these laws and regulations in connection with our services could result in substantial liability (including, but not limited to, criminal liability), adversely affect demand for our services, and force us to expend significant capital, research and development, and other resources to address the failure.

 

Health Data Privacy Laws. There are numerous federal and state laws related to health information privacy. In particular, the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”) and their implementing regulations, which we collectively refer to as “HIPAA,” include privacy standards that protect individual privacy by limiting the uses and disclosures of PHI and implementing data security standards that require covered entities to implement administrative, physical, and technological safeguards to ensure the confidentiality, integrity, availability, and security of PHI in electronic form. HIPAA also specifies formats that must be used in certain electronic transactions, such as admission and discharge messages and limits the fees that may be charged for certain transactions, including claim payment transactions. By processing and maintaining PHI on behalf of our covered entity clients, we are a HIPAA business associate and mandated by HIPAA to enter into written agreements with our covered entity clients – known as Business Associate Agreements (“BAAs”) – that require us to safeguard PHI. BAAs typically include:

 

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  a description of our permitted uses of PHI;
  a covenant not to disclose that information except as permitted under the BAA and to require that our subcontractors, if any, are subject to the substantially similar restrictions;
  assurances that reasonable and appropriate administrative, physical, and technical safeguards are in place to prevent misuse of PHI;
  an obligation to report to our client any use or disclosure of PHI other than as provided for in the BAA;
  a prohibition against our use or disclosure of PHI if a similar use or disclosure by our client would violate the HIPAA standards;
  the ability of our clients to terminate the underlying support agreement if we breach a material term of the BAA and are unable to cure the breach;
  the requirement to return or destroy all PHI at the end of our services agreement; and
  access by the Department of Health and Human Services (“HHS”) to our internal practices, books, and records to validate that we are safeguarding PHI.

 

In addition, we are also required to maintain BAAs, which contain similar provisions, with our subcontractors that access or otherwise process PHI on our behalf.

 

We may not be able to adequately address the business risks created by HIPAA implementation. Furthermore, we are unable to predict what changes to HIPAA or other laws or regulations might be made in the future or how those changes could affect our business or the costs of compliance. For example, in 2018, the HHS Office for Civil Rights published a Request for Information in the Federal Register seeking comments on a number of areas in which HHS is considering making both minor and significant modifications to the HIPAA privacy and security standards to, among other things, improve care coordination. We are unable to predict what, if any, impact the changes in such standards will have on our compliance costs or our product and service offerings.

 

We will also require large sets of de-identified information to enable us to continue to develop A.I. algorithms that enhance our product and service offerings. If we are unable to secure these rights in Client BAAs or as a result of any future changes to HIPAA or other applicable laws, we may face limitations on the use of PHI and our ability to use de-identified information that could negatively affect the scope of our product and service offering as well as impair our ability to provide upgrades and enhancements to our services.

 

We outsource important aspects of the storage and transmission of client and member information, and thus rely on third parties to manage functions that have material cyber-security risks. We attempt to address these risks by requiring outsourcing subcontractors who handle client information to sign BAAs contractually requiring those subcontractors to adequately safeguard PHI in a similar manner that applies to us and in some cases by requiring such outsourcing subcontractors to undergo third-party security examinations as well as to protect the confidentiality of other sensitive client information. In addition, we periodically hire third-party security experts to assess and test our security measures. However, we cannot be assured that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of client proprietary information and PHI.

 

Centers for Medicare & Medicaid Services (“CMS”) takes the position that an electronic fund transfer (“EFT”) payment to a health care provider is a “standard transaction” under HIPAA. As a “standard transaction”, these provider payments may be subject to certain limitations on the fees that may be charged for an EFT payment transaction with a health care provider. We outsource important aspects of our EFT payments to health care providers and thus rely on third parties to manage the EFT transactions and assure that the fees charged comply with HIPAA. The application of HIPAA to EFT payments is complex, and their application to specific value-added services for health care providers may not be clear. Our failure to accurately anticipate the application of HIPAA’s fee restrictions on certain standard transactions could create significant liability for us, resulting in negative publicity, and material adverse effect on our business and operating results.

 

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In addition to the HIPAA privacy and security standards, most states have enacted patient confidentiality laws that protect against the disclosure of confidential medical and other personally identifiable information (“PII”) and many states have adopted or are considering new privacy laws, including legislation that would mandate new privacy safeguards, security standards, and data security breach notification requirements. Such state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them.

 

Failure by us to comply with any of the federal and state standards regarding patient privacy and/or privacy more generally may subject us to penalties, including significant civil monetary penalties and, in some circumstances, criminal penalties. In addition, such failure may injure our reputation and adversely affect our ability to retain clients and attract new clients.

 

Even an unsuccessful challenge by regulatory authorities of our activities could result in adverse publicity and could require a costly response from us.

 

Anti-Kickback and Anti-Bribery Laws. There are federal and state laws that prohibit payment for patient referrals, patient brokering, remuneration of members, or billing based on referrals between individuals or entities that have various financial, ownership, or other business relationships with healthcare providers. In particular, the federal Anti-Kickback Statute prohibits offering, paying, soliciting, or receiving anything of value, directly or indirectly, for the referral of members covered by Medicare, Medicaid, and other federal healthcare programs or the leasing, purchasing, ordering, or arranging for or recommending the lease, purchase, or order of any item, good, facility, or service covered by these programs. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Some enforcement activities focus on below or above market payments for federally reimbursable health care items or services as evidence of the intent to provide a kickback. Many states also have similar anti-kickback laws, some of which are applicable to all patients and that are not necessarily limited to items or services for which payment is made by a federal healthcare program. In addition, the federal anti-referral law—the Stark Law—is very complex in its application and prohibits physicians (and certain other healthcare professionals) from making a referral for a designated health service to a provider in which the referring healthcare professional (or spouse or any immediate family member) has a financial or ownership interest, unless an enumerated exception applies. The Stark Law also prohibits the billing for services rendered resulting from an impermissible referral. Many states also have similar anti-referral laws that are not necessarily limited to items or services for which payment is made by a federal healthcare program and may include patient disclosure requirements. Moreover, both federal and state laws prohibit bribery and similar behavior. Any determination by a state or federal regulatory agency that we or any of our clients, vendors, or partners violate or have violated any of these laws could subject us to significant civil or criminal penalties, require us to change or terminate some portions of our business, require us to refund portions of our services fees, subject us to additional reporting requirements and oversight under a corporate integrity agreement or similar agreement to resolve allegations of noncompliance with these laws, cause us to be disqualified from serving clients doing business with government payors, and have an adverse effect on our business. Even an unsuccessful challenge by regulatory authorities of our activities could result in adverse publicity and could require a costly response from us.

 

Corporate Practice of Medicine Laws and Fee-Splitting Laws. Many states have enacted laws prohibiting physicians from practicing medicine in partnership with non-physicians, such as business corporations. In some states, including New York, these take the form of laws or regulations prohibiting splitting of physician fees with non-physicians or others. As we do not engage in the practice of medicine or fee-splitting with any medical professionals, we do not believe these laws restrict our business.  Our activities involve only monitoring and analyzing historical claims data, including our Members’ interactions with licensed healthcare professionals, and recommend the most suitable healthcare providers and/or sources of treatment.  We do not provide medical prognosis or healthcare.  In accordance with various states’ corporate practice of medicine laws and states’ laws and regulations which define the practice of medicine, our call center staff are prohibited from providing Members with any evaluation of any medical condition, diagnosis, prescription, care and/or treatment. Rather, our call center staff can only provide Members with general and publicly available information that is non-specific to the Members’ medical conditions and statistical information about the prevalence of medical conditions within certain populations or under certain circumstances. Our call center staff do not discuss Members’ individual medical conditions and are prohibited from asking Members for any additional protected health information (PHI) as such term is defined under HIPAA. Our call center staff have been trained and instructed to always inform Members that they are not licensed medical professionals, are not providing medical advice, and that Members should reach out to their medical provider for any medical advice.

 

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Medical professional regulation. The practice of most healthcare professions requires licensing under applicable state law. In addition, the laws in some states prohibit business entities from practicing medicine. In the future, we may contract with physicians, nurses and nurse practitioners, who will assist our clients with the clients’ care coordination, care management, population health management, and patient safety activities. We do not intend to provide medical care, treatment, or advice. However, any determination that we are acting in the capacity of a healthcare provider and acted improperly as a healthcare provider may result in additional compliance requirements, expense, and liability to us, and require us to change or terminate some portions of our business.
   
Medical Device Laws. The FDA may regulate medical or health-related software, including machine learning functionality and predictive algorithms, if such software falls within the definition of a “device” under the federal Food, Drug, and Cosmetic Act (“FDCA”). However, the FDA exercises enforcement discretion for certain low-risk software, as described in its guidance documents for Mobile Medical Applications, General Wellness: Policy for Low Risk Devices, and Medical Device Data Systems, Medical Image Storage Devices, and Medical Image Communications Devices. In addition, in December of 2016, President Obama signed into law the 21st Century Cures Act, which included exemptions for certain medical-related software, including software used for administrative support functions at a healthcare facility, software intended for maintaining or encouraging a healthy lifestyle, EHR software, software for transferring, storing, or displaying medical device data or in vitro diagnostic data, and certain clinical decision support software. The FDA has also issued draft guidance documents to clarify how it intends to interpret and apply the new exemptions under the 21st Century Cures Act. Although we believe that our software products are currently not subject to active FDA regulation, we continue to follow the FDA’s developments in this area. There is a risk that the FDA could disagree with our determination or that the FDA could develop new final guidance documents that would subject our Product to active FDA oversight. If the FDA determines that any of our current or future analytics applications are regulated as medical devices, we would become subject to various requirements under the FDCA and the FDA’s implementing regulations. Depending on the functionality and FDA classification of our analytics applications, we may be required to:
  •     register and list our A.I. products with the FDA;
  •     notify the FDA and demonstrate substantial equivalence to other products on the market before marketing our analytics applications;
  •     submit a de novo request to the FDA to down-classify our analytics applications prior to marketing; or
  •     obtain FDA approval by demonstrating safety and effectiveness before marketing our analytics applications.

 

The FDA can impose extensive requirements governing pre- and post-market conditions, such as service investigation and others relating to approval, labeling, and manufacturing. In addition, the FDA can impose extensive requirements governing software development controls and quality assurance processes.

 

Many states have licensing and other regulatory requirements requiring licensing of businesses which provide medical review services such as ours. These laws typically establish minimum standards for qualifications of personnel, confidentiality, internal quality control, and dispute resolution procedures. These regulatory programs may result in increased costs of operation for us, which may have an adverse impact upon our ability to compete with other available alternatives for healthcare cost control. In addition, new laws regulating the operation of managed care provider networks have been adopted by a number of states. These laws may apply to managed care provider networks we have contracts with. To the extent we are governed by these regulations, we may be subject to additional licensing requirements, financial and operational oversight and procedural standards for beneficiaries and providers.

 

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These laws and regulations may change rapidly, and it is frequently unclear how they apply to our business. Any failure of our products or services to comply with these laws and regulations could result in substantial civil or criminal liability and could, among other things, adversely affect demand for our services, force us to expend significant capital, research and development, and other resources to address the failure, invalidate all or portions of some of our contracts with our clients, require us to change or terminate some portions of our business, require us to refund portions of our revenue, cause us to be disqualified from serving clients doing business with government payors, and give our clients the right to terminate our contracts with them, any one of which could have an adverse effect on our business. Additionally, the introduction of new services may require us to comply with additional, yet undetermined, laws and regulations.

 

The security measures that we and our third-party vendors and subcontractors have in place to ensure compliance with privacy and data protection laws may not protect our facilities and systems from security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data, programming and human errors, or other similar events. Under the HITECH Act, as a business associate, we may also be liable for privacy and security breaches and failures of our subcontractors. Even though we provide for appropriate protections through our agreements with our subcontractors, we still have limited control over their actions and practices. A breach of privacy or security of individually identifiable health information by a subcontractor may result in an enforcement action, including criminal and civil liability, against us. We are not able to predict the extent of the impact such incidents may have on our business.

 

Our failure to comply may result in criminal and civil liability because the potential for enforcement action against business associates is now greater. Enforcement actions against us could be costly and could interrupt regular operations, which may adversely affect our business. While we have not received any notices of violation of the applicable privacy and data protection laws and believe we are in compliance with such laws, there can be no assurances that we will not receive such notices in the future.

 

There is ongoing concern from privacy advocates, regulators, and others regarding data protection and privacy issues, and the number of jurisdictions with data protection and privacy laws has been increasing. Also, there are ongoing public policy discussions regarding whether the standards for de-identified, anonymous, or pseudonymized health information are sufficient, and the risk of re-identification sufficiently small, to adequately protect patient privacy. We expect that there will continue to be new proposed laws, regulations, and industry standards concerning privacy, data protection, and information security in the United States, including the California Consumer Privacy Act, which went into effect January 1, 2020, and we cannot yet determine the impact such future laws, regulations, and standards may have on our business. Future laws, regulations, standards, and other obligations, and changes in the interpretation of existing laws, regulations, standards, and other obligations could impair our or our clients’ ability to collect, use, or disclose information relating to consumers, which could decrease demand for or the effectiveness of our platform, increase our costs, and impair our ability to maintain and grow our client base and increase our revenue. New laws, amendments to or re-interpretations of existing laws and regulations, industry standards, contractual obligations, and other obligations may require us to incur additional costs and restrict our business operations. In view of new or modified federal, state, or foreign laws and regulations, industry standards, contractual obligations, and other legal obligations, or any changes in their interpretation, we may find it necessary or desirable to fundamentally change our business activities and practices or to expend significant resources to modify our software or platform and otherwise adapt to these changes.

 

Any failure or perceived failure by us to comply with federal or state laws or regulations, industry standards, or other legal obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release, or transfer of personally identifiable information or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines, and penalties or adverse publicity and could cause our clients to lose trust in us, which could have an adverse effect on our reputation and business. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our ability to develop new products and features could be limited. Any of these developments could harm our business, financial condition, and results of operations. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of our platform.

 

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Further, on February 11, 2019, Office of the National Coordinator for Health Information Technology (“ONC”) and Centers for Medicare & Medicaid Services (“CMS”) proposed complementary new rules to support access, exchange, and use of electronic health information (“EHI”). The proposed rules are intended to clarify provisions of the 21st Century Cures Act regarding interoperability and “information blocking,” and, if adopted, will create significant new requirements for health care industry participants. The proposed ONC rule, if adopted, would require certain electronic health record technology to incorporate standardized application programming interfaces (“APIs”) to allow individuals to securely and easily access structured EHI using smartphone applications. The ONC rule would also implement provisions of the 21st Century Cures Act requiring that members be provided with electronic access to all of their EHI (structured and/or unstructured) at no cost. Finally, the proposed ONC rule would also implement the information blocking provisions of the 21st Century Cures Act and proposes seven “reasonable and necessary activities” that will not be considered information blocking as long as specific conditions are met.

 

The CMS proposed rule focuses on health plans, payors, and health care providers and proposes measures to enable members to move from health plan to health plan, provider to provider, and have both their clinical and administrative information travel with them.

 

It is unclear whether or when these rules, and others released simultaneously, will be adopted, in whole or in part. If adopted, the rules may benefit us in that certain EHR vendors will no longer be permitted to interfere with our attempts at integration, but the rules may also make it easier for other similar companies to enter the market, creating increased competition, and reducing our market share. It is unclear at this time what the costs of compliance with the proposed rules, if adopted, would be, and what additional risks there may be to our business.

 

Management has limited administrative experience obtaining and maintaining the proper licensure and authorizations required for us to conduct TPA business.

 

We are required to maintain a Third-Party Administrator License in 43 states and are required to maintain registration as a foreign corporation in every state but Delaware, where we are incorporated. Management has limited experience in administering these licensures and authorizations. Our failure to maintain any Third-Party Administrator License or foreign qualification to do business will prohibit us from doing business in a given state, and/or subject us to fines and other penalties. Our inability to maintain these licenses and qualifications will restrict our ability to conduct our TPA business or otherwise have a material adverse effect on our operations.

 

The healthcare regulatory and political framework is uncertain and evolving.

 

Healthcare laws and regulations are rapidly evolving and may change significantly in the future, which could adversely affect our financial condition and results of operations. For example, in March 2010, the Patient Protection and ACA was adopted, which is a healthcare reform measure that provides healthcare insurance for approximately 30 million more Americans. The ACA includes a variety of healthcare reform provisions and requirements that substantially changed the way healthcare is financed by both governmental and private insurers, which may significantly impact our industry and our business. Many of the provisions of the ACA phase in over the course of the next several years, and we may be unable to predict accurately what effect the ACA or other healthcare reform measures that may be adopted in the future, including amendments to the ACA, will have on our business. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals held that the individual mandate is unconstitutional and remanded the case to the lower court to reconsider its earlier invalidation of the full ACA. Pending review, the ACA remains in effect, but it is unclear at this time what effect the latest ruling will have on the status of the ACA.

 

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Our business could be adversely impacted by changes in laws and regulations related to the Internet or changes in access to the Internet generally.

 

The future success of our business depends upon the continued use of the Internet as a primary medium for communication, business applications, and commerce. Federal or state government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Legislators, regulators, or government bodies or agencies may also make legal or regulatory changes or interpret or apply existing laws or regulations that relate to the use of the Internet in new and materially different ways. Changes in these laws, regulations or interpretations could require us to modify our platform in order to comply with these changes, to incur substantial additional costs or divert resources that could otherwise be deployed to grow our business, or expose us to unanticipated civil or criminal liability, among other things.

 

In addition, government agencies and private organizations have imposed, and may in the future impose, additional taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. Internet access is frequently provided by companies that have significant market power and could take actions that degrade, disrupt or increase the cost of our clients’ use of our platform, which could negatively impact our business. Net neutrality rules, which were designed to ensure that all online content is treated the same by Internet service providers and other companies that provide broadband services were repealed by the Federal Communications Commission effective June 2018. The repeal of the net neutrality rules could force us to incur greater operating expenses or our clients’ use of our platform could be adversely affected, either of which could harm our business and results of operations.

 

These developments could limit the growth of Internet-related commerce or communications generally or result in reductions in the demand for Internet-based platforms and services such as ours, increased costs to us or the disruption of our business. In addition, as the Internet continues to experience growth in the numbers of users, frequency of use and amount of data transmitted, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms,” and similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet generally, or our platform specifically, is adversely affected by these or other issues, we could be forced to incur substantial costs, demand for our platform could decline, and our results of operations and financial condition could be harmed.

 

Risks Related to Operating as a Public Emerging Growth Company

 

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934 (the Exchange Act), the listing standards of Nasdaq and other applicable securities rules and regulations. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources. For example, the Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could harm our business, results of operations, and financial condition.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

As a result of disclosure of information in filings required of a public company, our business and financial condition is more visible, which may result in an increased risk of threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, results of operations, and financial condition.

 

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The individuals who now constitute our senior management team have limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our senior management team may not successfully or efficiently manage our transition to a public company that is subject to significant regulatory oversight and reporting obligations.

 

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our Class A common stock less attractive to investors.

 

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including:

 

not being required to have our independent registered public accounting firm attest to our internal control over financial reporting under Section 404 of the Sarbanes Oxley Act;
reduced disclosure obligations regarding executive compensation in our periodic reports and annual report on Form 10-K; and
exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

We could be an emerging growth company for up to five years following the completion of this offering. Our status as an emerging growth company will end as soon as any of the following takes place:

 

the last day of the fiscal year in which we have more than $1.07 billion in annual revenue;
the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates;
the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or
the last day of the fiscal year ending after the fifth anniversary of the completion of this offering.

 

We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on the exemptions afforded emerging growth companies. If some investors find our Class A common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our Class A common stock and the market price of our Class A common stock may be more volatile.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies.

 

If we are unable to implement and maintain effective internal control over financial reporting in the future, our ability to produce accurate financial statements could be impaired, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock may decline.

 

We have not yet established an Audit Committee of our Board of Directors, but we intend to do so prior to consummation of this offering in connection with our application to list our shares of Class A common stock on the Nasdaq Capital Market. Our current directors have limited experience with internal control procedures required of U.S. public companies and no current member of our Board of Directors is considered an audit committee financial expert. We intend to appoint additional directors to our Board, effective as of the consummation of this offering, at least one of whom will be considered an audit committee financial expert.

 

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As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act and, in accordance with this law, we will file periodic reports (Form 10-K’s, Form 10-Q’s and Form 8-K’s), proxy statements and other information with the Securities and Exchange Commission. Upon becoming a public reporting company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. We will also be required to establish and maintain effective disclosure controls. In addition, beginning with our first annual report on Form 10-K following this offering, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

 

There may be deficiencies with our internal controls that require improvements, and we will be exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

 

It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act. Currently, as a small company, we maintain our internal controls through a segregation of duties between our executive officers. With the exception of our Chief Financial Officer, our current officers and directors have limited experience in management of a publicly reporting company. This may be inadequate to have effective internal controls as we will rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures.

 

If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our Class A common stock.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, following the consummation of this offering, we will be required to prepare assessments regarding internal controls over financial reporting and, furnish a report by our management on our internal control over financial reporting.

 

We are in the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404. We will not be required to conduct the evaluation of effectiveness of our internal controls until the end of the fiscal year reported upon in our second annual report on Form 10-K following this offering. In addition, because we are a smaller reporting company, we are not required to obtain the auditor attestation of management’s evaluation of internal controls over financial reporting.

 

This process of internal control evaluation and testing is likely to result in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities. While our management expects to expend significant resources in an effort to complete this important project, there can be no assurance that we will be able to achieve our objective on a timely basis. If it is determined that we are not in compliance with Section 404, we may be required to implement new internal control procedures and re-evaluate our financial reporting. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our ability to comply with our periodic reporting obligations under the Exchange Act and on our stock price.

 

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In addition, in connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses” in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The PCAOB defines “significant deficiency” as a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.

 

In the event that a material weakness is identified, we would be required to adopt and implement policies and procedures to address such material weaknesses. We may also need to employ additional qualified personnel to assist us in these efforts. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify or that we will implement and maintain adequate controls over our financial process and reporting in the future.

 

Risks Related to Investing in Our Class A Common Stock

 

An active trading market may not develop for our securities, and you may not be able to sell your Class A common stock at or above the offering price per share.

 

This is the initial public offering of our securities and there is currently no public market for our Class A common stock.

 

We intend to apply to list our Class A common stock on the NASDAQ Capital Market. However, we cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our Class A common stock or how liquid that market might become. If such a market does not develop or is not sustained, it may be difficult for you to sell your shares of Class A common stock at the time you wish to sell them, at a price that is attractive to you, or at all.

 

The trading market for our Class A common stock in the future could be subject to wide fluctuations in response to several factors, including, but not limited to:

 

actual or anticipated variations in our results of operations;

 

our ability or inability to generate revenues or profit;

 

the number of shares in our public float; and

 

increased competition.

 

Furthermore, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our Class A common stock. Additionally, moving forward we anticipate having a limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of our Class A common stock. The offering price per share has been determined through negotiation between us and representatives of the underwriter and may not be indicative of the market prices that prevail after this offering. You may not be able to sell your Class A common stock at or above the offering price per share.

 

Our management has broad discretion in the use of proceeds from our offering and our use may not produce a positive rate of return.

 

The principal purposes of our offering are to increase our capitalization and financial flexibility, create a public market for our stock and thereby enable access to the public equity markets by our employees and stockholders, obtain additional capital, and strengthen our position in the TPA market. Approximately $1.5 million from the net proceeds of this offering may be used to service our debt obligations over the next 24 months. We plan to use the remaining net proceeds for working capital and other general corporate purposes. Our management has broad discretion over the specific use of the net proceeds we received in our offering and might not be able to obtain a significant return, if any, on investment of these net proceeds. Investors will need to rely upon the judgment of our management with respect to the use of proceeds. If we do not use the net proceeds that we received in our offering effectively, our business, results of operations, and financial condition could be harmed.

 

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Our issuance of additional capital stock in connection with financings, acquisitions, investments, our 2021 Global Stock Incentive Plan or otherwise will dilute all other stockholders.

 

We may need to raise additional capital through equity and debt financings in order to fund our operations. If we raise capital through equity financings in the future, that will result in dilution to all other stockholders. We also expect to grant equity awards to employees, directors, and consultants under our 2021 Global Stock Incentive Plan. As part of our business strategy, we may acquire or make investments in complementary companies, products, or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per-share value of our Class A common stock to decline.

 

We do not intend to pay dividends on our Class A common stock and, consequently, the ability of Class A common stockholders to achieve a return on investment will depend on appreciation, if any, in the price of our Class A common stock.

 

You should not rely on an investment in our Class A common stock to provide dividend income. We do not plan to declare or pay any dividends on our capital stock in the foreseeable future. Instead, we intend to retain any earnings to finance the operation and expansion of our business. As a result, Class A common stockholders may only receive a return on investment if the market price of our Class A common stock increases.

 

Certain of our founding shareholders will continue to own a significant percentage of our Class A common stock and will be able to exert significant control over matters subject to shareholder approval.

 

Certain of our founding shareholders, including HillCour Investment Fund, LLC, WellEnterprises USA, LLC, Eli David, Yaron Eitan Grays West Ventures LLC and our Chief Executive Officer, Edmundo Gonzalez collectively beneficially own more than 70% of our total voting power through an Agreement Relating to Voting Power Between Co-Founders of Marpai, Inc. and Grant of a Power of Attorney and after this offering is completed the Company will continue to be controlled by these shareholders. Upon the closing of this offering, these shareholders will collectively beneficially own approximately ____% of the voting power of our outstanding Class A Common Stock, or approximately __% if the underwriter exercises its option to purchase additional shares of Class A Common Stock from us in full. After this offering, these shareholders will have the ability to substantially influence us through this ownership position. For example, these shareholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. The interests of these shareholders may not always coincide with our corporate interests or the interests of other shareholders, and these shareholders may act in a manner with which you may not agree or that may not be in the best interests of our other shareholders. So long as these shareholders continue to collectively beneficially own a significant amount of our equity, they will continue to be able to strongly influence or effectively control our decisions.

 

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As a “controlled company” under the rules of the Nasdaq Capital Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders;

 

Certain of our founding shareholders including HillCour Investment Fund, LLC, WellEnterprises USA, LLC, Eli David, Yaron Eitan Grays West Ventures LLC and our Chief Executive Officer, Edmundo Gonzalez collectively beneficially own more than 70% of our total voting power through an Agreement Relating to Voting Power Between Co-Founders of Marpai, Inc. and Grant of a Power of Attorney and Proxy more fully described herein. Upon the closing of this offering, these shareholders will continue to own a controlling interest in us and we will meet the definition of a “controlled company” under the corporate governance standards for Nasdaq listed companies and we will be eligible to utilize certain exemptions from the corporate governance requirements of the Nasdaq Stock Market. We are a “controlled company” within the meaning of Nasdaq Listing Rule 5615(c). As a controlled company, we qualify for, and our board of directors, the composition of which is and will be controlled by these shareholders may rely upon, exemptions from several of Nasdaq’s corporate governance requirements, including requirements that:

 

·a majority of the board of directors consist of independent directors

·compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee comprised solely of independent directors; and

·director nominees be selected or recommended to the board of directors by a majority of its independent directors or by a nominating committee that is composed entirely of independent directors.

 

As long as our officers and directors, either individually or in the aggregate, own at least 50% of the voting power of our Company, we are a “controlled company” as defined under Nasdaq Marketplace Rules.

 

Accordingly, to the extent that we may choose to rely on one or more of these exemptions, our shareholders would not be afforded the same protections generally as shareholders of other Nasdaq-listed companies for so long as these shareholders are collectively able to control the composition of our board and our board determines to rely upon one or more of such exemptions.

 

We do not currently intend to rely on the “controlled company” exemption under the Nasdaq listing rules. However, we may elect to avail ourselves of these exemptions in the future.

 

If you purchase our securities in this offering, you will incur immediate and substantial dilution in the book value of your investment.

 

The initial public offering price is substantially higher than the net tangible book value per share of our securities. Investors purchasing shares of Class A common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing shares in this offering will incur immediate dilution of $           per share, based on the initial public offering price of $          per share.

 

We might not be able to maintain the listing of our Class A common stock on the NASDAQ Capital Market.

 

We intend to apply to list our Class A common stock on the NASDAQ Capital Market in connection with this offering. We will not consummate this offering if our application is not approved. However, there can be no assurance that we will be able to maintain the listing standards of that exchange, which includes requirements that we maintain our stockholders’ equity, total value of shares held by unaffiliated stockholders, and market capitalization above certain specified levels. If we fail to conform to the NASDAQ listing requirements on an ongoing basis, our Class A common stock might cease to trade on the NASDAQ Capital Market exchange, and may move to the OTCQB or OTC Pink Markets operated by OTC Markets Group, Inc. These quotation services are generally considered to be markets that are less efficient, and to provide less liquidity in the shares, than the NASDAQ Capital Market.

 

Future sales of our Class A common stock, or the perception that future sales may occur, may cause the market price of our Class A common stock to decline, even if our business is doing well.

 

Sales of substantial amounts of our Class A common stock in the public market after this offering, or the perception that these sales may occur, could materially and adversely affect the price of our Class A common stock and could impair our ability to raise capital through the sale of additional equity securities. The shares of Class A common stock sold in this offering will be freely tradable, without restriction, in the public market, except for any shares sold to our affiliates.

 

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In connection with this offering, we, our officers and directors and the holders of 5% or more of our currently outstanding shares of Class A common stock have agreed, subject to certain exceptions, not to sell or transfer any shares of Class A common stock for 180 days after the date of this prospectus without the consent of ThinkEquity. However, ThinkEquity may release these shares from any restrictions at any time. We cannot predict what effect, if any, market sales of shares held by any stockholder or the availability of shares for future sale will have on the market price of our Class A common stock.

 

Approximately                        shares of Class A common stock may be sold in the public market by existing stockholders after the date of this prospectus and an additional            shares of Class A common stock may be sold in the public market by existing stockholders on or about 181 days after the date of this prospectus, subject to volume and other limitations imposed under the federal securities laws. Sales of substantial amounts of our Class A common stock in the public market after the completion of this offering, or the perception that such sales could occur, could adversely affect the market price of our Class A common stock and could materially impair our ability to raise capital through offerings of our Class A common stock. See the section entitled “Shares Eligible for Future Trading” for a more detailed description of the restrictions on selling shares of our Class A common stock after this offering.

 

In addition, as of July 1, 2021, we had 330,000 options outstanding that, if fully vested and exercised, would result in the issuance of shares of Class A common stock. All of the shares of Class A common stock issuable upon the exercise of stock options and the shares reserved for future issuance under our 2021 Global Stock Incentive Plan will be registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance, subject to existing lock-up or market standoff agreements, volume limitations under Rule 144 for our executive officers and directors, and applicable vesting requirements.

 

The market price of our Class A common stock may be volatile and may decline regardless of our operating performance, and you may lose all or part of your investments.

 

The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  overall performance of the equity markets and/or publicly-listed technology companies;
  actual or anticipated fluctuations in our net revenue or other operating metrics;
  changes in the financial projections we provide to the public or our failure to meet these projections;
  failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet the estimates or the expectations of investors;
  the economy as a whole and market conditions in our industry;
  political and economic stability in Israel;
  exchange rate fluctuations between U.S. dollars and Israeli New Shekel;
  rumors and market speculation involving us or other companies in our industry;
  announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
  new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
  lawsuits threatened or filed against us;
  recruitment or departure of key personnel;
  other events or factors, including those resulting from war, incidents of terrorism, or responses to these events; and
  the expiration of contractual lock-up or market standoff agreements.

 

In addition, extreme price and volume fluctuations in the stock markets have affected and continue to affect many technology companies’ stock prices. Often, their stock prices have fluctuated in ways unrelated or disproportionate to the companies’ operating performance. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because technology and healthcare technology companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

 

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A possible “short squeeze” due to a sudden increase in demand of our Class A common stock that largely exceeds supply may lead to price volatility in our Class A common stock.

 

Following this offering, investors may purchase our common stock to hedge existing exposure in our Class A common stock or to speculate on the price of our Class A common stock. Speculation on the price of our Class A common stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our Class A common stock available for purchase in the open market, investors with short exposure may have to pay a premium to repurchase our common stock for delivery to lenders of our Class A common stock. Those repurchases may in turn, dramatically increase the price of our Class A common stock until investors with short exposure are able to purchase additional Class A common stock to cover their short position. This is often referred to as a “short squeeze.” A short squeeze could lead to volatile price movements in our common stock that are not directly correlated to the performance or prospects of our Class A common stock and once investors purchase the shares of Class A common stock necessary to cover their short position the price of our Class A common stock may decline.

 

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.

 

The trading market for our Class A common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our Class A common stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our stock price and trading volume to decline.

 

Provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current board of directors and limit the market price of our Class A common stock.

 

Provisions in our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and bylaws, include provisions that:

 

  permit the board of directors to establish the number of directors and fill any vacancies and newly-created directorships; and;
  provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws

 

Moreover, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our Class A common stock.

 

Our bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with us.

 

Our bylaws provide, to the fullest extent permitted by law, that a state or federal court located within the State of Delaware will be the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:

 

  any derivative action or proceeding brought on our behalf;
  any action asserting a breach of fiduciary duty;
  any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our bylaws; or
  any action asserting a claim against us that is governed by the internal affairs doctrine.

 

This exclusive forum provision will not apply to any causes of action arising under the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Nothing in our bylaws precludes stockholders that assert claims under the Securities Act or the Exchange Act from bringing such claims in state or federal court, subject to applicable law. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision which will be contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition.

 

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Our Amended and Restated Certificate of Incorporation provides that derivative actions brought on our behalf, actions against our directors, officers, employees or agent for breach of fiduciary duty and certain other actions may be brought only in the Court of Chancery in the State of Delaware and the stockholders shall be deemed to have consented to this choice of forum provision, which may have the effect of discouraging lawsuits against our directors, officers, other employees or agents.

 

Our Amended and Restated Certificate of Incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any stockholder for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any director, officer, employee or agent of the Company to the Company or the Company’s stockholders, (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”) or the Company’s Certificate of Incorporation or Bylaws, (d) any action to interpret, apply, enforce or determine the validity of the Company’s Certificate of Incorporation or Bylaws, or (e) any action asserting a claim governed by the internal affairs doctrine. The federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint, claim or proceeding asserting a cause of action arising under the Exchange Act or the Securities Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provision in our Amended and Restated Certificate of Incorporation.

 

The choice-of-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or its directors, officers or other employees, and may result in increased costs to a stockholder who has to bring a claim in a forum that is not convenient to the stockholder, which may discourage such lawsuits. Although under Section 115 of the DGCL, exclusive forum provisions may be included in a company’s certificate of incorporation, the enforceability of similar forum provisions in other companies’ certificates or incorporation or bylaws has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. If a court were to find the exclusive forum provision of our Amended and Restated Certificate of Incorporation inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Marpai Pre-Acquisition”, Management’s Discussion and Analysis of Financial Condition and Results of Operations of Continental Benefits Pre-Acquisition” and “Business.” These forward-looking statements involve a number of risks and uncertainties. Many of the following risks are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. We caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. These statements are based on current expectations of future events. Such statements include, but are not limited to, statements about future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, cost savings, objectives of management, business strategies, success of competing drugs, financing, potential growth and market opportunities, product candidates, clinical trial timing and plans, clinical and regulatory pathways for our development programs, the achievement of clinical and commercial milestones, the advancement of our technologies and our proprietary, co-developed and partnered products and product candidates, and other statements that are not historical facts.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “anticipate” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” “possible” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

  · our ability to integrate two businesses and effectively manage growth;
  · our ability to protect our intellectual property and continue to innovate;
  · our expectations around the financial performance of a combined company;
  · our success in retaining or recruiting, or changes required in, our officers, key employees or directors following our offering;
  · the potential insufficiency of our disclosure controls and procedures to detect errors or acts of fraud;
  · the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
  · the success of competing products or technologies that are or may become available;
  · our potential ability to obtain additional financing;
  · our ability to grow the business due to the uncertainty resulting from the recent COVID-19 pandemic or any future pandemic;
  · our ability to comply with complex and increasing regulations by state and federal authorities;
  · the impact of healthcare reform legislations;
  · our ability to have our securities listed on Nasdaq following a business combination;
  · our public securities’ potential liquidity and trading;

 

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  · the lack of an established market for our securities;
  · our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;
  · our anticipated use of the proceeds from this offering; and
  · our financial performance following this offering.

 

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate, and financial trends that we believe may affect our business, prospects, financial condition and results of operations, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

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 prospectus, 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. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.

 

All subsequent written or oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events, except as may be required under applicable law. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from our issuance and sale of ________ shares of our Class A common stock in this offering will be approximately $___ million, assuming an initial public offering price of $___ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full to cover overallotments, if any, we estimate that our net proceeds will be approximately $___ million.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $___ per share would increase (decrease) the aggregate net proceeds to us from this offering by approximately $___ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $___ million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

The principal purposes of this offering are to obtain additional capital to support our operations, establish a public market for our Class A common stock and facilitate our future access to the public capital markets. We currently anticipate that we will use the net proceeds from this offering, together with our existing resources, as follows:

 

We plan to use approximately 50% of the net proceeds from this offering to fund our research and development. This includes not only hiring new A.I. scientists, but also acquiring data from third parties.

 

In August 2019, in connection with an asset acquisition, Marpai Health issued a convertible note in the principal amount of $2,930,000 (the “SQN Convertible Note”). Interest on the SQN Convertible Note accrues at 6% per annum. It becomes payable on the first day of the month after the 12-month anniversary of the earliest of the following: (i) the consummation of an equity investment in Marpai Health’s capital stock with proceeds of at least $10,000,000, (ii) Marpai Health having continuous positive cash flow for two consecutive calendar quarters, or (iii) October 24, 2021, the second anniversary of the issuance of the SQN Convertible Note. If the holder of the SQN Convertible Note chooses not to convert the SQN Convertible Notes in full into shares of Class A common stock at the closing of the offering, we intend to use up to approximately $1.5 million from the net proceeds of this offering to repay a portion of the principal amount plus accrued interest on the SQN Convertible Note over the next 24 months. We intend to use the remaining net proceeds of this offering for working capital and general corporate purposes.

 

We believe that our existing cash and cash equivalents, together with the net proceeds from this offering, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 24 months. The amount and timing of our actual expenditures will depend upon numerous factors, including the status of our acquisition strategy, and other factors described under “Risk Factors” in this prospectus, as well as the amount of cash used in our operations. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the use of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our stock. Pending their use, we plan to invest the net proceeds from this offering in money market funds short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

 

We have never declared or paid dividends on our Class A common stock and we do not anticipate paying any cash dividends on our Class A common stock in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on applicable law and then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents as well as capitalization as of March 31, 2021 as follows:

 

  · On an actual basis;

 

  · On a pro forma basis to give effect to the consummation of the Acquisition, including (i) the issuance of 501,260 shares of Class A common stock and 451,389 shares of Class B common stock to the former holders of common stock of Marpai Health (prior to the conversion of the Original MH Notes into Marpai Health’s common stock); (ii) the issuance of 227,647 shares of Class A common stock and 448,523 shares of Class B common stock to the former holders of the Original MH Notes in the aggregate principal amount of $3,800,000; (iii) the issuance of 790,103 shares of Class A common stock and 27,905 shares of Class B common stock to the sole holder of membership interests of Continental Benefits; and (iv) the issuance of the New Notes (as defined below) in the aggregate principal amount of $2,198,459.

 

  · On a pro forma, as adjusted basis to give further effect to (i) our issuance and sale of  ______ shares of our Class A common stock in this offering at an assumed initial public offering price of $___ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions, estimated offering expenses payable; (ii) conversion of the New Notes (as defined below) and the June 2021 Notes into ______ shares of Class A common stock at $____ per share upon the consummation of this offering.

 

The pro forma as adjusted information below is illustrative only, and our capitalization following the closing of this offering will change based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the information in this table, together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus by us.

 

   As of March 31, 2021 
   Actual   Pro Forma
Combined
   Pro Forma
As
Adjusted
 
Cash and cash equivalents  $862,835   $4,864,835           
Convertible notes  $9,469,326   $5,379,406      
Stockholders’ equity:               
Class A common stock, $0.0001 par value; 46,841,836 authorized shares   3    152      
Class B common stock, $0.0001 par value; 3,158,164 authorized shares        93      
Additional paid-in capital   2,325,684    19,677,362      
Accumulated deficit   (7,132,489)   (7,892,489)     
Total stockholders’ equity   (4,806,802)   11,785,118      
Total capitalization  $4,662,524   $17,164,524      

 

Each $1.00 increase (decrease) in the assumed initial public offering price of  $_____ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $____ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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The number of shares of our Class A common stock to be outstanding after this offering is based on the _________ shares of Class A common stock to be outstanding as of the date of this prospectus and excludes the following:

 

  ______ shares of Class A common stock issuable upon the exercise of outstanding stock options, at a weighted average exercise price of $____ per share;

 

  ________ shares of Class A common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $___ per share;
     
   

 

  330,000 shares of Class A common stock reserved for future issuance under our 2021 Global Stock Incentive Plan; and
     
   ________ shares of Class A common stock issuable upon the exercise of the Representative’s Warrants.

 

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DILUTION

 

If you invest in our Class A common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after this offering.

 

Our historical net tangible book value (deficit) as of March 31, 2021 was $________, or $____ per share of our Class A common stock. Our historical net tangible book value (deficit) is the amount of our total tangible assets less our total liabilities. Historical net tangible book value per share represents historical net tangible book value (deficit) divided by the number of shares of our Class A common stock outstanding as of March 31, 2021.

 

Our pro forma net tangible book value as of March 31, 2021 was $_________, or $_____ per share of our Class A common stock. Pro forma net tangible book value represents the amount of our total tangible assets less our total liabilities, after giving effect to the pro forma adjustments described in “Capitalization”.

 

After giving further effect to our issuance and sale of _______ shares of Class A common stock in this offering at an assumed initial public offering price of $____ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions, estimated offering expenses payable by us, the conversion of the New Notes and the June 2021 Notes into an aggregate of _______ shares of Class A common stock, and the repayment of debt of $____ million, our pro forma as adjusted net tangible book value as of March 31, 2021 would have been approximately $__ million, or approximately $___ per share. This represents an immediate increase in pro forma as adjusted net tangible book value per share of  $____ to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value per share of approximately $____to new investors purchasing Class A common stock in this offering. Dilution per share to new investors purchasing Class A common stock in this offering is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the assumed initial public offering price per share paid by new investors.

 

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed public offering price per share       $  
Historical net tangible book value per share as of ______, 2021  $()     
Pro forma increase in net tangible book value (deficit) per share as of ________, 2021          
Pro forma net tangible book value per share as of ____, 2021          
Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing shares in this offering          
Pro forma as adjusted net tangible book value per share after giving effect to this offering          
Dilution in as adjusted net tangible book value per share to new investors participating in this offering       $       

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $____ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by $____ per share and the dilution to new investors purchasing Class A common stock in this offering by $____ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

If the underwriters exercise their option in full to purchase an additional _______ shares of Class A common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $____ per share, the increase in the net tangible book value per share to existing stockholders would be $____ per share and the dilution to new investors purchasing our Class A common stock in this offering would be $____ per share.

 

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The number of shares of Class A common stock to be outstanding after this offering is based on _______ shares of Class A common stock outstanding as of the date of this prospectus, and excludes:

 

The number of shares of our Class A common stock to be outstanding after this offering is based on the shares of Class A common stock to be outstanding as of the date of this prospectus and excludes the following:

 

  _______ shares of Class A common stock issuable upon the exercise of outstanding stock options, at a weighted average exercise price of $         per share;

 

  _______ shares of Class A common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $             per share;
     
   

 

  330,000 shares of Class A common stock reserved for future issuance under our 2021 Global Stock Incentive Plan; and
     
  _______ shares of Class A common stock issuable upon the exercise of the Representative’s Warrants.

 

To the extent that outstanding exercisable options or warrants are exercised, you may experience further dilution. If all outstanding exercisable options and warrants with exercise prices below $____ per share were exercised, our as adjusted net tangible book value as of March 31, 2021 (calculated on the basis of the assumptions set forth above) would have been approximately $____ million, or approximately $____ per share, causing immediate dilution of $____ per share to new investors purchasing shares in this offering.

 

In addition, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital by issuing equity securities or convertible debt, your ownership will be further diluted.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF MARPAI, INC. PRE-ACQUISITION

 

The following discussion and analysis of Marpai, Inc.’s financial condition and results of operations should be read in conjunction with Marpai, Inc.’s audited balance sheet and the related notes and other financial information included elsewhere in this prospectus.

 

Overview

 

Marpai, Inc. was formed as a Delaware corporation on January 22, 2021 with the intention to facilitate an initial public offering (IPO) and other related transactions in order to carry on the business of two healthcare entities, Marpai Health and Continental Benefits LLC.

 

Our mission is to positively change healthcare for the benefit of (i) its future clients who are self-insured employers that pay for their employees’ healthcare benefits and will engage us to administer the latter’s healthcare claims, (ii) employees who receive these healthcare benefits from its future Clients, and (iii) healthcare providers including, doctors, doctor groups, hospitals, clinics, and any other entities providing healthcare services or products. For that purpose, on April 1, 2021 we acquired all of the equity interests of Marpai Health and Continental Benefits (“Acquisition”).

 

Results of Operations

 

We have neither engaged in any operations nor generated any revenues during the period from January 22, 2021 (inception) to March 31, 2021. As we did not have any activity during that period, other than issuance of shares, separate statements of operations, changes in stockholders’ equity and cash flows have not been presented and as such, there is no discussion of cash flows and other financial measurements. Our only activities since inception have been organizational activities and those necessary to prepare for the Acquisition. Following the Acquisition, Marpai, Inc.’s operations will include revenues and expenses generated from Marpai Health and Continental Benefits operations.

 

Liquidity and Capital Resources

 

On April 1, 2021, pursuant to the terms of the Purchase and Reorganization Agreement, and a Note Exchange Agreement, we issued convertible promissory notes in the aggregate principal amount of $2,198,459 (the “New Notes”) in exchange for certain then outstanding convertible promissory notes of Marpai Health of equivalent amount of outstanding principal and accrued but unpaid interest. The New Notes carry a simple interest rate of 8% per annum over a two-year term and the principal and accrued and unpaid interest thereon are expected to convert into an aggregate of [ ] shares of Class A common stock upon the closing of this offering, at a price that is 70% of the per share public offering price in this offering.

 

In June 2021, the Company entered into convertible debt agreements with several investors for the issuance of convertible promissory notes in the aggregate principal amount of $300,000 (the “June 2021 Notes”). The June 2021 Notes are due two years from the date, of issuance and accrue interest at 8% per annum, payable in cash at maturity or convertible to shares. The outstanding principal balance and unpaid accrued interest of the notes automatically convert upon the Company’s next equity financing round with gross proceeds to the Company of at least $2,000,000, other than an initial public offering (“IPO”), into the most senior class of shares of the Company issued in such financing round at a price per share equal to a 30% discount on the lowest price per share paid by the investors in such a financing round. The outstanding principal amount of and accrued interest will be converted automatically into unregistered shares of Class A common stock concurrently with the consummation of this offering at a price equal to 70% of the per share public offering price stated in the final prospectus for the IPO. Unless otherwise automatically converted upon the IPO or in a financing round, the June 2021 Notes are converible in certain situations, at a conversion price based on a maximum company pre-money valuation of the Company $48,262,000 on a fully diluted basis into the most senior class of stock of the Company.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MARPAI HEALTH PRE-ACQUISITION

 

The following discussion and analysis of Marpai Health’s financial condition and results of operations should be read in conjunction with Marpai Health’s interim condensed consolidated financial statements for the three months ended March 31, 2021 and 2020, and the related notes and other financial information included elsewhere in this prospectus.

 

Results of Operations

 

Comparison of the Three Months ended March 31, 2021 and 2020

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

   Three Months Ends March 31,         
   2021   2020   Change   % 
Revenue                    
Net revenue   -    -    -    n/a 
Cost of revenue   -    -    -    n/a 
Gross Profit   -    -    -    n/a 
    n/a    n/a           
Operating Expense                    
Research and development   282,165    430,822    (148,657)   -34.5%
General and administrative   801,837    523,093    278,744    53.3%
Sales and marketing   321,120    123    320,997    260973.2%
Total Operating Expense   1,405,122    954,038    451,084    47.3%
Operating Loss   (1,405,122)   (954,038)   (451,084)   47.3%
Other income and (expenses)                    
Interest expense, net   (183,439)   (105,031)   (78,408)   74.7%
Other income   6,697    6,393    304    4.8%
Foreign exchange gain (loss)   (9,750)   (4,940)   (4,810)   -97.4%
Total other income (expense)   (186,492)   (103,578)   (82,914)   80.0%
Loss before income taxes   (1,591,614)   (1,057,616)   (533,998)   50.5%
Income tax expense   -    -    -    n/a 
Net Loss   (1,591,614)   (1,057,616)   (533,998)   50.5%
Comprehensive Loss   (1,591,614)   (1,057,616)   (533,998)   50.5%

 

Revenues and Cost of Revenue

 

During the three months ended March 31, 2021 and 2020, Marpai Health did not have any revenues or cost of revenue. Marpai Health is a development stage company with no operating history and no revenues.

 

Research and development

 

Marpai Health incurred $282,165 of research and development expenses for the three months ended March 31, 2021 compared to $430,822 for the three months ended March 31, 2020, a decrease of $148,657 or 34.5% on a period-over-period basis. The decrease is attributable to having the software development project reach the development stage in August 2020, which resulted in substantial portion of the software development costs being capitalized during the three months ended March 31, 2021, while no software development costs were capitalized during the comparative three months ended March 31, 2020.

 

as compared with the prior period was primarily a result of a reduction in staffing, subcontractors and technology costs (such as Software and third-party Cloud access) needed to develop the data analytics platform and new A.I. modules. Staffing expenses comprise of payroll, benefits and share-based compensation to employees. Subcontractor expenses comprise of service costs and share-based compensation.

 

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General and Administrative Expenses

 

Total general and administrative expense increased by $278,744 for the three months ended March 31, 2021 compared with the three months ended March 31, 2020. The increase for the three months ended March 31, 2021 was primarily due to an increase in accounting and legal services, related to the Acquisition.

 

Sales and Marketing

 

Total sales and marketing expense increased by $320,997 for the three months ended March 31, 2021 as compared with three months ended March 31, 2020. The increase for the three months ended March 31, 2021 was primarily due to an increase in branding expense.

 

Interest Expense, net

 

Interest expense, net increased by $78,408 for the three months ended March 31, 2021 as compared with the three months ended March 31, 2020. The increase resulted from the additional interest expense related to the issuance of convertible notes during the year ended December 31, 2020.

 

Liquidity and Capital Resources

 

Since Marpai Health’s inception in 2019, it has generated no revenues, has incurred losses and generated negative cash flows from operations. It has spent most of its cash resources on research and development activities. It has financed its operations primarily with the proceeds from sale and issuance of convertible promissory notes.

 

Cash Flows

 

The following tables summarizes selected information about Marpai Health’s sources and uses of cash and cash equivalents:

 

Comparison of the Three Months Ended March 31, 2021 and 2020

 

The following table summarizes Marpai Health’s sources and uses of cash for the three months ended March 31, 2021 and 2020:

 

   Three Months Ended March 31 
   2021   2020 
Net cash used in operating activities   (760,293)   (497,802)
Net cash used in investing activities   (509,535)   (31,137)
Net cash provided by financing activities   375,833    550,000 
Net (decrease) increase in cash and cash equivalents  $(893,995)  $21,061 

 

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Net Cash Used in Operating Activities

 

Marpai Health had no revenue for the three months ended March 31, 2021 and continued to incur losses. Net cash used in operating activities totaled $760,293 for the three months ended March 31, 2021, and increased by $262,491 or 52.7% as compared to $497,802 for the three months ended March 31, 2020.

 

Net Cash Used in Investing Activities

 

Marpai Health used $509,535 in cash in the three months ended March 31, 2021 for capitalized software development costs, as compared with $31,137 cash used for capitalized software in the three months ended March 31, 2020.

 

Net Cash Provided by Financing Activities

 

The amounts $375,833 and $550,000 provided by financing activities in the three months periods ended March 31, 2021 and 2020, respectively, were primarily related to proceeds from the sale and issuance of convertible promissory notes to investors and issuance of warrants in February 2021.

 

Off Balance Sheet Arrangements

 

Marpai Health does not have relationships with other organizations or process any transactions that would constitute off balance sheet arrangements.

 

New Accounting Pronouncements

 

Marpai Health has considered recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its consolidated financial statements.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CONTINENTAL BENEFITS PRE-ACQUISITION

 

The following summary consolidated statements of operations data for the fiscal years ended December 31, 2020 and 2019 have been derived from Continental Benefits’ audited consolidated financial statements included elsewhere in this prospectus. Additionally, the three months ended March 31, 2020 and 2019 have been derived from Continental Benefits’ unaudited condensed consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of March 31, 2021 are derived from Continental Benefits’ condensed consolidated financial statements that are included elsewhere in this prospectus. The historical financial data presented below is not necessarily indicative of Continental Benefits’ financial results in future periods, and the results for the three months ended March 31, 2021 is not necessarily indicative of its operating results to be expected for the full fiscal year ending December 31, 2021 or any other period. You should read the summary consolidated financial data in conjunction with those financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Continental Benefits’ condensed consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our condensed consolidated financial statements have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Forward-Looking Statements.”

 

Business Overview

 

Continental Benefits provides benefits outsourcing services to clients in the United States across multiple industries. Continental Benefits’ backroom administration and third-party administration (“TPA”) services are supported by a customized technology platform and a dedicated benefits call center. Under its TPA platform, Continental Benefits provides health and welfare administration, dependent eligibility verification, Consolidated Omnibus Budget Reconciliation Act (“COBRA”) administration, and benefit billing services. Continental Benefits is a Florida limited liability company formed in November 2013.

 

Continental Benefits is one of the largest independent TPA’s servicing the self-insured market in the United States, consisting of a fully integrated billing and enrollment platform, claims administration, and customer service to administer the TPA services. TPA services are typically measured as Enrolled Employee “EE” Lives or Member Lives. The term “EE” refers to the enrolled employees in a client benefit program (and may also be referred to as “client lives”). Most Services are priced on a Per Employee Per Month (“PEPM”) basis with a smaller number of services priced on a Per Member Per Month (“PMPM”) basis. Members are the employees and their dependents that are enrolled in a client benefit program. Continental engages primarily in selling health benefit programs and customer relationship activities for contracted clients with the primary focus of reducing the overall cost of healthcare while maintaining or improving the quality of care. In mid-2018, Continental introduced a revolutionary new product called TopCare® whereby members are referred to high quality providers (using a proprietary ratings system) leading to better quality and typically lower overall cost of a medical episode.

 

Impact of COVID-19 Pandemic

 

On March 11, 2020, the World Health Organization declared the outbreak of a respiratory disease caused by a new coronavirus a pandemic. First identified in late 2019 and known now as COVID-19, the outbreak has impacted thousands of individuals worldwide. In response, many countries have implemented measures to combat the outbreak that have impacted global business operations. Subsequent to the consolidated balance sheet date, there has been no significant impact to Continental Benefits’ operations, and Continental Benefits is operating at normal levels. Continental Benefits has responded to the outbreak by executing its Business Continuity Plan and implemented an enhanced Work from Home program. No impairments were recorded as of the consolidated balance sheet date; however, due to significant uncertainty surrounding the situation, Marpai, Inc.’s management’s judgment regarding this could change in the future. In addition, while the Continental Benefits’ results of operations, cash flows, and financial condition could be negatively impacted, the extent of the impact cannot be reasonably estimated at this time.

 

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Contingencies

 

The Company has been charged certain administrative tax penalties by the IRS related to prior year 1099 tax filings. In March 2021, the Company received a favorable ruling from the IRS waiving the 2018 tax year penalty of $678,780. Based on the opinion of the Company’s counsel, although the Company is in the process of appealing the remaining tax years, the full amount of the remaining penalties and interest of $853,405 has been accrued as of March 31, 2021. In June 2021, the Company received written confirmation from the IRS that all outstanding penalties have been waived and that nothing is due to the IRS from the Company. The Company has not reversed the accrual as of March 31, 2021.

 

Results of Operations

 

Comparison of the three months ended March 31, 2021 to the three months ended March 31, 2020

 

Our financial results for the three months ended March 31, 2021 are summarized as follows in comparison to the three months ended March 31, 2020:

 

   Three Months Ended March 31,         
   2021   2020   $ Increase / (Decrease)   % Var 
Net sales  $4,215,082   $5,274,224   $(1,059,142)   (20.1)%
Cost of revenue                    
Service fees   2,306,355    2,723,925    (417,570)   (15.3)%
Direct expense - claims   424,137    571,245    (147,108)   (25.8)%
Direct expense - member services   365,783    474,640    (108,857)   (22.9)%
Total cost of revenue   3,096,275    3,769,810    (673,535)   (17.9)%
Gross profit   1,118,807    1,504,414    (385,607)   (25.6)%
Operating expenses                    
Administrative   1,045,397    1,889,382    (843,985)   (44.7)%
Information technology   865,966    1,342,691    (476,725)   (35.5)%
Sales and marketing   628,487    797,240    (168,753)   (21.2)%
Facilities   184,718    199,360    (14,642)   (7.3)%
Depreciation   162,373    144,709    17,664    12.2%
Total operating expenses   2,886,941    4,373,382    (1,486,441)   (34.0)%
Operating loss   (1,768,134)   (2,868,968)   1,100,834    (38.4)%
Other non operating income                    
Interest income   -    11,221    (11,221)   (100.0)%
Other income   16,004    -    16,004      
Total non operating income   16,004    11,221    4,783    42.6%
Net loss  $(1,752,130)  $(2,857,747)   1,105,617    (38.7)%

 

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Revenue

 

Total net sales for the three months ended March 31, 2021 were $4.2 million, a decrease of 20.1% compared to $5.3 million for the three months ended March 31, 2020. The decline in net sales was attributable to reduced run-out fees related to lower customer attrition from 2020 partially offset by an increase in services selected by our clients. The increase in services was mainly driven by our improved TopCare® program adoption with new 2021 clients and for our renewed clients.

 

Cost of Revenue

 

Total cost of revenues consists of (1) service fees, which primarily include vendor fees associated with the client’s benefit program selections, (2) the direct labor cost associated with claim management and processing services, and (3) direct labor costs associated with providing customer support and services to the clients, members, and other external stakeholders. Total cost of revenue decreased 17.9% to $3.1 million for the three months ended March 31, 2021 compared to $3.8 million for the three months ended March 31, 2020. This decrease was driven by the reduction of service fees and direct labor expense in claims and member services.

 

Gross Profit

 

Gross profit decreased by 25.6% to $1.1 million for the three months ended March 31, 2021 compared to $1.5 million for the three months ended March 31, 2020, due to the lower run-out fees which tend to be higher margin services. As a response to the decline in gross profit, flexible labor reductions were enacted to better align revenues/volumes with labor costs and resources.

 

Operating Expenses

 

Operating expenses for the three months ended March 31, 2021 were $2.9 million, as compared to $4.4 million for the three months ended March 31, 2020. This represents a decrease of 34.0%, or $1.5 million. The decrease is primarily attributable to the following:

 

  (i) Administrative expenses, which consist of leadership, compliance, accounting, and indirect/secondary labor expenses decreased 44.7%, largely due to cost management and lower headcount.

 

  (ii) Information technology declined 35.5% from 2020 to 2021 primarily due to a decline in overall labor expense due to the shift of configuration services as well as efficiencies from previously implemented automated software initiatives and cost containment projects in 2020.

 

  (iii) Sales and marketing expenses decreased by 21.2%, or a total cost of $0.6 million for the three months ended March 31, 2021 compared to $0.8 million for the three months ended March 31, 2020. The reduction was attributed to a decrease in sales management headcount as well as the decline in travel and entertainment expenses due to the impacts of COVID-19 travel restrictions.

 

Liquidity and Capital Resources

 

Liquidity and Capital Resources as of and for the Three Months Ended March 31, 2021

 

The accompanying condensed consolidated financial statements have been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying condensed consolidated financial statements as of March 31, 2021, Continental Benefits had an accumulated deficit of $58,394,822 and had working capital of $2,249,019. At March 31, 2021, Continental Benefits had $4,579,903 of unrestricted cash on hand and no bank debt. Continental Benefits has historically met its cash needs through a combination of cash flows from operating activities, and periodic contributions from its member. Continental Benefits’ cash requirements are generally for operating activities.

 

Effective April 1, 2021, Continental Benefits is a wholly owned subsidiary of Marpai, Inc. The major investor of Marpai, Inc. has committed to financially support operations for the next twelve months from issuance of these financial statements.

 

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Working Capital

 

   March 31, 
   2021   2020 
Total Current Assets  $11,425,582   $10,096,239 
Total Current Liabilities   9,176,563    7,135,217 
Working Capital  $2,249,019   $2,961,022 

 

Cash Flows

 

   Three Months Ended March 31, 
   2021   2020 
Net loss  $(1,752,130)  $(2,857,747)
           
Net cash used in operating activities  $(2,997,212)  $(1,679,579)
Net cash provided by (used in) investing activities   13,832    (112,725)
Net cash provided by (used in) financing activities   313,454    (1,173,524)
Net decrease in cash and restricted cash  $(2,669,926)  $(2,965,828)

 

Net Cash Used in Operating Activities

 

Continental Benefits used net cash in operating activities of $2,997,212 and $1,679,579 for the three months ended March 31, 2021 and 2020, respectively. Net cash used in operating activities for the three months ended March 31, 2021 was primarily driven by the net loss of $1,752,130 and by a decrease in accrued liabilities of $2,672,799. Net cash used in operating activities for the three months ended March 31, 2020 was primarily driven by the net loss of $2,857,747, offset by unbilled receivables of $661,901 and deferred revenue of $867,647.

 

Net Cash Provided by (Used in) Investing Activities

 

Continental Benefits had net cash provided by investing activities of $13,832 and used in $112,725 for the three months ended March 31, 2021 and 2020, respectively.

 

Net Cash Provided by (Used in) Financing Activities

 

The $313,454 provided by and the $1,173,524 used in financing activities for the three months ended March 31, 2021 and 2020, respectively, were related to proceeds from capital contributions and payments for distributions.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are more fully described in the notes to our financial statements. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.

 

Revenue Recognition

 

Revenue is recognized when control of the promised services is transferred to Continental Benefits’ customers in an amount that reflects the consideration expected to be entitled to in exchange for those services. As Continental Benefits completes its performance obligations, which are identified below, it has an unconditional right to consideration, as outlined in Continental Benefits’ contracts. Generally, Continental Benefits’ accounts receivable are expected to be collected in 30 days in accordance with the underlying payment terms.

 

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Software Development Costs

 

Continental Benefits accounts for costs incurred in the development of computer software as software research and development costs until the preliminary project stage is completed. Direct costs incurred in the development of software are capitalized once the preliminary project stage is completed, management has committed to funding the project, and completion and use of the software for its intended purpose is probable. Continental Benefits ceases capitalization of development costs once the software has been substantially completed and is ready for its intended use.

 

Software development costs are amortized over their estimated useful lives, generally three years. Amortization commences when the software is available for its intended use. Costs associated with upgrades and enhancements that result in additional functionality are capitalized. Capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenue and changes in software technologies. Unamortized capitalized software development costs determined to be in excess of anticipated future net revenue are impaired and expensed during the period of such determination. The Company capitalized approximately $0 and $37,000 of internally developed software costs during the three months ended March 31, 2021 and 2020, respectively.

 

Income Taxes

 

Continental Benefits is treated as a partnership for federal income tax purposes. Consequently, federal income taxes are not payable or provided for by Continental Benefits. Taxable income and losses are reported on the income tax returns of Continental Benefits’ member, and no provision for federal income taxes has been recorded in the accompanying financial statements.

 

Recently Adopted Accounting Pronouncements

 

On January 1, 2020, the Company adopted the requirements of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and elected the optional transition method to apply the transition provisions from the effective date of adoption. There was no cumulative-effect adjustment to beginning retained earnings as a result of adopting ASC 842. The objective of this ASU, along with several related ASUs issued subsequently, is to increase transparency and comparability between organizations that enter into lease agreements. For lessees, the key difference of the new standard from the previous guidance (Topic 840) is the recognition of a right-of-use (ROU) asset and lease liability on the balance sheet. The most significant change is the requirement to recognize ROU assets and lease liabilities for leases classified as operating leases. The standard requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

 

In April 2019, the FASB issued ASU No. 2019-04 “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” ASU No. 2019-04 was issued as part of the FASB’s ongoing project to improve upon its ASC, and to clarify and improve areas of guidance related to recently issued standards on credit losses, hedging, and recognition and measurement. This guidance contains several effective dates but is applicable to the Company’s fiscal year beginning January 1, 2020. The adoption of this guidance did not have a material impact on its consolidated financial statements.

 

In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.” ASU No. 2018-18 was issued to resolve the diversity in practice concerning the manner in which entities account for transactions based on their assessment of the economics of a collaborative arrangement. This guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning January 1, 2020. The adoption of this guidance did not have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820. The ASU is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The adoption of this standard did not have any material effect on the Company’s consolidated financial statements or any component of member’s equity.

 

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In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning January 1, 2020. The adoption of this guidance did not have a material impact on its consolidated financial statements.

 

Recent Accounting Pronouncements

 

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No. 2020-04 provides guidance on optional expedients for a limited time to ease the operational burden in accounting for (or recognizing the effects of) reference rate reform (LIBOR) on financial reporting. This guidance is effective upon the ASUs issuance on March 12, 2020 and companies may elect to apply the amendments prospectively through December 31, 2022. The Company is reviewing its commercial contracts that may utilize LIBOR as a reference rate. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

 

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BUSINESS

 

The business described below is that of the combined business, which includes Marpai Health’s technologies and A.I. modules, as well as the business of the healthcare payer, Continental Benefits. “Purchase and Reorganization Agreement” refers to the Amended and Restated Equity Interest Purchase and Reorganization Agreement dated April 1, 2021, by and among Marpai, Inc. (“Buyer”), Marpai Health, all stockholders of Marpai Health (“Marpai Stockholders”), holders of convertible notes of Marpai Health (“Marpai Noteholders,” and collectively with the Marpai Stockholders, the “Marpai Sellers”), Continental Benefits, LLC (“Continental Benefits”), WellEnterprises USA, LLC (the “Company Seller” and collectively with the Marpai Sellers, the “Sellers”) and HillCour for the purpose of joinder, to effectuate Marpai, Inc.’s Acquisition of Marpai Health and Continental Benefits. “Effective Time” refers to the time of the closing of the Acquisition pursuant to the Purchase and Reorganization Agreement. “Transaction Document” refers to any agreement, certificate or instrument delivered by a party under or in connection with the Purchase and Reorganization Agreement.

 

Marpai Health

 

Marpai Health, Inc. (originally named “CITTA, Inc.”) was founded in February 2019 as a Delaware corporation. Together with its wholly-owned subsidiary, EYME Technologies Ltd., founded in March 2019 in Israel (“EYME,” and collectively with Marpai Health, Inc., “Marpai Health”), Marpai Health engages in developing and marketing artificial intelligence (“A.I.”) and healthcare technology to analyze data with the goal of predicting and preventing costly healthcare events related to chronic conditions and expensive medical and surgical procedures.

 

In August 2019, Marpai Health entered into an asset purchase agreement to acquire a software system and big data analytics platform for research, analysis and prediction of security related events using A.I. for law enforcement agencies (the “Purchased Assets”). The purchase price of the Purchased Assets was $3,250,000, consisting of $70,000 in cash, 31,250 shares of Marpai Health’s common stock, and the SQN Convertible Note in the aggregate principal amount of $2,930,000. Marpai Health has since customized the acquired software system and technology platform and built new A.I. modules on it for the purposes of porting the system to the cloud and making it available in a software as a service (“SaaS”) model to allow for usage in the healthcare industry and compliance with healthcare privacy and security regulations.

 

Marpai Health is a development stage company with no operating history. EYME serves as Marpai Health’s research and development center with nine A.I. and software researchers and engineers in Israel. For the twelve months ended December 31, 2020, Marpai Health reported no revenues and a net loss of approximately $3.9 million. As of December 31, 2020, Marpai Health reported total assets of approximately $6.5 million, of which approximately $3.8 million represented capitalized software. At March 31, 2021, Marpai Health had an accumulated deficit of $7.1 million, working capital deficit of $2.7 million and total debt of approximately $9.6 million.

 

Continental Benefits

 

Continental Benefits, LLC was founded in Florida as a limited liability company in November 2013 (“Continental Benefits”). Continental Benefits is a wholly owned subsidiary of WellEnterprises USA, LLC which was founded in 2012. Continental Benefits provides benefits outsourcing services to clients in the U.S. across multiple industries. Continental Benefits’ backroom administration and third-party administration (“TPA”) services are supported by a customized technology platform and a dedicated benefits call center. Under its TPA platform and TopCare® program, Continental Benefits provides health and welfare administration, dependent eligibility verification, Consolidated Omnibus Budget Reconciliation Act (“COBRA”) administration, and benefit billing.

 

For the twelve months ended December 31, 2020 and 2019, Continental Benefits reported net revenues of approximately $18.4 million and $20.3 million, respectively, and a net loss of approximately $12.5 million and $11.5 million, respectively. As of December 31, 2020 and March 31, 2021, Continental Benefits had an accumulated deficit of approximately $56.6 million and $58.4 million, respectively. WellSystems is a wholly-owned subsidiary of Continental Benefits. WellSystems had no significant activity for the years ended December 31, 2020 and 2019, and for the three months ended March 31, 2021.

 

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In September 2019, Marpai Health began to approach TPAs in an effort to commercialize its technology. Sharing the vision of bringing to market a healthcare “payor of the future” by using advanced A.I. technology in the TPA business, Marpai Health and Continental Benefits started to have discussions about information exchange, and joint development in December 2019 and Continental Benefits has been serving as Marpai Health’s A.I. products design partner ever since. Based on the data collected by Continental Benefits, Marpai Health developed various A.I. modules as well as a delivery system for its healthcare predictions. In August 2020, Marpai Health started to explore long-term strategic opportunities with Continental Benefits. In September 2020, the parties entered into a letter of intent pursuant to which Marpai Health will acquire Continental Benefits. On April 1, 2021, pursuant to the terms of the Purchase and Reorganization Agreement, the stockholders of Marpai Health and the sole member of Continental Benefits contributed their respective securities and ownership interests in Marpai Health and Continental Benefits to Marpai, Inc. for a combination of shares of Class A common stock and Class B common stock of Marpai, Inc. (the “Acquisition”). Options to purchase 225,558 shares of Marpai Health common stock and warrants to purchase 300,000 shares of Marpai Health common stock were exchanged, on a one to one basis, for options and warrants to purchase shares of our Class A common stock. In addition, pursuant to a Note Exchange Agreement, we issued New Notes in the aggregate principal amount of $2,198,459 in exchange for certain then outstanding convertible promissory notes of Marpai Health of equivalent amount of outstanding principal and accrued but unpaid interest. The SQN Convertible Note remains outstanding. For details on the Acquisition, see section titled, “Business - Marpai, Inc.’s Acquisition of Marpai Health and Continental Benefits” below.

 

The healthcare industry is highly regulated and the criteria are often vague, and subject to change and interpretation by various federal and state legislatures, courts, enforcement and regulatory authorities. Only a treating physician can determine the condition and appropriate treatment for any individual patient. Future prospects of the combined company are subject to the legal, regulatory, commercial and scientific risks. Marpai Health has not been profitable since inception, and Continental Benefits has incurred significant losses for the past three years. The combined company may continue to incur operating losses for at least the next twelve months. See the section titled “Risk Factors.”

 

Marpai, Inc.’s Acquisition of Marpai Health and Continental Benefits

 

The following is a summary of the material terms of the Purchase and Reorganization Agreement. The Purchase and Reorganization Agreement contains representations and warranties that Marpai, Inc., on the one hand, and the Sellers on the other hand, have made to one another as of specific dates. The assertions embodied in the representations and warranties are qualified by information in confidential disclosure schedules exchanged by the parties. Some of these schedules contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Purchase and Reorganization Agreement.

 

The following summary has been included in this prospectus to provide you with information regarding the terms of the Acquisition, does not purport to be complete, and is qualified in its entirety by reference to the Purchase and Reorganization Agreement.

 

General

 

On April 1, 2021, pursuant to the terms of the Purchase and Reorganization Agreement, the stockholders of Marpai Health and Continental Benefits contributed their respective ownership interests in Marpai Health and Continental Benefits to Marpai, Inc. for a combination of shares of our Class A common stock and Class B common stock (collectively, “Common Stock”) of Marpai, Inc. (the “Acquisition”). Options to purchase 225,558 shares of Marpai Health common stock and warrants to purchase 300,000 shares of Marpai Health common stock were exchanged, on a one to one basis, for options and warrants to purchase shares of our Class A common stock. In addition, pursuant to a Note Exchange Agreement, we issued New Notes in the aggregate principal amount of $2,198,459 in exchange for certain outstanding convertible promissory notes of Marpai Health of equivalent outstanding principal and accrued but unpaid interest. HillCour and WellEnterprises, LLC agreed to perform certain transition services for us pursuant to a Transition Services Agreement.

 

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The Acquisition was treated as an integrated transaction for U.S. federal income tax purposes, qualified as a tax-free reorganization pursuant to section 351 or 368 of the Internal Revenue Code of 1986, as amended.

 

The Purchase and Reorganization Agreement required that Continental Benefits to not have less than $4.762 million of cash on hand, and to have no debt at the time of closing of the Acquisition.

 

Pursuant to the Purchase and Reorganization Agreement, Continental Benefits was valued solely for purposes of the Acquisition, on a cash-free and debt-free basis, at $8.5 million. Including the $4.762 million of cash on Continental Benefits’ balance sheet, equity totaled $13.26 million. In addition, pursuant to Purchase and Reorganization Agreement, Marpai Health was valued solely for purposes of the Acquisition at an assumed pre-money valuation of the last convertible note’s conversion price of $35 million.

 

As a result of the Acquisition,

 

  We have acquired all of the then outstanding membership interests of Continental Benefits in exchange for 790,103 shares of our Class A common stock and 27,905 shares of our Class B common stock and, subject to certain adjustments as more fully described in the Purchase and Reorganization Agreement, based upon a valuation as a separate concern of $8.5 million on a cash free and debt free basis;
     
  We have acquired all of the then outstanding capital stock Marpai Health in exchange for an aggregate of 728,906 shares of our Class A common stock and 899,912 shares of our Class B common stock, based upon the valuation of Marpai Health as a separate concern of $35 million;
     
  We have satisfied and retired Marpai Health’s then remaining and outstanding convertible promissory notes, with aggregate outstanding principal and accrued but unpaid interest of $2,198,459, in exchange for the New Notes of equivalent aggregate principal amount;
     
  Marpai Health has still the SQN Convertible Note outstanding;
     
  All options granted by Marpai Health have been assumed by us and exchanged into options to purchase our Class A common stock. The exchange of certain options issued by Marpai Health to employees of EYME Technologies Ltd., a wholly owned subsidiary of Marpai Health, is subject to the issuance of a tax ruling by the Israeli Tax Authority;
     
  All awards of phantom units granted under Continental Benefits, LLC Long-Term Incentive Plan were discharged; and
     
  All outstanding warrants granted by Marpai Health automatically converted into warrants to purchase our Class A common stock at the same exercise price as they were initially granted by Marpai Health.

 

In addition, pursuant to the Purchase and Reorganization Agreement, the seller of Continental Benefits, WellEnterprises USA, LLC, as well as its owner and affiliate, HillCour, Inc., agreed, subject to the closing of the Acquisition, to be exclusively responsible for, pay, fully satisfy and otherwise discharge in full certain liabilities that existed as of April 1, 2021 (the “Closing Date”), both known and unknown as of such date:

 

  Continental’s phantom unit awards outstanding on the Closing Date;

 

  the failure of Continental to possess or maintain effectiveness of any permit which was required for the operation of the business of Continental Benefits prior to closing;

 

  any proceedings relating to or in connection with any actual violation of or failure to comply with any Healthcare Law (as defined in the Purchase and Reorganization Agreement) prior to closing;

 

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  any disciplinary or enforcement action from any governmental authority related to the operation of Continental Benefits’ business prior to closing, whether or not related to taxes or a violation of Healthcare Laws;

 

  any litigation or cause of action outside the ordinary course of business relating to the operation of the Continental’s business prior to Closing;

 

  the failure of Continental to pay any taxes for the period prior to closing when due;

 

  any violation of the Privacy and Security Laws relating to the operation of Continental’s business prior to Closing;

 

  certain claims or litigation by a client of Continental; and

 

  certain amounts paid by Continental in excess of the amount received from the Continental’s customer (or the customer’s health benefit plan) with respect to certain unresolved billing dispute claims.

 

Pre-Acquisition Entity

Structure

 

 

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Marpai, Inc.’s Current Structure

 

 

Effective Time of the Acquisition

 

The Acquisition became effective on April 1, 2021.

 

Treatment of Marpai’s Stock Options and Continental Benefits’ Phantom Units

 

Each outstanding option of Marpai Health has been assumed by Marpai, Inc. and automatically converted into an option to purchase shares of Marpai, Inc.’s Class A common stock. Prior to the Effective Time, Continental Benefits and HillCour have discharged all awards of phantom units granted under the Continental Benefits, LLC Long-Term Incentive Plan. The aggregate value of the discharged phantom unit awards is estimated to be $1,032,000.

 

Representations and Warranties

 

The Purchase and Reorganization Agreement contained representations and warranties of Marpai, Inc., Marpai Health, each Marpai Seller, WellEnterprises, LLC, HillCour, and Continental Benefits, for a customary transaction of this type relating to, among other things which include, in addition to other customary closing conditions, (i) organization, capacity and standing; (ii) authority and enforceability of the Purchase and Reorganization Agreement and related documents; (iii) absence of conflict; (iv) the absence of undisclosed liabilities; (v) capitalization; (vi) litigation; (vii) compliance with laws; (viii) the absence of undisclosed liabilities; (ix) absence of material adverse effect; (x) investment intent; broker fees; (xi) adequate investigation; (xii) independent investigations; (xiii) absence of rights to purchase securities of Continental Benefits; (xiv) the phantom unit schedule; (xv) absence of unnamed subsidiaries; (xvi) financial statements; (xvii) contracts; (xviii) legal company contracts; (xix) real estate; (xx) personal property; (xxi) accounts receivable; (xxii) title to assets; sufficiency of assets; (xxiii) employment matters; (xxiv) employee benefits; (xxv) litigation; (xxvi) compliance with laws; (xxvii) intellectual property; (xxviii) environmental matters; (xxix) tax matters, (xxx) insurance; (xxxi) transactions with affiliates; (xxxii)  absence of certain business practices; (xxxiii) suppliers and Customers; (xxxiv) healthcare laws; (xxxv) data privacy; (xxxvi) no brokers or finders; (xxxvii) PPP Loan, (xxxvii) nonpublic offering (xxxviii) investment representation; (xxxix) title and validity of Marpai Securities; and (xxxx) Marpai, Inc. stock certificate legends.

 

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Intended Tax Treatment of Acquisition Transaction

 

Consummation of the transactions contemplated by the Purchase and Reorganization Agreement, including the Acquisition along with our initial public offering, is intended to be treated as an integrated transaction for U.S. federal income tax purposes, qualified as a tax-free reorganization pursuant to section 351 or 368 of the Internal Revenue Code of 1986, as amended.

 

Discharge and Satisfaction of Covered Liabilities

 

In addition, the seller of Continental, WellSystems, LLC, as well as its owner and affiliate, HillCour, Inc., have agreed to be exclusively responsible for, pay, fully satisfy and otherwise discharge in full certain liabilities that exist as of Closing Date or may arise in the future, related to following categories of events, facts, acts, omissions, circumstances and/or subject matters, and that relate to the period prior to the Closing Date, both known and unknown as of such date (collectively, the “Covered Liabilities”):

 

  Continental’s phantom unit awards outstanding on the Closing Date;

 

  the failure of Continental to possess or maintain effectiveness of any permit which was required for the operation of the business of Continental Benefits prior to closing;

 

  any proceedings relating to or in connection with any actual violation of or failure to comply with any Healthcare Law (as defined in the Purchase and Reorganization Agreement) prior to the Closing Date;

 

  any disciplinary or enforcement action from any governmental authority related to the operation of Continental Benefits’ business prior to closing, whether or not related to taxes or a violation of Healthcare Laws;

 

  any litigation or cause of action outside the Ordinary Course of Business relating to the operation of the Continental Benefits’ business prior to Closing

 

  the failure of Continental to pay any taxes for the period prior to closing when due;

 

  any violation of the Privacy and Security Laws relating to the operation of the Continental Benefits’ business prior to Closing;

 

  any claim or litigation by a client of the Company as described in the Purchase and Reorganization Agreement; and

 

  any amounts paid by the Company in excess of the amount received from the Company’s customer (or the customer’s health benefit plan) with respect to any unresolved billing dispute claim in excess of $50,000 existing as of the closing and any unresolved billing dispute claim older than one hundred eighty (180) days as of the Closing Date.

 

Class B Conversion

 

On June 28, 2021, Eli David, Yaron Eitan, Edmundo Gonzalez, Grays West Ventures LLC, HillCour Investment Fund, LLC, and WellEnterprises USA, LLC converted an aggregate of 927,817 shares of the Company’s Class B common stock they held into 927,817 shares of Class A common stock on a one to one basis (“Class B Conversion”). Until the Class B conversion, the Company was authorized to issue two classes of common stock, Class A common stock and Class B common stock. The issued and outstanding shares of Class B common stock were converted into Class A common stock as described above, and the authorized class of Class B common stock was eliminated with the filing of the Second Amended and Restated Charter.

 

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Power of Attorney and Proxy

 

Concurrently with the Class B Conversion, the Company, (i) HillCour Investment Fund, LLC and WellEnterprises USA, LLC (together, the “HillCour Founding Group”) and (ii) Eli David, Yaron Eitan, Edmundo Gonzalez and Grays West Ventures LLC (collectively, the “Grays Founding Group,” and together with the HillCour Founding Group, the “Co-Founders”) entered into the Power of Attorney and Proxy pursuant to which the HillCour Founding Group granted the Grays Founding Group the right to vote 342,471 shares of the Company’s Class A common stock it held (“Proxy Shares”) on all matters relating to any of the following: (i) change to the composition of the Company’s Board of Directors; (ii) sale of all or substantially all of the Company’s assets or capital stock, or a merger involving the Company; (iii) replacement of the Company’s CEO or other C-level officers; (iv) amendment or approval of any corporate documents or agreements in connection with the Company’s corporate structure or capital raising activities; (v) approval of the Company’s annual budget and business plan; and (vi) the Company’s acquisition, joint venture or other collaborative agreements. Consequently, the HillCour Founding Group and the Grays Founding Group currently have the right to vote 858,960 and 858,959 shares of the Company’s capital stock, respectively. The Power of Attorney and Proxy also provides that the number of Proxy Shares is subject to adjustment from time to time so as to maintain as much as possible, equal voting power in the Company between the HillCour Founding Group on the one hand and the Grays Founding Group on the other, subject to certain exceptions related to transfer of shares by the parties.

 

Pursuant to this Power of Attorney and Proxy, the Co-Founders have also agreed to vote all their shares for the election of (a) Damien Lamendola (or another nominee of the HillCour Founding Group), (b) Edmundo Gonzalez; and (c) Yaron Eitan (or up to two other nominees of the Grays Founding Group) as the Company’s directors. The Power of Attorney and Proxy is irrevocable and will remain in full force and effect until the earlier of (i) consummation of the sale of all or substantially all of the Company’s assets, or the acquisition of the Company by a third party (by way of stock acquisition, merger, recapitalization or otherwise), or (ii) the time when the Grays Founding Group collectively owns fewer than 413,190 shares of the Company’s capital stock.

 

Directors and Executive Officers of the Combined Company

 

Pursuant to the terms of the Purchase and Reorganization Agreement, all of the directors of Continental Benefits have resigned. Effective as of the Closing, the combined company’s board of directors is fixed at seven members and comprised of two former members of Marpai Health’s executive management team, four independent directors, and Damien Lamendola, the indirect majority owner of WellEnterprises USA, LLC and HillCour. The composition of the board of directors is expected to satisfy the requisite sophistication and independence requirements for audit committee members pursuant to Nasdaq listing requirements.

 

Our current management team consists of the following members of the former Marpai Health executive 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
         
Mordechai Geva, Ph.D.   Chief Technology Officer   Co-founder, Chief Technology Officer of Marpai Health

 

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Indemnification

 

HillCour is a party to the Purchase and Reorganization Agreement solely for the purposes of its joinder provisions. HillCour agrees to pay and perform, and to be jointly and severally liable with WellEnterprises USA, LLC, the Company Seller, for its Covered Liabilities obligations and indemnification obligation to Marpai, Inc. against all Losses relating to either (collectively, the “Guaranteed Obligations”):

 

  any breach by WellEnterprises, LLC or Continental Benefits of a representation or warranty in the Purchase and Reorganization Agreement or any Transaction Document; or

 

  any breach, non-performance or non-compliance of any pre-Closing or post-Closing covenant or agreement of the WellEnterprises, LLC and/or pre-Closing covenant or agreement of Continental Benefits contained in the Purchase and Reorganization Agreement or any Transaction Document.

 

HillCour’s liability under the joinder provisions will not be affected by (a) any amendment to the Purchase and Reorganization Agreement, (b) the release or discharge of Company Seller in any creditors’ rights, receivership, bankruptcy or other insolvency proceedings, (c) the impairment, limitation or modification of the liabilities of Company Seller to Marpai, Inc. resulting from the operation of any present or future provision of the U.S. bankruptcy code or other insolvency statute, (d) any suretyship defenses or other defenses to the enforcement of guarantees generally, or (e) the rejection or disaffirmance of the Purchase and Reorganization Agreement in any such bankruptcy or insolvency proceedings.

 

HillCour’s obligations under the joinder provisions continue, and remain in full force and effect notwithstanding, without limitation, the dissolution of Sellers or until fulfillment or termination of all of the Guaranteed Obligations.

 

HillCour represents that it is deriving direct or indirect benefits from the transactions contemplated by the Purchase and Reorganization Agreement, and that HillCour’s execution of Purchase and Reorganization Agreement is a material inducement to Marpai Inc.’s execution of the Purchase and Reorganization Agreement.

 

Under the terms of the Purchase and Reorganization Agreement, Marpai, Inc. has agreed to indemnify WellEnterprises USA, LLC and certain of its affiliates agreed to indemnify Marpai, Inc. with respect to Losses based upon, asserted against, arising out of, or relating to: (1) any breach or inaccuracy of Marpai, Inc.’s representations and warranties, covenants and agreements in the Purchase and Reorganization Agreement; (2) any breach, non-performance of or non-compliance with any post-Closing covenant or agreement by Marpai, Inc., or Continental Benefits; and (3) fraud by Marpai, Inc.

 

WellEnterprises USA LLC has agreed to indemnify Marpai, Inc. with respect to Losses based upon, asserted against, arising out of, or relating to: (1) any breach or inaccuracy of WellEnterprises USA LLC’s representations and warranties, covenants and agreements in the Purchase and Reorganization Agreement; (2) any breach, non-performance of or non-compliance with any post-Closing covenant or agreement by WellEnterprises USA LLC or Continental Benefits (3) any of the Covered Liability; and (4) fraud by WellEnterprises USA LLC.

 

Any obligation of WellEnterprises USA LLC to indemnify Marpai, Inc. against Losses arising out of: (1) any breach or inaccuracy of any representation or warranty of Continental Benefits or Company Seller contained in the Purchase and Reorganization Agreement or any Transaction Document; (ii) any breach, non-performance or non-compliance of any pre-Closing or post-Closing covenant or agreement of the Seller and/or pre-Closing covenant or agreement of the Continental Benefits contained in the Purchase and Reorganization Agreement or any Transaction Document; will be satisfied (i) first, from the Escrow Amount, until such amount has been exhausted or released or otherwise reserved in respect of a claim, and (ii) last, directly by Company Seller.

 

Registration Rights

 

We agreed that if, following the date of the Purchase and Reorganization Agreement, we sell or issue any securities (including securities convertible into or exchangeable or exercisable for any shares of our capital stock) that entitles any holder thereof to registration rights with respect to such securities (or any shares of capital stock issuable upon conversion or exercise of such securities), or otherwise grants registration rights to any of our existing security holders (the “Registration Rights”), then we will also grant the same Registration Rights to the Marpai Sellers and WellEnterprises, LLC on a pari passu basis, provided that all securityholders with Registration Rights shall be subject to all customary provisions and restrictions required by us in relation thereto, including without limitation, lockups, cutbacks, and underwriting undertakings.

 

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Interest of Certain Persons in the Acquisition

 

Certain of our officers, directors or director nominees received a direct or indirect benefit as a result of the Acquisition that would not be realized by the holders of our Class A common stock generally. See “The Acquisition - Certain Relationships and Related Party Transactions”.

 

Prior to the Closing, Continental Benefits was 100% owned by WellEnterprises USA LLC which was 100% owned by HillCour, Inc. (“HillCour”). HillCour also used to hold approximately 21.5% of equity interests of Marpai Health. HillCour is 100% owned by HillCour Holding Corporation. Our Director, Damien Lamendola, is the indirect majority owner of WellEnterprises USA, LLC and HillCour, and the direct majority owner of HillCour Holding Corporation. Mr. Lamendola currently indirectly holds approximately 50.7% of the outstanding capital stock of the Company, and assuming full conversion of the New Notes and the June 2021 Notes, he can hold as much as 51.0% of the outstanding capital stock of the Company.

 

Accounting Treatment

 

Marpai, Inc. accounts for business combinations pursuant to Accounting Standards Codification ASC 805, Business Combinations. In accordance with ASC 805, the Company uses its best estimates and assumptions to accurately assign fair value to the assets acquired and the liabilities assumed at the acquisition date. Goodwill as of the acquisition date is measured as the excess of the purchase consideration over the fair value of the assets acquired and the liabilities assumed. The results of the Marpai Health and Continental Benefits have been included in the consolidated financial statements of Marpai, Inc. since the date of the Acquisition.

 

Our Business

 

We are a technology-driven healthcare payer, which uses A.I. to predict and help prevent costly events for our Members, and in turn lower our Clients’ health care costs. 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. Currently, we have over 60 Clients. We provide services to a total of over 20,000 of our Clients’ employees, and including their spouses and dependents, we serve a total of over 40,000 Members in 44 states in addition to the District of Columbia. No single Client represents more than 6% of our annual revenue.

 

Industry Trends in the Healthcare Payer Market

 

Today, some megatrends are affecting all participants in the healthcare ecosystem, including payers, providers, and patients:

 

1. Rising Healthcare Costs – Healthcare expenditures have grown in the U.S. from 5% of GDP (Gross Domestic Product) in 1960 to 18% of GDP in 2019, according to Statistica, a consultancy. Per capital healthcare costs (adjusted for inflation and presented in 2020 dollars) increased from $5,801 in 1990 to $7,425 in 2000 to $10,222 in 2010, and these are projected to be greater than $12,000 in 2020 according to our analysis based on the Health System Tracker of the Peterson Center on Healthcare and Kaiser Family Foundation.
   
2. A.I. to Help Manage Expansive Volume of Electronic Healthcare Data – The volume of all data of all types is estimated to double every two years, but healthcare data is growing at an even faster pace. In 2020, 2,413 exabytes of healthcare data will be generated compared to only 153 exabytes in 2013 (an exabyte is a billion gigabytes), according to Statista. With so much data, the latest breakthroughs in A.I., specifically in the field of deep learning, are beginning to make an impact in healthcare.

 

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3. Consumerism in Healthcare – Devices that monitor our vital signs, such as the Apple Watch® and FitBit® as well as myriad health and wellness applications, demonstrate the trend toward having consumers at the center of healthcare, including trying to change behaviors that lead to better healthcare outcomes.

 

Key drivers of healthcare cost increases are chronic diseases and various forms of waste.

 

Chronic diseases - According to the Centers for Disease Control and Prevention (“CDC”), chronic conditions such as diabetes, cardiovascular diseases and pulmonary conditions, account for 75% of the U.S. aggregate spending on healthcare each year. Our Clients’ data also suggest that the cost of care for a Member with a chronic condition, such as diabetes, hypertension, chronic obstructive pulmonary disease (“COPD”) and kidney diseases, is two to four times as much as the average cost of care for one without any chronic conditions.  As many chronic diseases can be prevented and managed given early detection, it is vital that a patient who is on a path to develop these chronic diseases be identified and be given preventive care treatments as early as possible.

 

Waste - A survey of 54 peer-reviewed studies found that up to 30% of medical spending is wasted, according to “Waste in the US Health Care System – Estimated Costs and Potential for Savings,” published in the Journal of the American Medical Association (“JAMA”) in October 2019. Among the waste identified, they include:

 

  Waste related to care coordination (organizing a patient’s care to achieve safe and effective care) – $27 billion to $78 billion annually;

 

  Waste related to failure of care delivery (timely and effective care) – $102 billion to $166 billion annually; and

 

  Waste related to failure to obtain the best pricing – $231 billion to $240 billion annually.

 

In our own Clients’ data, we see wide price variations for the same medical/healthcare procedure in the same city of between four and seven times the median cost. According to a study by UnitedHealth in published May 2019, one of the largest payers in the U.S., reducing the cost variations of common tests could result in an annual saving of $18 billion. Our TopCare® program identifies top-rated test centers and healthcare providers with pricing information and allows us to steer a Member to get the same test (e.g., MRI, CT scan) with the same equipment but at a more competitive price by switching from one provider to another within the same geographic area.

 

Market Opportunities

 

According to the Employee Benefit Research Institute, approximately 78.7% of U.S. companies with 500 or more employees offered a self-insured plan as of 2018. Collectively, private employers are the largest source of healthcare insurance in the U.S.

 

The market is dominated by the five largest healthcare payers – United Healthcare, BlueCross (including its licensee, Anthem), Aetna, Cigna and Humana – and according to their annual reports, they serve approximately 194 million Americans. The U.S. has an insured population of approximately 298 million, leaving 104 million people to be served by the thousand or so other insurers or TPAs based on the National Association of Insurance Commissioners U.S. Health Insurance Industry 2019 Annual Results. Continental Benefits is partnered with 2 of the largest medical networks Cigna and Aetna and is considered a strategic partner for the larger firms to capture the “middle-market” of self-insured clients.

 

The average annual healthcare expenditure is approximately $11,000 per person, according to the Centers for Medicare & Medicaid Services (“CMS”) as of 2018. In other words, a total of approximately $1.2 trillion in claims of healthcare costs are processed by healthcare payers that are not one of the five largest payers in the U.S. We believe the segment of the market not served by the largest five payers present us with a market opportunity of approximately $39.9 billion in revenue, which includes our administration fees as well as our share of revenue from selling other products such as care management services or actuarial services, to our Clients.

 

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Our A.I. Capabilities – Deep Learning

 

During the past few years, we have witnessed the greatest leap in performance in the history of A.I., largely due to a subfield of A.I. known as “deep learning” (or “deep neural networks”). While traditional machine learning methods require extensive manual processing (e.g., for feature extraction), deep learning methods allow for “end-to-end” learning, directly operating on raw data and predicting the final outcome.

 

The accuracy of deep learning-based models is significantly higher than traditional machine learning models especially when more data and more data types are available. This makes deep learning very relevant for big data platforms, which involve large quantities of data and various data types. Despite the huge success of deep learning in improving the state-of-the-art computer vision, speech recognition, text understanding, and other areas, few companies have the expertise to develop and deploy deep learning-based solutions, due to the numerous technical challenges involved. We believe that is why the application of deep learning remains limited in the healthcare space and primarily confined to medical image processing today.

 

We are creating a robust deep learning infrastructure that would allow us to analyze nearly any data type. More importantly, this infrastructure is expected to have the capability to automatically train on multiple data types at once and obtain unified predictions. Specifically, over time, we expect our deep learning capabilities to be used for the following data types:

 

  Structured data - Any form of data that results in a tabular database. Examples of such data include laboratory tests, claims data, and payment details to healthcare providers. Our deep learning models for structured data, which rely on fully connected neural networks, allow us to automatically train on any such structured databases, and incorporate the insights into the predictive models.

 

  Images - While traditional image processing requires cumbersome development for each specific use case, deep learning-based models can directly operate on any image data, without having to go through a preprocessing feature extraction phase. We are developing a series of deep learning models based on convolutional neural networks that could be extended for processing medical images, including radiology imaging such as MRI, CT Scan, X-Ray, Ultrasound, PET Scan, as well as processing other types of medical images, such as those in dermatology, pathology, and ophthalmology.

 

  Text - Traditionally, analyzing text data requires lengthy natural language processing (“NLP”). Recent breakthroughs in deep learning, especially the advent of transformer networks (e.g., BERT), allow for end-to-end training of language models which are significantly more accurate than previous NLP methods. Our infrastructure includes support for these deep learning-based language models, allowing us to automatically process textual data as well. A prime example of textual medical data is the plain text description of doctors’ notes, which includes information about the symptoms, diagnosis, and treatment. Even though some of this data, such as disease codes, appear in structured databases as well, the textual data contains significantly more information that does not appear elsewhere.

 

  Multi-type data - Deep learning can also be applied on multiple data sources and data types. For each data type at the first stage, the relevant deep learning models are applied (e.g., CNN for images, Transformers for text, etc.), and then, at the second stage, the processed information from various data sources is fed into a secondary deep learning model, which will provide unified predictions. This is one of the major advantages of deep learning over traditional A.I., allowing it to incorporate multiple big data sources into a single unified prediction model, far exceeding the accuracy rate achieved by traditional methods.

 

  Data fusion - We have the ability to study different data types together. Data that are images (e.g., CT scan) with data that are in tabular form (e.g., figures from healthcare claims). Putting these different data types together is data fusion.

 

The largest technology players have been aggressive recruiters of the top A.I. talent around the world. Marpai Health has been able to recruit and maintain top talent largely due to potential employees wanting to work with Dr. Eli David. As Dr. David maintains his professorship in the A.I. field, we believe he will continue to have a pipeline of qualified candidates, mostly Masters and PhD students, who are potential hires for us as our needs expand. We believe this will give us a competitive advantage.

 

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Our TopCare® Program

 

We believe that our A.I. capabilities in the area of deep learning enable us to make more accurate predictions about costly healthcare events using data types that are hard or impossible to use using traditional A.I. This allows us to help our Clients prevent costly healthcare events, and reduce the growth of long-term healthcare spending while also improving the quality of healthcare, which is commonly known as “bending the cost curve” in our industry.

 

Continental Benefits has been providing its TPA services on its patent-pending TopCare® program for the past two years. Since January 2021, our A.I.-powered TopCare program® became live, making it possible for us to offer care management with high-impact predictions. Our A.I. technology is able to process, analyze and store myriad types of data in large scale. Our A.I. models recognize patterns and detect anomalies, giving us greater insights on a patient’s medical trajectory, although we do not provide medical prognosis, or are engaged in the practice of medicine of any sort. Our A.I.-enabled predictions generate real-time alerts based on that trajectory allow our call center staff to start outreaching and recommend the best care to an at-risk Member, whether that is a visit to a primary care physician or to a specialist, for a root cause or drill down analysis. With a full disclaimer to the Member that our system does not provide medical advice or prognosis, our call center staff encourages the Member to develop an actionable healthcare plan with licensed medical professionals. Using our innovative technology, TopCare® allows us to help self-insured employers manage their employees’ healthcare needs proactively.

 

The current data types our A.I. technology uses to predict healthcare needs include the following structured data:

 

  Historical claims data (including a medical examination, referral request or pharmaceutical prescription);
  Demographic information; and
  Blood test and other laboratory test data.

 

In the future, we expect our A.I. technology to use the following unstructured data types to predict healthcare needs:

 

  Pathology image;
  Advanced images from X-ray, magnetic resonance imaging (“MRI”) and computed tomography (“CT”);
  Electronic health records;
  Health risk assessments;
  Information gathered from applications used by Members; and
  Information gathered from applications used by Members; and
  Information gathered from wearables like Fitbit devices and the Apple watch.

 

In the future, we intend to incorporate clinicians directly into our TopCare® Program so that we may communicate directly with Members regarding the insights generated by our technology, subject to strict compliance with federal, state and local regulations. Our A.I.-enabled predictions help both Members and their Providers to be proactive and get in front of costly healthcare events, so they can predict, prevent, and plan around them. We believe our services to provide not only lower costs, but also better value for the money spent on healthcare, and therefore greatly reducing any waste related to care coordination and care delivery. Eventually, we hope our technology will inform Members as to any specific health risks they should be cognizant of, in order to adjust their behavior and medical care accordingly.

 

The key components of our TopCare® program include:

 

  Deep Member Profile – We understand a Member’s health based on their medical history, demographic information, historical claims, and in some cases, what they have shared with us as their own health risk assessments. All this data is fed through various deep learning modules and automatically processed;

 

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  Claims Trajectory – Our A.I. models have studied millions of claims and have mapped out an expected trajectory for Members. The predictions are based on all available data on each Member. Currently, the data includes structured data, such as demographic information, historical claims, laboratory test data when available. In the future, we expect the data to include unstructured data, such as medical images, text-based assessments and other types of health records. All these data will be fed into deep learning models for each data type, and subsequently fed into a unified deep learning model which finds patterns and insights across all data and data types available for the Member; and

 

  Alerts – Our A.I. models come to life via alerts, which are triggered by an event such as a particular claim. Each alert is a new data point for each Member, invoking the entire model to update its predictions. Deep learning models are especially superior for finding non-linear patterns and correlations. For example, a new data point X that apparently is completely unrelated to prediction Y, may actually affect it through complex non-linear patterns, which are very difficult for humans and traditional A.I. to find, but deep learning models are very good at finding those patterns, which trigger new actionable alerts. These alerts allow the TopCare® team to start outreaching to an at-risk Member.

 

Matching Members with High Quality Providers

 

Matching Members with high-quality providers is a key component of our services. Provider quality is continuously tracked and measured by feeding A.I. models with various provider quality databases. Monitoring providers’ outcomes, costs, and proper conduct will allow our models to score good and poor-quality providers as well as measure cost-efficiency. This information will allow us to assist Members in making more informed decisions on their healthcare provider options.

 

Although we do not provide medical prognosis or are engaged in the practice of medicine of any sort, we believe our A.I. technology can in the future process in-depth insights from laboratory results, imaging, and electronic health records to help us detect suspicious claims and potential over-treatment. These cases are always examined by clinicians and may be used to educate both Members and Providers, or otherwise steer Members to better healthcare solutions. High-performing Providers will be used by our A.I. models for developing the “gold standard” with respect to pricing models and to understand what is usual and customary in terms of costs.

 

Given the high price variability for expensive medical procedures, we want to steer Members to cost-effective but also high-quality providers. For instance, TopCare® may generate an alert for a Member who is on a trajectory to have a knee replacement surgery over the next twelve months. In that case, without specifically relaying the contents of our system-generated alerts to the Member, we will educate the Member early on his/her options in terms of highly rated orthopedic surgeons for that exact procedure within his/her geographic area. This may happen months before the actual surgery and involves the Member’s choice of care. This helps reduce any waste related to not obtaining the best pricing for healthcare options. Clients’ plans may also allow for incentives whereby the Member’s co-insurance is reduced or eliminated if he/she selects the high-quality and more cost-effective surgeon. In the future, subject to strict compliance to applicable federal, state and local laws, we plan to be able to share the insights generated by our alerts with our Members.

 

For our Clients, we use A.I. to design and optimize plans and costs given the historical data of its employee population and its predicted costly healthcare events. This information forms the building-blocks of plan design, risk management, and plan optimization. Continuous monitoring of the at-risk population as well as measuring how mitigation strategies are working are also key components to lowering the overall cost of claims.

 

Part of the technology in our TopCare® offering also tracks member outreach to see how and if the Member has responded, and what communication vehicles are the most successful for a particular Member (e.g. text, email, phone call). This data helps us tailor outreach that best facilitates Member responses and, therefore, reduces waste related to care coordination and care delivery. The response is also fed through a feedback loop to the deep learning models to not only improve the predictions, but more importantly, the actionable alerts.

 

Our Products and Services

 

We differentiate ourselves by using A.I. to predict costly healthcare events before they happen. These predictions enable us to provide proactive intervention and superior care management to our Clients. For example, our A.I. modules help to predict which Members are likely to develop a chronic disease or require a costly medical procedure over the next twelve months. With this information, we refer Members to high quality healthcare providers who may be able to help them postpone or eliminate the onset of the chronic disease, or the need for costly medical procedures. Healthier Members cared for by high quality providers translates into lower total cost of healthcare claims for employer groups. In the future, assuming strict compliance with applicable federal, state and local regulations, we hope to be able to share the specific contents of these alerts directly with our Members.

 

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Our current core product and service offering includes handling all aspects of administration related to a healthcare plan. We typically design for our Client a healthcare benefit plan which outlines exactly what coverage the Client would like to provide to its employees.

 

We then manage the plan for the Client by providing the following services:

 

  Providing a Client’s employees access to a provider network via relationships with Aetna, Cigna, and regional networks;

 

  Concierge type services to help members find providers and care management as well as to answer questions, such as on claims and benefits;

 

  Validating and adjudicating claims from Clients’ employees, including automated adjudication;

 

  Promoting health and use of high-quality providers to the member population across Clients;

 

  Paying claims on behalf of our Clients; and

 

  Stop-loss insurance via one or several providers.

 

We do not bear the financial risk with respect to the cost of the claims for any employer. Instead, the self-insured employers and stop-loss insurance companies, if the self-insured employers purchase stop-loss insurance policies to protect themselves from having higher than planned healthcare costs, bear the risk arising from the cost of claims. We sell complementary services to our Clients including care management, case management, actuarial services, health savings account administration and bill review services. Our margin on these partner products varies greatly, but each service makes the overall package for our Clients more complete.

 

Our Strategy

 

Our strategy is to create a proprietary technology platform enabling rapid growth in the healthcare payer market. With the use of A.I., we believe we can achieve our dual goals of lowering the cost of claims for Clients, while maintaining high quality healthcare outcomes for Members.

 

Today, we have already developed six A.I. modules to predict the following chronic conditions:

 

  Type 2 Diabetes;
  Cardio-vascular disease;
  Kidney disease;
  Chronic obstructive pulmonary disease (COPD);
  High-cost imaging of knee; and
  Knee replacement.

 

These modules allow us to identify which members to enroll in care management. In January 2021, our A.I.-powered TopCare program® became live, making it possible for us to offer care management with high-impact predictions. Eleven Clients have signed up to use this enhanced product offering on a trial basis as a prototype as of July 2021. We plan to continue to develop our technology, expand the number of A.I. modules TopCare® will incorporate as well as other functionalities, and sign up as many Clients who will pay a premium price for this enhanced product offering as possible.

 

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Although our A.I. technology has not yet been integrated with any of our TPA business’ core systems, other than TopCare, to date, we plan to use A.I. in virtually every part of our TPA business by the end of 2022 as follows:

 

Claims management that will enable accurate auto-adjudication of most claims, which will lower our operating costs and increase our operating efficiency. This will also include detecting and flagging suspicious claims before final adjudication.
   
Member engagement and self-service options via an intuitive and easy-to-use application, which will also lower the cost to serve Clients and allow Members to interact with us as often as they wish. We will present the best providers in terms of quality and costs, in a manner that is centered around a Member’s needs and geography.
   
Continuous Provider quality tracking that will enable us to identify the best Providers and also the usual and customary practices and their related costs.
   
Smart plan design including cost optimization, performance monitoring and risk prediction.

 

We plan to use a significant amount of the proceeds from this offering to expand our research and development efforts, build technology infrastructure, and greatly expand our A.I. research. We believe all of these items are necessary in creating a “Payer of the Future” in the TPA market, and we plan to grow both organically and through acquisitions.

 

We leverage our A.I. capabilities to differentiate ourselves in the healthcare TPA market and expand our market footprint and penetration. We show Continental Benefits’ current Clients what their employee population may look like in terms of at-risk Members in the years to come, and how we can help them manage the related healthcare costs and design appropriate plans. We will continue to track Provider quality. We believe this approach will allow us to offer custom-made healthcare plans that can achieve the dual goals of improving Members’ general health by providing targeted and proactive intervention and optimization of care, while also controlling the escalating cost of claims and reducing waste in delivery of healthcare services.

 

We also plan to sell our software tools, which use advanced forms of A.I. to predict chronic conditions and other costly healthcare events, to traditional health insurance companies as well as Medicare Advantage plans. However, since we are a TPA, they may consider us to be their competitors and decide not to purchase our software tools. If this strategy fails, we will not be able to sell our software tools at a potentially high profit margin, and that in turn could negatively impact our profitability prospect. To date, we have not sold any solutions to these players.

 

Currently, our care management is provided by several third-party vendors. In the future, we may bring this function in-house. Care management functions may include telemedicine, prescription drug delivery, wellness programs and chronic condition management.

 

In September 2020, FTI was retained to assist with Continental Benefits’ organizational restructuring with a view to reduce its operating expenses and achieve break-even or near-term profitability. In November 2020, FTI recommended an organizational re-design, including reducing the ratio of managers to direct reports, eliminating the Program Management Office, counseling out employees due to performance issues, and cuts in claims and customer service departments to bring the operating costs more in line with industry norms, which resulted in the elimination of a total of 56 positions. FTI also recommended a number of cost-cutting measures, including rationalizing the IT processes, cancelling IT contracts that were not used, and generally optimizing IT expenditures. We believe that these measures, which were implemented on a rolling-basis through March 2021 immediately prior to the Acquisition, will save us on an annualized basis, approximately $5.5 million in headcount-related expenses and approximately $1.5 million in non-headcount-related expenses. The implementation of the restructuring and other recommendations will continue after completion of this offering and may take longer than planned.

 

We intend to invest in the core infrastructure that will allow us to be a growth platform. These investments include expansion of our A.I. research and development team in Israel, as well as expanded technology infrastructure at Continental Benefits. We will also expand our sales and marketing efforts. Our growth strategy may also include acquiring other TPAs, who can add to our client base, and building complementary modules on our platform.

 

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Research and Development

 

We plan to use approximately 50% of the net proceeds from this offering to fund our research and development. This includes not only hiring new A.I. scientists, but also acquiring data from third parties. We routinely use data from Clients, but also purchase data from other sources such as state entities, which capture claims and other healthcare data. When our team builds an A.I. model, we look to validate it with existing data. For example, we may work on data sets, which have Member data for five years. We commonly set the most recent year aside and build the models on the other four years. This allows us to test the predictions against available data, making validation of the models easier.

 

Currently, each A.I. model is developed with the goal of helping redirect a costly event or prevent a chronic condition. Over the next 12 to 24 months, we plan to develop A.I. model-driven solutions for orthopedic surgeries, cardiovascular conditions and kidney disease. In the future, we expect to also expand our research and development efforts to several other conditions, including respiratory disease, liver disease and forms of cancer.

 

Competition

 

Although we believe that the services we offer our Clients are highly differentiated, we operate in a highly competitive market. We only provide administrative services to self-insured employers who provide healthcare benefits to their employees. These self-insured employers can always elect to abandon self-insurance and simply buy medical insurance from one of the large players such as, Aetna, Cigna, or United Healthcare. There can be no assurances that our Clients or prospective Clients will remain self-insured for any given period of time. If the number of employers which choose to self-insure declines, the size of our targeted market will shrink.

 

Also, there are other technology-driven companies focused on creating a TPA business among self-insured employers. Like us, they provide machine learning predictions models targeted at measuring risks for Members, identifying members susceptible to adverse healthcare events before they occur, and provide proactive guidance for preventive care. We compete with almost 1,000 TPAs, all of whom are vying for the same business - the management of healthcare benefits for self-insured employers. There is only one TPA at a time for every employer wanting to provide health benefits via a self-insured model, and an employer may remain with the same TPA for many years. This means that although the market is very large, not all of it is accessible by us in any one year. In addition to the very large health insurance companies, there are new players in the market such as Collective Health, Bind Health Insurance and Centivo, which have all raised substantial venture capital funds, are pursuing a similar strategy to ours, and share our vision to use technology to transform the healthcare payer space. We believe that like us, Collective Health and Clover Health are also targeting at self-insured employers. Although all of them are relatively young companies, they have products in the market already and are known to provide technology-driven TPA services. These companies claim to save employers money and also claim to have high retention rates.

 

Some of the competitors named above perform care management functions as part of their offerings. Currently, we offer this function through our strategic partners. In the future, we may bring this function in-house. We believe our A.I.-enabled predictions further differentiate our solution by being able to steer Members to the appropriate healthcare Provider sooner. The ultimate gauge of success in our market will be who can help employers reduce the growth of long-term healthcare spending while also improving the quality of healthcare solutions.

 

Government Regulation

 

Overview

 

We believe that our business and operations as outlined above are in substantial compliance with applicable laws and regulations. Only a treating physician can determine if a prediction made by our TopCare® program is correct or appropriate for any individual patient. Our future prospects are subject to the legal, regulatory, commercial and scientific risks outlined below and under the section titled, “Risk Factors.”

 

The healthcare industry is highly regulated and continues to undergo significant changes as third-party payors, such as Medicare and Medicaid, traditional indemnity insurers, managed care organizations and other private payors, increase efforts to control cost, utilization and delivery of healthcare services. Healthcare companies are subject to extensive and complex federal, state and local laws, regulations and judicial decisions.

 

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Health Care Reform

 

The Affordable Care Act or the ACA was enacted into law in 2010. The provisions of the ACA are comprehensive and varied and are generally directed at implementing health insurance reforms to increase health insurance coverage and reduce the number of uninsured and reshaping the health care delivery system to increase quality and efficiency and reduce cost. Certain provisions of the ACA took effect immediately or within a few months, while others will be phased in over time, ranging from one year to ten years. Because of the complexity of health care reform generally, additional legislation is likely to be considered and enacted over time. The ACA, and any subsequent health care reform legislation, will require the promulgation of substantial regulations with significant effect on the health care industry. Thus, the health care industry will be subjected to significant new statutory and regulatory requirements, and consequently to structural and operational changes and challenges, for a substantial period of time.

 

Reimbursement

 

Neither we nor our self-insured Clients receive reimbursements from federal health care programs such as Medicare and Medicaid. If in the future, we receive reimbursements from these programs, which are subject to complex statutory and regulatory requirements, administrative rulings, interpretations of policy, determinations by fiscal intermediaries and government funding restrictions, all of which would materially increase or decrease reimbursement to our Company.

 

Fraud and Abuse

 

Health care fraud and abuse laws have been enacted at the federal and state levels to regulate both the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to such beneficiaries. Under these laws, individuals and organizations can be penalized for various activities, including submitting claims for services that are not provided, are billed in a manner other than as actually provided, are not medically necessary, are provided by an improper person, are accompanied by an illegal inducement to utilize or refrain from utilizing a service or product, or are billed in a manner that does not comply with applicable government requirements. Both individuals and organizations are subject to prosecution under the criminal and civil fraud and abuse statutes relating to health care providers.

 

The federal anti-kickback law (the “Anti-Kickback Law”) prohibits, among other things, knowingly and willfully offering or receiving remuneration to induce the referral of items or services that are reimbursable by a federal health care program. The Office of Inspector General has issued a series of regulations, known as the “safe harbors” which immunizes the parties to the business arrangement from prosecution under the Anti-Kickback Law. The failure of a business arrangement to fit within a safe harbor does not necessarily mean that the arrangement is illegal. Many states have adopted laws similar to the Anti-Kickback Law, and some apply to items and services reimbursable by any payor, including private insurers.

 

The so-called Stark Law prohibits physician referrals of Medicare patients to an entity providing certain “designated health services” if the physician or an immediate family member of the physician has any financial relationship with the entity and the financial relationship does not fall within one of the enumerated exceptions to the Stark Law. In addition to the Stark Law, many states have their own self-referral bans, which may extend to all self-referrals, regardless of the payor.

 

The federal False Claims Act imposes liability for the submission of false or fraudulent claims for payment to the federal government. The knowing and improper failure to return an overpayment can serve as the basis for a False Claims Act action and Medicare and Medicaid overpayments must be reported and returned within 60 days of identification. The qui tam provisions of the False Claims Act allow a private individual to bring an action on behalf of the federal government and to share in any amounts paid by the defendant to the government in connection with the action. Various states have enacted similar laws modeled after the False Claims Act that apply to items and services reimbursed under Medicaid and other state health care programs, and, in several states, such laws apply to claims submitted to all payors.

 

The Health Insurance Portability and Accountability Act of 1996 prohibits the knowing and willful execution of a scheme to defraud any health care benefit program, including a private insurer. It also prohibits falsifying, concealing, or covering up a material fact or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for health care benefits, items, or services.

 

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State and Federal Privacy and Data Security Laws

 

The Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (HIPAA) and the Health Information Technology for Economic and Clinical Health Act of 2009 and its implementing regulations (HITECH) govern the collection, use, disclosure, maintenance and transmission of identifiable patient information (“Protected Health Information” or “PHI”). HIPAA and HITECH apply to covered entities, which may include health plans as well as to those entities that contract with covered entities (“Business Associates”). HITECH imposes breach notification obligations that require the reporting of breaches of “Unsecured Protected Health Information” or PHI that has not been encrypted or destroyed in accordance with federal standards.

 

Federal Regulations (Title 42 Part 2 of the Code of Federal Regulations) set forth very specific rules governing the use and disclosure of drug and alcohol treatment information obtained from federally-supported treatment facilities.

 

In addition to the federal privacy and security laws and regulations, most states have enacted data security laws governing other types of personal data such as employee and customer information.

 

State Managed Care Laws

 

State insurance and managed cared laws and regulations regulate the contractual relationships with managed care organizations, utilization review programs and third-party administrator activities. These regulations differ from state to state, and may contain network, contracting, and financial and reporting requirements, as well as specific standards for delivery of services, payment of claims, and adequacy of health care professional networks.

 

Corporate practice of medicine and fee-splitting and laws

 

Many states have laws prohibiting physicians from practicing medicine in partnership with non-physicians, such as business corporations. In some states, including New York, these take the form of laws or regulations prohibiting splitting of physician fees with non-physicians or others. As we do not engage in the practice of medicine or fee-splitting with any medical professionals, we do not believe these laws restrict our business. We merely monitor and analyze historical claims data, including our Members’ interactions with licensed healthcare professionals, and recommend the most suitable healthcare providers and/or sources of treatment. We do not provide medical prognosis or healthcare. In accordance with various states’ corporate practice of medicine laws and states’ laws and regulations which define the practice of medicine, our call center staff are prohibited from providing Members with any evaluation of any medical condition, diagnosis, prescription, care and/or treatment. Rather, our call center staff can only provide Members with general and publicly available information that is non-specific to the Members’ medical conditions and statistical information about the prevalence of medical conditions within certain populations or under certain circumstances. Our call center staff do not discuss Members’ individual medical conditions and are prohibited from asking Members for any additional protected health information (PHI) as such term is defined under HIPAA. Our call center staff have been trained and instructed to always inform Members that they are not licensed medical professionals, are not providing medical advice, and that Members should reach out to their medical provider for any medical advice.

 

However, any determination by a state court or regulatory agency that our service contracts with our clients violate these laws could subject us to civil or criminal penalties, invalidate all or portions of some of those contracts, require us to change or terminate some portions of our business, require us to refund portions of our services fees, and have an adverse effect on our business. Even an unsuccessful challenge by regulatory authorities of our activities could result in adverse publicity and could require a costly response from us. In the event that in the future we will share or allow access by Members to the contents of our alerts or related information, we will allow the same to be subject to full compliance with regulatory requirements, including, potentially, those regulations regarding the corporate practice of medicine, fee-splitting laws, and medical profession regulation.

 

State Laws Governing Licensure of Healthcare Professionals

 

State professional licensing boards contain requirements for the licensure of health care professionals and typically require a healthcare professional who is providing professional services in that state to be licensed. Some state licensing boards specifically address the licensure of professionals who are providing services via telephone or other electronic means. As a TPA, we must maintain active TPA licenses in all states that are not expressly exempt from requiring a TPA license where we conduct business.

 

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Employees

 

As of July 1, 2021, we have a total of 128 full-time employees, with 12 of them located in Tel Aviv, Israel. None of them are parties to any labor agreements or are represented by a labor union. Except for Ronnie Brown, our Chief Operating Officer, all our executive officers are full-time employees.

 

Properties

 

Continental’s principal executive and administrative offices are located at 5701 East Hillsborough Ave., Suite 1417, Tampa, Florida, and consist of leased office space totaling approximately 32,842 square feet, which will expire in November 2023. Its base rent is approximately $49,360 per month, subject to annual adjustments, with aggregate minimum lease commitments at December 31, 2020, totaling approximately $1,970,695.

 

Marpai Health leases an additional 3,089 square feet of corporate office space for our wholly-owned subsidiary which houses our research and development team in Tel Aviv, Israel. Rent is approximately $10,500 per month. Current lease will expire in June 2024.

 

We believe that the current office space is adequate to meet our needs.

 

Legal Proceedings

 

We are subject to litigation arising in the ordinary course of our business, including litigation principally relating to our TPA business. Although the results of litigation and claims are inherently unpredictable and uncertain, we are not currently a party to any legal proceedings the outcome of which, if determined adversely to us, are believed to, either individually or taken together, material to our business, results of operations, cash flows or financial condition. Certain legal proceedings to which Continental Benefits is currently a party are detailed below.

 

IRS Penalty Notice – Continental Benefits

 

In September 2020, Continental Benefits received Notice 972CGs from the IRS regarding certain tax penalties related to prior year 1099 tax filings. Based on the opinion of Continental Benefits’ counsel, although Continental Benefits is in the process of appealing, the full amount of penalties and interest of $1,532,185 has been accrued as of December 31, 2020. Further interest has been put on hold by the IRS as the Company pursues the appeals process. Continental submitted a response letter to the Notice 972CGs on November 12, 2020 (“Response Letter”) requesting that the IRS not assess this penalty, under the requirement of IRC 6724(a), because Continental Benefits acted in a responsible and reasonable manner, and the incorrectly reported payee information arose from events beyond Continental Benefits’ control and was not due to willful neglect. Specifically, Continental Benefits requested removal of the penalty because the incorrectly reported information at issue was determined to have been received by Continental Benefits from the payees directly and Continental made initial and, when required, annual solicitations to payees to furnish correct TINs. The Company recently received a letter dated March 8, 2021 from the IRS that granted a $678,780 waiver for the full amount of the 1099 penalties the tax year 2018. In June 2021, the Company received written confirmation from the IRS that all outstanding penalties have been waived and that nothing is due to the IRS from the Company. The Company has not reversed the accrual as of March 31, 2021.

 

CMS/Zelis Litigation

 

By letter dated September 3, 2020, the Centers for Medicare and Medicaid Services (“CMS”) notified Continental of a complaint alleging that Continental Benefits uses a clearinghouse (“Zelis”) that charges a percentage-based fee for Electronic Funds Transfer (“EFT”) transactions, which potentially violates HIPAA, 45 CFR 162.923(a).

 

CMS has indicated that the issue of providers being charged to conduct standard transactions is an industry-wide concern, and that CMS is investigating the issue. During the investigation, and until a decision is made, CMS advises that the complaint will remain open. It is in a review status and will not escalate or require additional information from Continental Benefits at this time. CMS has advised it will contact Continental Benefits if there are any questions or changes. There are no outstanding deadlines or next steps at this time.

 

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Intellectual Property

 

We rely on a combination of trade secrets, patent, trademark and copyright laws in the United States, as well as intellectual property licenses and other contractual rights (including confidentiality procedures, contractual provisions, and non-disclosure and assignment-of-intellectual property agreements with our employees, independent contractors, consultants and companies with which we conduct business) to establish and protect our A.I. technology, intellectual property and proprietary rights, trade secrets, databases, and our brand.

 

We have registered TopCare® as a service mark in the United States, and we are the registered holder of a domain name that includes “Marpai, Inc.” We also have three patent applications pending in the United States, in the general area of generating and displaying sales leads and referrals, and gathering data in the healthcare arena. While Marpai Health continues to consult with counsel on the advisability to seek patent protection of some of its algorithms, Marpai Health relies heavily on trade secrets to protect its intellectual property around its A.I. technology.

 

We continue to maintain our intellectual property and confidential business information in a number of ways. For instance, we have a policy of requiring all employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship with us. Our employee agreements also require relevant employees to assign to us all rights to any inventions made or conceived during their employment with us in accordance with applicable law. In addition, we have a policy of requiring individuals and entities with which we discuss potential business relationships to sign non-disclosure agreements. Lastly, our agreements with Clients include confidentiality and non-disclosure provisions.

 

MANAGEMENT

 

Officers, Directors and Director Nominees

 

Our current six executive officers, three directors and four director nominees are as follows:

 

Name   Age   Position
Edmundo Gonzalez   48   Chief Executive Officer, Secretary and Director
Ronnie Brown   68   Chief Operating Officer
Arthur Hoath, IV   52   Chief Revenue Officer
Dr. Mordechai Geva   40   Chief Technology Officer
         
Yaron Eitan   64   Chairman of the Board of Directors
Damien Lamendola   65   Director
Gonen Antebi   48   Director Nominee
Jane Cavalier Lucas   60   Director Nominee
Vincent Kane   48   Director Nominee
Colleen DiClaudio   43   Director Nominee

 

(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominations and Governance Committee

 

Business Experience

 

The following is a brief account of the education and business experience of our current directors and executive officers:

 

Edmundo Gonzalez, Chief Executive Officer, Secretary and Director

 

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Mr. Gonzalez has served as our Chief Executive Officer, Secretary, and a member of our board of directors since inception. He also served as the co-founder and Chief Executive Officer of Marpai Health since its inception in February 2019. He is the current owner of Grays West Ventures, LLC, a company through which he provided consultant services.

 

Mr. Gonzalez is a technology entrepreneur and investor in private and publicly traded companies with over 20 years of experience. From December 2013 to December 2018, Mr. Gonzalez served as a Partner of CNTP’s US VC Partners Management, LLC, a management company running CNTP’s, series of investment funds, where he analyzed potential investments, structured deals, and monitored companies post-investment. From October 2015 to September 2020, Mr. Gonzalez served as a consultant to, and Co-founder and Chairman of the Board of FreightHub, Inc., a digital cross-border logistics company, which is now completing a transaction to become a publicly-traded company. Mr. Gonzalez also currently serves as Manager of Grays West Ventures LLC, Manager of Grays West Ventures II LLC, Manager of Grays West Real Estate LLC, and Manager of Selway Capital LLC.

 

Previously, Mr. Gonzalez was the co-founder and member of the Board of 340Basics Technologies, a healthcare IT company that grew from zero to $40 million of revenue in 5 years. He received a B.A. from Harvard University and an M.B.A. from Columbia Business School.

 

We believe that Mr. Gonzalez is qualified to serve as a member of our board of directors based on his experience building successful companies and analyzing potential investments, and perspective he brings as the former Chief Executive Officer of Marpai Health.

 

Ronnie Brown, Chief Operating Officer

 

Ms. Brown has served as our Chief Operating Officer since April 1, 2021. She also served as a Senior Advisor for Marpai Health from February 2020 to April 2021, providing advice and counsel to Marpai Health relevant to self-funded health programs and the integration of technology in processing claims. She is a healthcare industry veteran with over 30 years of experience in the self-funded healthcare insurance market. She has diverse experience in healthcare operations, benefit plan administration, cost containment, health care analytics, medical stop-loss and electronic provider payments. A frequent industry speaker, she served as national Chairperson of the Society of Professional Benefit Administrators and has been a presenter at Self Insurance Institute of America’s conferences.

 

From January 2013 to January 2016, Ms. Brown served as Chief Operating Officer at Zelis Healthcare (formerly Pay-Plus Solutions). From January 2016 to January 2020, she served as Vice President of Client Services and Special Projects at Inetico (currently Valenz Health). From March 2009 to July 2011, she served as Chief Operating Officer at First Services Administrators, a Florida-based Third Party Administrator. From June 1988 to February 2009, she served as Regional Vice President of Self Insured Benefit Administrators, a Florida-based Third Party Administrator. She received an AA from New York Technical College.

 

Arthur Hoath, Chief Revenue Officer

 

Mr. Hoath has served as our Chief Revenue Officer since April 5, 2021. He is a sales and marketing leader with over 20 years of experience in several healthcare sectors, including healthcare cost management, payor management, and specialty managed care. He has also been very active in industry conferences, such as HCAA, SIIA and SPBA.

 

Mr. Hoath served as Senior Vice President of Sales and Marketing at AMPS (Advanced Medical Pricing Solutions) from October 2019 to April 2021, where he managed strategic sales and marketing for next-generation medical claims solutions for payors, brokers, and employers. He also served as Executive Vice President of Business Development at Inetico (currently Valenz Health) from January 2016 to October 2019, and Executive Vice President of Sales and Marketing at Zelis (formerly Pay-Plus Solutions) from April 2013 to January 2016.  He received a B.S. from West Chester University.

 

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Dr. Mordechai “Moti” Geva Co-founder and Chief Technology Officer

 

Dr. Mordechai Geva has served as our Chief Technology Officer since April 1, 2021, and was the Chief Technology Officer Marpai Health immediately prior to that, and General Manager of EYME Technologies Ltd. (a fully owned subsidiary of Marpai Health formed and operated in Israel) from March 2019 to March 2021. He is the current owner of Keystone System Ltd. a company through which he provides consultant services. From January 2017 to December 2019 Mr. Geva served as co-founder and Chief Executive Officer of Birmeeza Technologies Ltd. Prior to that, Mr. Geva served as a Research Director for the Applied Cryptography and Cybersecurity Research Center at Bar Ilan University, from January 2016 to December 2017.

 

Dr. Moti Geva is a technology and innovation leader with over 15 years of experience. Previously, established and led the Israeli Cyber Emergency Response Team, the national focal point for handling all civilian cyber security incidents. He received a B.S. from Jerusalem College of Technology and a M.S. and Ph.D. from Bar-Ilan University.

 

Yaron Eitan, Chairman of the Board

 

Mr. Eitan has served as Chairman of our board of directors since April 1, 2021. He served Chairman of the board of directors of Marpai Health since its inception in February 2019. Mr. Eitan has also served as a member of the board of directors of Nano Dimension, Ltd. (NASDAQ: NNDM) since April 2020, and he continues to serve in this role. He served as Executive Chairman of the board of directors of DeepCube Ltd. from February 2017 to March 2021. Mr. Eitan also continues to serve Emporus, Ltd as a Chairman since February 2020, and Selway Capital LLC as Managing Partner since December 2008.

 

Yaron Eitan is a technology entrepreneur and investor of private and publicly traded companies with over 30 years of experience. He is the Chairman of deep learning companies DeepCube, Ltd. and Emporus Technologies, Ltd., and he was the co-founder and co-Chairman of 340Basics Technologies Previously, he was a Partner at CNTP, a multi-stage investment fund, where he led all Israeli investments, and he has been a member of the board of directors of several technology companies. He received a B.S. from Haifa University and an M.B.A. from The Wharton School of the University of Pennsylvania.

 

We believe that Mr. Eitan is qualified to serve as a member of our board of directors based on his significant technology and entrepreneurship expertise, the perspective he brings as the former Chairman of Marpai Health, and his deep learning background.

 

Damien Lamendola, Director

 

Mr. Lamendola joined the Board on April 1, 2021. Mr. Lamendola founded Continental Benefits in 2013 and was previously the Chief Executive Officer until 2019. Mr. Lamendola has served as President of HillCour Holding Corporation (f/k/a Welldyne Holding Corp.) since March 2002, and he continues to serve in this role. Mr. Lamendola also continues to serve HillCour Holding Corporation as a Board Member since 2017, WellDyneRx, LLC as a Board Member since 2017, and HillCour Investment Fund, LLC as Manager since 2017.

 

As President of HillCour Holding Corporation, Mr. Lamendola leads and oversees all strategic operations of multiple operating companies in the health care space. He received a B.S. from McNeese State University and an M.B.A. from Washington University.

 

We believe that Mr. Lamendola is qualified to serve as a member of our board of directors based on his perspective and experience building and leading strategic corporate operations and his expertise in the health care industry.

 

Gonen Antebi, Director Nominee

 

Mr. Antebi will join our board at the completion of the offering. Mr. Antebi has served as CEO of 340B Technologies d/b/a Nuvem since May 2015, and he continues to serve in this role. He also served as the CFO of Nuvem between May 2015 and November 2020.

 

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As CEO of 340B Technologies d/b/a Nuvem, Mr. Antebi oversees all strategic operations. As the CFO, he oversaw Nuvem's accounting and reporting, tax and Financial Planning and Analysis functional departments and had direct responsibility for analyzing Nuvem's financial strengths and weaknesses, cash management and forecasting. Mr. Antebi worked closely with independent accounting firms to issue quarterly and annual financial reports and controlled day-to-day risk management activities. He received a B.A. from The College of Management Academic Studies.

 

We believe that Mr. Antebi is qualified to serve as a member of our board of directors based on his perspective and experience leading strategic corporate operations and his financial expertise and experience in the health care industry.

 

Jane Cavalier Lucas, Director Nominee

 

Ms. Cavalier Lucas will join our board at the completion of the offering. Ms. Cavalier Lucas has served as CEO of BrightMark LLC since April 2016, and she continues to serve in this role.

 

As CEO, Ms. Cavalier Lucas leads BrightMark LLC’s consulting business which provides branding and marketing solutions for business clients. She served as co-founder and CEO of Bright Sun Consulting from June 1996 to August 2000. She served as Executive Vice President of Strategic Planning Worldwide of McCann Erickson from October 1994 to May 1996. Ms. Cavalier Lucas received a B.S. from Union College.

 

We believe that Ms. Cavalier Lucas is qualified to serve as a member of our board of directors based on her perspective and experience providing branding and marketing solutions for business clients, and her experience in the health care industry.

 

Vincent Kane, Director Nominee

 

Mr. Kane will join our board at the completion of the offering. Mr. Kane has served as Senior Director & Actuary of Health and Group Benefits at Willis Towers Watson, a global risk management, insurance brokerage and advisory company, since February 2011, and he continues to serve in this role. As a Senior Director, Mr. Kane provides senior actuary consulting on client strategic design, pricing, financial analysis, health analytics and intellectual capital development at Willis Towers Watson New England. Previously, he was an actuary at Tufts Health Plan, Verisk Health, Towers Perrin, Manulife Financial and Aetna. Mr. Kane received a B.A. from Harvard University and an M.A. from The Wharton School of the University of Pennsylvania.

 

We believe that Mr. Kane is qualified to serve as a member of our board of directors based on his perspective and experience leading health analytics and intellectual capital development projects, and his experience in the health care industry.

 

Colleen DiClaudio, Director Nominee

 

Ms. DiClaudio will join our board at the completion of the offering. Ms. DiClaudio has served as President and Founder of 340B Technologies d/b/a Nuvem since August 2014, and she continues to serve in this role. Ms. DiClaudio also continues to serve SRAX, Inc. as a member of its board of directors since September 2017, and she served as vice president of business development of CompleteCare Health Network from June 2009 through August 2014.

 

As President and Founder of 340B Technologies DBA Nuvem, Ms. DiClaudio oversees day-to-day operations. She received a Master’s Degree of Public Health from the University of Medicine and Dentistry of New Jersey and a Bachelor’s Degree in Public Health from Stockton University.

 

We believe that Ms. DiClaudio is qualified to serve as a member of our board of directors based on her experience in business development and the healthcare technology sector, as well as her entrepreneurial background.

 

Number and Terms of Office of Officers and Directors

 

Upon consummation of this offering, our board of directors will have seven members, four of whom will be deemed “independent” under SEC and Nasdaq rules.

 

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Our officers are appointed by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our certificate of incorporation as it deems appropriate.

 

Director Independence