Marpai, Inc 8-K/A, filed Jan 10, 2023
Marpai, Inc. (MRAI)
About this 8-K/A
Marpai, Inc filed this 8-K/A on January 10, 2023.
Items reported
- Item 2.01: Completed an acquisition or sale of assets
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Explanatory Note
Item 2.01 Completion of Acquisition or Disposition of Assets.
On November 1, 2022, Marpai, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Initial Report”) to report the Company’s consummation of Maestro Health, LLC (“Maestro Health”), a Delaware limited liability company, pursuant to the terms of the Membership Interest Purchase Agreement executed by and among the Company, X.L. America, Inc., a Delaware corporation, Seaview Re Holdings Inc., a Delaware corporation, and AXA S.A., a French société anonyme.
This Current Report on Form 8-K/A (this “Amendment”) amends and supplements the Initial Report to provide financial statements of Maestro Health, and the pro forma financial statements of the Company required by Item 9.01 of Form 8-K. No other modifications to the Initial Report are being made by this Amendment. This Amendment should be read in conjunction with the Initial Report.
Item 9.01 Financial Statements and Exhibits.
(a) |
Financial Statements of Business Acquired. |
The audited financial statements of Maestro Health as of and for the year ended December 31, 2021, together with the related notes to the financial statements, are included as Exhibit 99.1 to this Current Report and are incorporated herein by reference. The unaudited financial statements of Maestro Health as of and for the nine months ended September 30, 2022 are included as Exhibit 99.2.
(b) |
Pro Forma Financial Information. |
The unaudited pro forma combined financial statements of the Company as of and for the year ended December 31, 2021, together with the related unaudited notes to the financial statements, are included as Exhibit 99.3 to this Current Report and are incorporated herein by reference.
(d) Exhibits.
Exhibit |
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Description |
99.1 |
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99.2 |
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99.3 |
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104 |
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Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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MARPAI, INC. |
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Date: |
January 10, 2023 |
By: |
/s/ Edmundo Gonzalez |
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Name: Edmunod Gonzalez |
Exhibit 99.1
Maestro Health, LLC. and Subsidiaries
Consolidated Financial Statements Years Ended December 31, 2021 and
2020
Mazars USA LLP is an independent member firm of Mazars Group.
Maestro Health, LLC. and Subsidiaries
Table of Contents
December 31, 2021 and 2020
Page(s)
Independent Auditor’s Report 1-2
Consolidated Balance Sheets 3-4
Consolidated Statements of Operations 5
Consolidated Statement of Members’ Deficit 6
Consolidated Statements of Cash Flows. 7
Notes to the Consolidated Financial Statements 8-16
Consolidating Balance Sheets 17-20
Consolidating Statements of Operations 21-22
Independent Auditor’s Report
To the Members and Managers of Maestro Health, LLC.
Opinion
We have audited the accompanying consolidated financial statements of Maestro Health, LLC. and subsidiaries (“Maestro”), which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of operations, members’ (deficit), and cash flows for the years then ended, and the related notes to the consolidated financial statements.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Maestro as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are required to be independent of Maestro and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Maestro’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements, are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.
In performing an audit in accordance with generally accepted auditing standards, we:
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.
Report on Supplementary Information
Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating balance sheets and consolidating statements of operations are presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.
May 20, 2022
Maestro Health, LLC. and Subsidiaries
Consolidated Balance Sheets December 31, 2021 and 2020 |
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2021 |
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2020 |
Assets Current Assets |
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Cash and cash equivalents |
$ 11,488,444 |
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$ 8,300,348 |
Accounts receivable |
421,013 |
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270,222 |
Miscellaneous receivables |
1,614,519 |
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10,186,254 |
Other current assets |
1,594,174 |
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1,966,628 |
Intercompany |
304,536 |
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171,272 |
Total current assets before funds held for clients |
15,422,686 |
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20,894,724 |
Funds held for clients |
19,251,650 |
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27,621,639 |
Total Current Assets |
34,674,336 |
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48,516,363 |
Property, Plant and Equipment, net of accumulated depreciation |
4,457,256 |
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5,555,175 |
Capitalized Development, net of accumulated depreciation |
6,589,665 |
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7,275,522 |
Other Noncurrent Assets |
1,245,389 |
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1,552,964 |
Total Assets |
$ 46,966,646 |
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$ 62,900,025 |
The accompanying notes are an integral part of these consolidated financial statements.
3
Maestro Health, LLC. and Subsidiaries
Consolidated Balance Sheets (Cont’d) December 31, 2021 and 2020 |
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2021 |
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2020 |
Liabilities and Members' Deficit Current Liabilities |
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Accounts payable |
$ 348,257 |
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$ 192,619 |
Accrued payroll and related taxes |
4,107,627 |
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3,691,269 |
Other current liabilities |
2,191,117 |
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3,502,291 |
Revolving line of credit |
53,400,000 |
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31,400,000 |
Intercompany |
1,501 |
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- |
Total current liabilities before funds held for clients |
60,048,502 |
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38,786,178 |
Funds held for clients |
19,251,650 |
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27,621,639 |
Total Current Liabilities |
79,300,152 |
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66,407,817 |
Other Liabilities, long-term |
2,746,544 |
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3,127,107 |
Total Liabilities |
82,046,696 |
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69,534,925 |
Commitments and Contingencies (see Note 5) |
- |
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- |
Members' Deficit |
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Additional paid-in capital |
194,950,143 |
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194,100,006 |
Retained earnings (deficit) |
(230,030,193) |
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(200,734,907) |
Total Members' Deficit |
(35,080,050) |
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(6,634,901) |
Total Liabilities and Members' Deficit |
$ 46,966,646 |
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$ 62,900,024 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Maestro Health, LLC. and Subsidiaries
Consolidated Statements of Operations Year Ended December 31, 2021 and 2020 |
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2021 |
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2020 |
Revenue, administrative service fees |
$ 19,375,677 |
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$ 19,360,757 |
Expenses Personnel and related expenses |
33,226,412 |
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34,789,614 |
Other selling, general and administrative expenses |
11,401,024 |
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13,888,597 |
Depreciation and amortization |
3,329,689 |
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4,318,867 |
Total Operating Expenses |
47,957,125 |
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52,997,078 |
Operating Income (Loss) |
(28,581,448) |
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(33,636,321) |
Other Expense (Income) Interest expense / (income) |
157,621 |
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133,225 |
Other expense/(income) |
(277,345) |
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8,673,949 |
Total Other Expense (Income) |
(119,724) |
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8,807,174 |
Loss From Operations Before Income Taxes |
(28,461,724) |
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(42,443,494) |
Income Tax Provision (Benefit) |
833,562 |
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10,793,510 |
Net Loss |
$ (29,295,286) |
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$ (53,237,004) |
The accompanying notes are an integral part of these consolidated financial statements.
5
Maestro Health, LLC. and Subsidiaries
Consolidated Statement of Members’ Deficit Years Ended December 31, 2021 and 2020
Common Stock Membership Units Additional Retained
Shares Amount Units Amount Paid-in Capital Deficit Total
Balance, January 1, 2020 |
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948 |
$ - - |
$ - $ 194,100,006 |
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$ (147,497,903) |
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$ 46,602,103 |
Net loss |
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- |
- - |
- - |
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(53,237,004) |
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(53,237,004) |
Balance, December 31, 2020 |
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948 |
$ - - |
$ - $ 194,100,006 |
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$ (200,734,907) |
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$ (6,634,901) |
Net loss |
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- |
- - |
- - |
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(29,295,286) |
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(29,295,286) |
Additional paid in capital (Tax benefit reimbursement) |
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- |
- 850,137 |
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850,137 |
Balance, December 31, 2021 |
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948 |
$ - 948 |
$ - $ 194,950,143 |
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$ (230,030,193) |
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$ (35,080,050) |
* On December 17, 2020, Maestro Health, Inc. was converted into Maestro Health, LLC. As a consequence, all outstanding shares of Common Stock were retired and converted into Membership Units.
The accompanying notes are an integral part of these consolidated financial statements.
6
Consolidated Statements of Cash Flows Years Ended December 31, 2021 and 2020 |
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2021 |
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2020 |
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Operating Activities Net loss |
$ (29,295,286) |
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$ (53,237,004) |
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Adjustments to reconcile to net cash from operating activities: Depreciation and amortization |
3,329,689 |
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4,318,867 |
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Impairment Loss |
- |
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8,399,716 |
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Capital (Gains)/Losses |
(912) |
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35,835 |
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Deferred income taxes Changes in operating assets and liabilities, net of acquisition: Accounts receivable |
-
(150,791) |
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17,156,348
193,378 |
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Miscellaneous receivables and other assets |
9,251,764 |
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1,253,654 |
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Accounts payable |
155,639 |
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(235,643) |
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Accrued payroll and related taxes |
416,358 |
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719,140 |
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Other current liabilities and accrued expenses |
(1,311,174) |
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(1,048,284) |
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Other long-term liabilities |
(380,563) |
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2,563,343 |
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Net change in intercompany accounts |
(131,764) |
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160,939 |
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Total adjustments |
$ 11,178,247 |
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$ 33,517,294 |
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Net Cash Used in Operating Activities |
$ (18,117,040) |
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$ (19,719,710) |
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Investing Activities Capitalized development costs |
(1,542,556) |
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(3,520,029) |
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Purchase of property and equipment |
(2,445) |
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(4,058,732) |
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Net Cash Used in Investing Activities |
$ (1,545,001) |
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$ (7,578,761) |
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Financing Activities Proceeds from APIC (tax benefit reimbursement) |
850,137 |
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- |
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Proceeds from issuance of debt |
22,000,000 |
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31,400,000 |
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Net Cash Provided By Financing Activities |
22,850,137 |
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31,400,000 |
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Net Change in Cash and Cash Equivalents |
$ 3,188,096 |
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$ 4,101,529 |
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Cash and Cash Equivalents, beginning of year |
$ 8,300,348 |
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$ 4,198,819 |
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Cash and Cash Equivalents, end of year |
$ 11,488,444 |
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$ 8,300,348 |
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Supplemental Disclosure of Cash Flow Information Cash paid for interest |
$ 161,283 |
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$ 143,771 |
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Cash paid for taxes |
$ - |
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$ - |
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Supplemental Disclosure of Non-Cash Investing Activities Issuance of membership units as consideration for earn-out payable |
$ |
- |
$ |
- |
|
The accompanying notes are an integral part of these consolidated financial statements.
7
Maestro Health, LLC. and Subsidiaries
Notes to the Consolidated Financial Statements Years Ended December 31, 2021 and 2020
Maestro Health, LLC and Subsidiaries (the “Company”) is a Self-Funded Health Plan service provider which
delivers a complete, all-in employee health and benefits solution to brokers, carriers, and employers.
Maestro Health, LLC is a Delaware domiciled limited liability company owned 100% by the AXA Group. It was formerly known as Maestro Health Inc., a Delaware domiciled corporation, which was organized on May 2, 2013. Maestro Health, Inc. converted to Maestro Health, LLC effective as of December 17, 2020. The Company’s services help employers control all aspects of the complex employee health and benefits system. The Company owns and operates self-funded insurance administration, benefits administration, enrollment, ACA compliance, consumer directed health care account administration, medical management, and consolidated billing solution applications, unifying them on a single, comprehensive mobile and web platform. In 2021, the Company added an Out of Network Repricing Solution and an Rx Patient Assistance Program to its service offerings. The Company provides services to clients throughout the United States from offices in Chicago, Illinois (headquarters); Charlotte, North Carolina; Southfield, Michigan; and Bethesda, Maryland.
The Company has experienced operating losses and negative cash flows from operations since inception and has been primarily funded with equity contributions and proceeds under credit facilities. At December 31, 2021 the Company has total members’ deficit of $35,080,050 and an accumulated deficit of $230,030,194 largely driven by the impairment of intangible assets in 2019 and 2020. The Company has implemented a change in business focus leading to a transition away from certain non-profitable business lines and has refocused the strategy towards self-funded solutions. The revised business plan indicates that the Company will achieve breakeven by 2023 and profitability in 2024 and thereafter. There can be no assurance these plans will be successful. In addition, the Company will benefit from the support of its sole shareholder, the AXA Group, to support the investments required as part of its strategic plan. In this context, the Company has received written assurances from the AXA Group that additional investment and loan extensions will be provided, if needed, which management believes will be sufficient to continue as a going concern through May 20, 2023.
Consolidation
The consolidated financial statements include the financial results of Maestro Health, Inc. and its wholly owned subsidiaries. The wholly owned subsidiaries are Integra Employer Health, LLC, Context Benefit Advisors, LLC, Workable Solutions, LLC, and Group Associates, Inc. Intercompany balances and transactions have been eliminated in consolidation. A formerly wholly owned subsidiary, IntegraHealth Management, LLC, was dissolved as of September 26, 2019. Colton Groome Benefit Advisors, LLC was renamed Context Benefit Advisors, LLC as of October 16, 2019.
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions are used for, but not limited to, establishing the allowance for doubtful accounts, purchase price allocations, depreciation and amortization useful lives, capitalization of development costs, asset impairment evaluations, deferred tax assets and liabilities, rebate receivables, stock-based compensation, and other contingencies. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are maintained at financial institutions, and, at times, balances may exceed federally insured limits. The Company has never experienced losses related to these balances.
Accounts Receivable
The Company evaluates historical information and current economic conditions, as well as individual account histories when establishing the allowance for doubtful accounts. The policy for reserving for uncollectible accounts is to do so once accounts become over 180 days outstanding or the customer has filed for bankruptcy. As of December 31, 2021 and 2020, the Company recorded $6,375 and $141,544 in the
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Maestro Health, LLC. and Subsidiaries
allowance for doubtful accounts, respectively.
Miscellaneous Receivables
The Company accounts for other miscellaneous receivables for unsettled transactions and other monetary obligations owed by other debtors. The miscellaneous receivables classified in current assets are related to client activities due to the Company from other debtors for referral, commission, and rebate income.
Funds Held for Clients and Custodial Receivables (Payables)
The Company holds funds for clients in the form of custodial cash. These amounts are held to pay claims, stop loss premiums, and medical, dental, and voluntary insurance premiums on behalf of clients and participants. This custodial cash is shown on the Company’s consolidated balance sheets as part of funds held for clients and custodial receivables (payables) as an asset and a corresponding liability.
In its capacity as a third-party administrator, the Company bills and collects insurance premiums from benefits administration clients on behalf of insurance carriers and collects payments from self-funded clients for the purpose of paying health insurance claims of their employees. Billings and payments called are reflected as receivables with a corresponding liability recorded as part of funds held for clients and custodial receivables (payables). The Company will not pay the liability until the receivable has been fully funded.
Property and Equipment
Property and equipment, other than property and equipment acquired in acquisitions as described in Note 2, are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using a straight-line method applied to useful lives as follows:
Furniture and equipment 7 years
Marketing equipment 7 years
Computer equipment 5 years
Telephone systems 5 years
Leasehold improvements 3 years or remaining life of lease Software 3 years
Repairs and maintenance are expensed when incurred and expenditures for improvements are capitalized. Upon sale or retirement, the related cost and accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in operations.
Software Development Costs
Software development costs are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 985-20 if the software is to be sold, leased or otherwise marketed, or by FASB ASC Subtopic 350-40 if the software is for internal use. For internal use software, capitalization of software development costs begins during the application development stage and concludes when the product is substantially complete and ready for its intended use. The ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future product revenue and related cash flows, estimated economic product lives, and changes in software and hardware technology. The capitalized software development cost at December 31, 2021 and 2020 was $11,494,627 and $9,952,071, respectively. The costs capitalized in 2020 and 2021 relate to various ongoing development projects related to the Company’s mobile and web platform. Once software projects become available for general release, the Company begins to amortize the costs over the related project’s estimated economic useful life to Depreciation and Amortization expense. Accumulated amortization was $4,904,962 and $2,676,549 as of December 31, 2021 and 2020, respectively.
Long-Lived Assets
The Company periodically reviews the carrying value of long-lived assets for recoverability or whenever events or changes in circumstances indicate that such amounts have been impaired. The Company’s method for measuring impairment of long-lived assets is an undiscounted cash flow basis. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated decline in revenue or operating profit, and a material decrease in the fair value of some or all of the assets. If such impairment exists, the carrying value of the asset is reduced to its estimated fair value based on discounted cash flows. As of December 31, 2020, management chose to impair its long-lived assets in the amount of $7,756,713. After this impairment, the Company does not have intangible assets.
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Maestro Health, LLC. and Subsidiaries
10
Maestro Health, LLC. and Subsidiaries
Business Combinations
When the Company acquires businesses or business assets in a business combination, the total consideration paid is allocated to the fair value of the tangible assets, liabilities, and identifiable intangible assets acquired. Any residual purchase consideration is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired, and liabilities assumed. These estimates are based on the application of valuation models using historical experience and information from independent valuation consultants. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted- average cost of capital, the cost savings expected to be derived from acquiring an asset and estimated earn- out liabilities based on future results. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of these estimates. Acquisition-related costs are expensed as incurred. Refer to Note 2 for further information.
Definite Life Intangible Assets
Client contracts and lists, developed technology, non-compete agreements, and certain other trade names were recorded at their estimated fair value at the date of each respective acquisition and are amortized over their estimated useful lives generally ranging from one to 15 years using the straight-line method. The Company evaluates definite life intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset might not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset are less than its’ carrying amount. At March 1, 2018, all intangible assets were marked to net book value and revalued at fair market value as a result of the AXA Acquisition. As of December 31, 2020, there were impairment charges fully impairing the remaining definite lived intangible assets, which is further discussed in Note 3. As of December 31, 2021 and 2020, the net book value of the intangible assets remains zero.
Employee Benefit Plan
The Company has established a voluntary investment plan that covers all eligible employees. Employees may elect to contribute up to 100% of gross salary to this plan, and the Company matches the employee contribution up to 2% of gross salary, up to the 2021 IRS limit of $19,500. Non-elective employer contributions vest immediately at the rate of 100%. Contributions made to or on the behalf of employees under these plans were $297,837 as of December 31, 2021 and $188,184 as of December 31, 2020. Contributions made by the employees amounted to $1,332,661 at December 31, 2021 and $1,560,395 at December 31, 2020.
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Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP. The revenue standard’s core principle is built on the contract between a vendor and a client for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled.
The Company’s policy is to begin to record revenue only when the following criteria are met:
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Maestro Health, LLC. and Subsidiaries
The Company’s revenues are largely attributable to administrative service fees collected from employers on a per member basis, medical management fees charged on an hourly basis, as well as commission income on the repricing of out of network claims, the Rx savings achieved and insurance products sold. In accordance with the above-outlined policy and with the various administrative service agreements with clients, fees associated with services are recognized in the period such services are rendered and earned.
The Company also has certain revenue associated with client agreements where services are provided over a contract period that spans multiple months. Revenue for these arrangements is recognized under the proportional performance method on a ratable basis over the period of the entire arrangement.
Income Taxes
In 2015, the Company adopted ASU 2015-17, which requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the Consolidated Balance Sheets. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse. A valuation allowance is provided when the Company determines that it is more-likely-than-not that a portion of the deferred tax asset balance will not be realized. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Historically, due to the Company’s losses in certain jurisdictions, it was more-likely-than-not that certain federal and state deferred tax assets would not be realized. As of December 31, 2021 and 2020 the Company recorded a deferred tax asset of $0, as further discussed in Note 5.
The Company follows the provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” which seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. Under ASC 740-10-25, an organization must recognize the tax benefit associated with tax positions taken for tax return purposes when it is more likely than not that the position will be sustained. The Company recognizes any corresponding interest and penalties associated with its income tax positions in income tax expense.
Paid Time Off (PTO)
The Company accrues for employee vacation when the rights vest and accumulate and such amounts can be reasonably estimated.
Fair Value of Financial Instruments
The carrying values of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The Company believes that the current carrying amount of its notes payable approximates fair value because the interest rates on these instruments are subject to change with, or approximate, market interest rates.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.
The Company grants credit to clients of various sizes throughout the United States. For the years ended December 31, 2021 and 2020, one client made up approximately 18% and 11%, respectively, of total revenues. As of December 31, 2021 and 2020, one client made up approximately 16% and 14%, respectively, of accounts receivable. The Company does not have any significant suppliers.
Trust Assets and Liabilities
In its capacity as a third-party administrator, the Company bills and collects insurance premiums from benefits administration clients on behalf of insurance carriers and collects payments from self-funded clients for the purpose of paying health insurance claims of their employees. Billings and payments called are reflected as receivables with a corresponding liability recorded as premiums payable or as claims payable. The Company will not pay the liability until the receivable has been fully funded.
12
Maestro Health, LLC. and Subsidiaries
Reclassifications
With the implementation of the new billing system for self-funded clients in 2021, the related fee collected from clients and remittance via automated payments to the Brokers are no longer recognized as pass through revenue and expense, which is consistent with ASC 606. Appropriate reclass net-off’s are made for prior year consolidated statement of operations to confirm with current year presentation.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, “Leases,” which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease and causes lessees to recognize leases on the balance sheets as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than one year. ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years, with early adoption permitted. ASU 2016- 02 requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. FASB extended this deadline from 2020 to 2022 due to the coronavirus crisis. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
Subsequent Events
The Company has evaluated subsequent events through May 20, 2022, the date the consolidated financial statements were available to be issued. Refer to Note 8 for a summary of significant subsequent events.
Transactions
The transactions below were accounted for as business combinations in accordance with ASC 805, “Business Combinations.” The 2021 and 2020 operating results include the effects of the acquisitions from the transaction date forward.
Acquisition by AXA S.A.
On January 22, 2018, the Company entered into a merger agreement with AXA S.A. (and its designated subsidiaries) to merge entities with the Company, selling all its issued and outstanding shares. This transaction was accounted for as a business combination in accordance with ASC 805, “Business Combinations”. The 2019 operating results include the effects of the acquisition from the transaction date forward.
Series A participating convertible preferred stock received its Series A preference amount to include cumulative dividends and the per common share Merger Consideration. Series B non-participating convertible preferred stock received its Series B preference amount. The transaction qualified as a Liquidity Event in accordance with the 2014 Stock Option and Incentive Plan (as amended) for each holder of In-Money Options which became fully vested and exchanged for an amount equal to the per common share less the exercise price of such In-Money Options. After other monetary obligations were met and deducted from the proceeds, the per common stock share price was calculated to be $0.63. As of December 31, 2019, reserves held in escrow have been fully distributed; the Closing Adjustment Escrow was distributed on July 31, 2018, for
$3,737,416; and the Indemnity Escrow was distributed on December 20, 2019, for $4,975,000. As of December 31, 2019, reserves of $500,000 were being held for the Expense Fund; the Expense Fund was distributed as of February 27, 2020, for the amount of $268,429, with the remainder having been used as expense.
Context Benefit Advisors
On May 21, 2020, an Asset Purchase Agreement was executed by and among Context Benefit Advisors, LLC (“Context Benefit Advisors”), a wholly owned subsidiary of Maestro Health, LLC, and The Hilb Group of North Carolina, LLC, (“Hilb”) whereby Context Benefit Advisors sold to Hilb a portfolio of brokerage contracts, for an upfront cash consideration of $36,000. All assets in scope were subsequently transferred to Hilb.
13
Maestro Health, LLC. and Subsidiaries
Group Associates
On December 28, 2020, an Asset Purchase Agreement was executed by and among Group Associates, Inc. (“Group Associates”), a wholly owned subsidiary of Maestro Health, LLC, and Benefit Partner, LLC d/b/a Salus Group (“Salus”), whereby Group Associates sold to Salus a portfolio of benefit administration and brokerage contracts, for an upfront consideration of $200,000. The transfer of the assets was completed during the second quarter of 2021 and trailing commissions due were settled by December 31, 2021.
At December 31, 2021 and 2020, property and equipment were comprised of the following:
|
2021 |
|
2020 |
Furniture, fixtures, and equipment |
$ 7,443,136 |
|
$ 7,526,829 |
Less accumulated deprecation and amortization |
2,985,880 |
|
1,971,654 |
|
$ 4,457,256 |
|
$ 5,555,175 |
Depreciation and amortization expense was $1,101,276 and $1,010,161 for the years ended December 31, 2021 and 2020, respectively.
Amortizable Intangible Assets
The gross carrying amount, accumulated amortization, and weighted-average amortization period, by class and in total, at December 31, 2021 and 2020, were as follows:
December 31, 2021
Intangible Asset |
Gross Amount |
|
Impairment |
|
Accumulated Amortization |
|
|
Net Amount |
|
|
Original Weighted Average Amortization Period (Years) |
Customer list |
$ 7,300,000 |
|
$ 5,961,667 |
|
$ 1,338,333 |
|
$ |
|
- |
|
10.0 |
Non-compete |
1,700,000 |
|
661,111 |
|
1,038,889 |
|
|
|
- |
|
3.0 |
Trade name |
22,500,000 |
|
17,579,082 |
|
4,920,918 |
|
|
|
- |
|
10.0 |
Purchased tech |
21,300,000 |
|
12,542,632 |
|
8,757,368 |
|
|
|
- |
|
5.0 |
|
$ 52,800,000 |
|
$ 36,744,492 |
|
$ 16,055,508 |
|
$ |
|
- |
|
7.8 |
December 31, 2020 |
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
Original |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Gross |
|
|
|
Accumulated |
|
|
Net |
|
|
Amortization |
Intangible Asset |
Amount |
|
Impairment |
|
Amortization |
|
|
Amount |
|
|
Period (Years) |
Customer list |
$ 7,300,000 |
|
$ 5,961,667 |
|
$ 1,338,333 |
|
$ |
|
- |
|
10.0 |
Non-compete |
1,700,000 |
|
661,111 |
|
1,038,889 |
|
|
|
- |
|
3.0 |
Trade name |
22,500,000 |
|
17,579,082 |
|
4,920,918 |
|
|
|
- |
|
10.0 |
Purchased tech |
21,300,000 |
|
12,542,632 |
|
8,757,368 |
|
|
|
- |
|
5.0 |
|
$ 52,800,000 |
|
$ 36,744,492 |
|
$ 16,055,508 |
|
$ |
|
- |
|
7.8 |
Amortization expense for intangible assets was $0 and $1,743,286 for the years ended December 31, 2021 and 2020, respectively.
14
Maestro Health, LLC. and Subsidiaries
The Company recorded intangible asset impairment of $7,756,714 as of December 31, 2020. After this impairment, the Company does not have intangible assets.
Leases
The Company has various non-cancelable operating lease agreements for office space and other equipment through 2028. Rent expense for the years ended December 31, 2021 and 2020 was $1,603,170 and
$1,433,568, respectively.
On March 1, 2018, the Company entered into a lease agreement for premises, comprised of 10,019 rentable square feet, in Southfield, Michigan. The lease term commenced on July 2, 2018 and will continue through and expire on July 31, 2023. In accordance with the commencement of this lease agreement, the Company vacated its premises (and terminated its lease) in Bingham Farms, Michigan.
On July 24, 2018, the Company entered into an amended lease agreement for the Company’s corporate headquarters in Chicago, Illinois, where the Company expanded its occupied premises, extended the lease term, and modified other general lease provisions. The Company expanded its occupied premises by an additional 4,905 rentable square feet. The lease term commenced on November 1, 2018 and will continue through and expire on September 30, 2028.
On July 8, 2019, the Company entered into a lease agreement with Regus, in Bethesda, Maryland, for Office 719. The lease term commenced on July 15, 2019 and the current extension will expire on July 31, 2022. The Company intends to extend the lease at renewal through July 31, 2023.
On October 25, 2019, the Company entered into a lease agreement for residential housing for one of the Company’s Executive Officers. The premises are comprised of 3,200 rentable square feet, in Chicago, Illinois. The lease term commenced on December 1, 2019 and will continue through and expire on November 30, 2023.
On December 19, 2019, the Company entered into a lease agreement for premises comprised of 31,475 rentable square feet in Charlotte, North Carolina. The lease term commenced on June 1, 2020 and will continue through and expire on May 31, 2029. In accordance with the commencement of this lease agreement, the Company vacated its prior office premises in Charlotte, North Carolina and terminated that lease at its expiration date of September 30, 2021.
On May 20, 2020, the Company entered into a lease agreement with Regus, in Bethesda, Maryland, for Office 720. The lease commenced on July 1, 2020 and was on a month-to-month basis. This lease was terminated on September 30, 2021.
The future minimum lease payments required for each of the following fiscal years ending are:
2022 |
$ 1,461,982 |
2023 |
1,407,358 |
2024 |
1,266,301 |
2025 |
1,309,409 |
2026 and beyond |
5,404,435 |
|
$ 10,849,485 |
Legal Proceedings
From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business. The Company is currently a party to a collection claim wherein the Plaintiff, due to their acquisition of accounts receivable of several providers, is looking to recover amounts owed to said providers in the amount of $1,005. A settlement was reached for $500 for a full release and dismissal from the lawsuit. The Company is also party to a dispute with a former employee and the Company has prevailed on its motion for
15
Maestro Health, LLC. and Subsidiaries
summary disposition in the Circuit Court. The former employee has appealed, and the case remains in the Michigan Court of Appeals. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity financial position, results of operations, or liquidity.
The benefit / (expense) for income taxes for the years ended December 31, 2021 and 2020 consisted of the following components:
|
2021 |
|
2020 |
Current: Federal |
$ (833,562) |
|
$ 7,922,843 |
State |
- |
|
(1,560,005) |
Total current benefit/(expense) |
(833,562) |
|
6,362,838 |
Deferred: Federal |
- |
|
(14,064,139) |
State |
- |
|
(3,092,209) |
Total deferred benefit/(expense) |
- |
|
(17,156,348) |
Total benefit/(expense) for income taxes. |
$ (833,562) |
|
$ (10,793,510) |
A reconciliation of the U.S. federal statutory tax rate to the effective rates reported for income before taxes for the years ended December 31, 2021 and 2020 is as follows:
|
2021 |
|
|
2020 |
Provision for taxes at U.S. statutory rate |
|
0.0% |
|
21.0% |
% State income taxes - net of federal benefit |
|
0.0% |
|
-11.0% |
Non-deductible expenses |
|
0.0% |
|
0.0% |
Impairment expense |
|
0.0% |
|
0.0% |
Deferred conversion to LLC |
|
0.0% |
|
-34.7% |
Other |
|
0.0% |
|
-0.7% |
Valuation |
|
0.0% |
|
0.0% |
Effective tax rate |
|
0.0% |
|
-25.4% |
Effective December 17, 2020, the Company elected to convert to a Limited Liability Corporation (LLC) owned by two partners. As a result, the Company will now be treated as a partnership and wrote off its deferred balances. For the 2021 reporting year, the Company’s net losses are absorbed by their owner/partners and reported within their financial statements. An agreement exists between the parties that any tax benefit that accrues to the partners from the Company’s net losses will be reinvested in the Company once those figures are finalized.
As of December 31, 2021, the Company did not have any material uncertain tax positions. The Company does not expect any material changes to its unrecognized tax benefits within the next 12 months. The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year or otherwise directly related to an existing deferred tax asset, in which case the uncertain tax position is recorded net of the asset on the balance sheets. Interest and penalties are recognized in income tax expense. As of December 31, 2021, there were no accrued interest and penalties related to uncertain tax positions. The Company has filed income tax returns in the U.S. federal jurisdiction for all years since inception in 2013. For taxation years before 2017, the Company is no longer subject to U.S. Federal or state income tax examinations.
16
Maestro Health, LLC. and Subsidiaries
On February 5, 2020, the Company entered into a $10,000,000 loan agreement with AXA S.A., with a termination date as of August 5, 2020. The loan was received in full by the Company on February 5, 2020. On August 5, 2020, the loan was subsequently increased to $21,400,000, with a new termination date as of August 5, 2021. The additional amount was received in full by the Company on August 5, 2020. On August 5, 2021, the loan was extended to a termination date as of July 5, 2022.
On April 15, 2020, the Company entered into a $10,000,000 loan agreement with AXA S.A., with a termination date as of October 15, 2020. The loan was received in full by the Company on April 15, 2020. On October 15, 2020, the loan was extended to a termination date as of October 15, 2021. On October 13, 2021, the loan was extended to a termination date as of July 5, 2022.
On February 24, 2021, the Company entered into a $10,000,000 loan agreement with AXA S.A., with a termination date as of February 28, 2022. The loan was received in full by the Company on February 26, 2021.
On June 17, 2021, the Company entered into a $12,000,000 loan agreement with AXA S.A., with a termination date as of June 17, 2022. The loan was received in full by the Company on June 17, 2021.
On December 17, 2020, Maestro Health, Inc. was converted into Maestro Health, LLC. As a consequence, all 948 outstanding shares of Common Stock were retired and converted into 948 Membership Units. The total membership units are held by the Company’s two owners. AXA Holdings U.S. Holdings, Inc. has 748 membership units and Seaview Re Holdings Inc. has 200 membership units. There have been no changes in membership units as of December 31, 2021.
On February 24, 2022, the Company renewed a $10,000,000 loan agreement with AXA S.A., with a termination date of July 5, 2022. All outstanding loans totaling $53.4m will be consolidated into one loan in April 2022.
Workforce Reduction
Effective March 31, 2022, the Company reduced its workforce by 41 employees. The reduction is part of the revised business plan and is intended to reduce the need for AXA loans beyond 2022.
17
Maestro Health, LLC. and Subsidiaries
Consolidating Balance Sheets
December 31, 2021 |
|
|||||||||||
|
Maestro |
|
Integra |
|
Context |
|
|
Workable Group |
|
|
|
|
|
Health |
|
Employer Health |
|
Benefit Advisors |
|
|
Solutions Associates |
|
Eliminations |
|
Consolidated |
Assets Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ 11,012,473 |
|
$ 340,201 |
|
$ 65,074 |
|
$ |
- $ 70,696 |
|
$ - |
|
$ 11,488,444 |
Accounts receivable |
- |
|
217,005 |
|
- |
|
|
- $ 204,008 |
|
- |
|
421,013 |
Miscellaneous receivables |
216,141 |
|
623,272 |
|
1,262 |
|
|
- $ 773,844 |
|
- |
|
1,614,519 |
Other current assets |
1,463,736 |
|
41,221 |
|
- |
|
|
- $ 89,216 |
|
- |
|
1,594,174 |
Intercompany |
121,937,480 |
|
110,623,760 |
|
826,737 |
|
|
- $ 21,150,633 |
|
(254,234,074) |
|
304,536 |
Total current assets before funds held for clients |
134,629,830 |
|
111,845,459 |
|
893,073 |
|
|
- 22,288,397 |
|
(254,234,074) |
|
15,422,686 |
Funds held for clients |
- |
|
17,367,203 |
|
- |
|
|
27,165 1,857,283 |
|
- |
|
19,251,650 |
Total Current Assets |
134,629,830 |
|
129,212,662 |
|
893,073 |
|
|
27,165 24,145,680 |
|
(254,234,074) |
|
34,674,336 |
Property, Plant and Equipment, net of accumulated depreciation |
3,602,642 |
|
823,710 |
|
- |
|
|
- 30,904 |
|
- |
|
4,457,256 |
Capitalized Development, net of accumulated depreciation |
6,589,665 |
|
- |
|
- |
|
|
- - |
|
- |
|
6,589,665 |
Deferred Tax Asset |
- |
|
- |
|
- |
|
|
- - |
|
- |
|
- |
Other Noncurrent Assets |
6,329,624 |
|
1,000,000 |
|
- |
|
|
- - |
|
(6,084,235) |
|
1,245,389 |
Total Assets |
$ 151,151,761 |
|
$ 131,036,372 |
|
$ 893,073 |
|
$ |
27,165 $ 24,176,584 |
|
$ (260,318,309) |
|
$ 46,966,646 |
18
Maestro Health, LLC. and Subsidiaries
Consolidating Balance Sheets
December 31, 2021 - Continued |
|
||||||||||||
|
Maestro |
|
Integra |
|
Context |
|
Workable |
|
Group |
|
|
|
|
|
Health |
|
Employer Health |
|
Benefit Advisors |
|
Solutions |
|
Associates |
|
Eliminations |
|
Consolidated |
Liabilities and Members' Deficit Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
$ 266,332 |
|
$ 81,925 |
|
$ - |
|
$ - |
|
$ - |
|
$ - |
|
$ 348,257 |
Accrued payroll and related taxes |
4,107,627 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
4,107,627 |
Other current liabilities |
1,004,578 |
|
851,356 |
|
- |
|
- |
|
335,183 |
|
- |
|
2,191,117 |
Revolving line of credit |
53,400,000 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
53,400,000 |
Intercompany |
127,463,052 |
|
107,749,667 |
|
874,028 |
|
- |
|
18,148,828 |
|
(254,234,075) |
|
1,501 |
Total current liabilities before funds held for clients |
186,241,589 |
|
108,682,948 |
|
874,028 |
|
- |
|
18,484,011 |
|
(254,234,075) |
|
60,048,502 |
Funds held for clients |
- |
|
17,367,203 |
|
- |
|
27,165 |
|
1,857,283 |
|
- |
|
19,251,650 |
Total Current Liabilities |
186,241,589 |
|
126,050,151 |
|
874,028 |
|
27,165 |
|
20,341,294 |
|
(254,234,075) |
|
79,300,152 |
Other Liabilities, long-term |
598,460 |
|
2,148,085 |
|
- |
|
- |
|
- |
|
- |
|
2,746,544 |
Total Liabilities |
186,840,049 |
|
128,198,236 |
|
874,028 |
|
27,165 |
|
20,341,294 |
|
(254,234,075) |
|
82,046,696 |
Commitments and Contingencies (see Note 5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Members' Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
195,048,936 |
|
30,512,320 |
|
98,792 |
|
5,954,422 |
|
2,864,607 |
|
(39,528,934) |
|
194,950,143 |
Retained earnings (deficit) |
(230,737,224) |
|
(27,674,184) |
|
(79,747) |
|
(5,954,422) |
|
970,683 |
|
33,444,700 |
|
(230,030,193) |
Total Members' Deficit |
(35,688,288) |
|
2,838,136 |
|
19,045 |
|
|
|
3,835,290 |
|
(6,084,234) |
|
(35,080,050) |
Total Liabilities and Members' Deficit |
$ 151,151,761 |
|
$ 131,036,372 |
|
$ 893,073 |
|
$ 27,165 |
|
$ 24,176,584 |
|
$ (260,318,309) |
|
$ 46,966,646 |
19
Maestro Health, LLC. and Subsidiaries
Consolidating Balance Sheets
December 31, 2020 |
|
||||||||||
|
Maestro Health |
|
Integra Employer Health |
|
Context Benefit Advisors |
|
Workable Group Solutions Associates |
|
Eliminations |
|
Consolidated |
Assets |
|
|
|
|
|
|
|
|
|
|
|
Current Assets Cash and cash equivalents |
$ 7,623,295 |
|
$ 570,028 |
|
$ 73,522 |
|
$ - $ 33,503 |
|
$ - |
|
$ 8,300,348 |
Accounts receivable |
94,637 |
|
35,367 |
|
- |
|
- 140,219 |
|
- |
|
270,222 |
Miscellaneous receivables |
7,653,116 |
|
1,335,749 |
|
2,454 |
|
- 1,194,935 |
|
- |
|
10,186,254 |
Other current assets |
1,795,318 |
|
163,471 |
|
- |
|
- 7,839 |
|
- |
|
1,966,628 |
Intercompany |
102,102,729 |
|
88,485,456 |
|
776,548 |
|
- 18,631,951 |
|
(209,825,413) |
|
171,272 |
Total current assets before funds held for clients |
119,269,095 |
|
90,590,071 |
|
852,524 |
|
- 20,008,447 |
|
(209,825,413) |
|
20,894,724 |
Funds held for clients |
- |
|
18,369,783 |
|
- |
|
27,165 9,224,691 |
|
- |
|
27,621,639 |
Total Current Assets |
119,269,095 |
|
108,959,854 |
|
852,524 |
|
27,165 29,233,138 |
|
(209,825,413) |
|
48,516,363 |
Property, Plant and Equipment, net of accumulated depreciation |
4,342,472 |
|
1,163,871 |
|
- |
|
- 48,832 |
|
- |
|
5,555,175 |
Capitalized Development, net of accumulated depreciation |
7,275,522 |
|
- |
|
- |
|
- - |
|
- |
|
7,275,522 |
Deferred Tax Asset |
- |
|
- |
|
- |
|
- - |
|
- |
|
- |
Other Noncurrent Assets |
3,282,794 |
|
1,200,080 |
|
- |
|
- - |
|
(2,929,910) |
|
1,552,964 |
Intangible Assets, net |
- |
|
- |
|
- |
|
- - |
|
- |
|
- |
Goodwill, net |
- |
|
- |
|
- |
|
- - |
|
- |
|
- |
Total Assets |
$ 134,169,883 |
|
$ 111,323,805 |
|
$ 852,524 |
|
$ 27,165 $ 29,281,970 |
|
$ (212,755,323) |
|
$ 62,900,024 |
20
Maestro Health, LLC. and Subsidiaries
Consolidating Balance Sheets
December 31, 2020– Continued |
|
||||||||||||
|
Maestro |
|
Integra |
|
Context |
|
Workable |
|
Group |
|
|
|
|
|
Health |
|
Employer Health |
|
Benefit Advisors |
|
Solutions |
|
Associates |
|
Eliminations |
|
Consolidated |
Liabilities and Members' Deficit Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
$ 106,536 |
|
$ 86,083 |
|
$ - |
|
$ - |
|
$ - |
|
$ - |
|
$ 192,619 |
Accrued payroll and related taxes |
2,596,179 |
|
770,412 |
|
- |
|
- |
|
324,678 |
|
- |
|
3,691,269 |
Other current liabilities |
2,348,335 |
|
544,265 |
|
220 |
|
- |
|
609,471 |
|
- |
|
3,502,291 |
Revolving line of credit |
31,400,000 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
31,400,000 |
Intercompany |
103,866,321 |
|
88,177,655 |
|
863,231 |
|
3,024 |
|
16,915,181 |
|
(209,825,413) |
|
(1) |
Total current liabilities before funds held for clients |
140,317,371 |
|
89,578,415 |
|
863,451 |
|
3,024 |
|
17,849,330 |
|
(209,825,413) |
|
38,786,178 |
Funds held for clients |
- |
|
18,369,783 |
|
- |
|
27,165 |
|
9,224,691 |
|
- |
|
27,621,639 |
Total Current Liabilities |
140,317,371 |
|
107,948,198 |
|
863,451 |
|
30,189 |
|
27,074,021 |
|
(209,825,413) |
|
66,407,817 |
Other Liabilities, long-term |
518,130 |
|
2,608,978 |
|
- |
|
- |
|
- |
|
- |
|
3,127,107 |
Total Liabilities |
140,835,501 |
|
110,557,176 |
|
863,451 |
|
30,189 |
|
27,074,021 |
|
(209,825,413) |
|
69,534,925 |
Commitments and Contingencies (see Note 5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Members' Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
194,198,799 |
|
30,512,320 |
|
98,793 |
|
5,954,422 |
|
2,864,607 |
|
(39,528,934) |
|
194,100,006 |
Retained earnings (deficit) |
(200,864,417) |
|
(29,745,691) |
|
(109,721) |
|
(5,957,446) |
|
(656,657) |
|
36,599,024 |
|
(200,734,907) |
Total Members' Deficit |
(6,665,618) |
|
766,629 |
|
(10,928) |
|
(3,024) |
|
2,207,950 |
|
(2,929,910) |
|
(6,634,901) |
Total Liabilities and Members' Deficit |
$ 134,169,883 |
|
$ 111,323,805 |
|
$ 852,524 |
|
$ 27,165 |
|
$ 29,281,970 |
|
$ (212,755,323) |
|
$ 62,900,024 |
21
Maestro Health, LLC. and Subsidiaries
Consolidating Statements of Operations
Year ended December 31, 2021
Revenue, administrative service fees |
Maestro Health $ 273 |
|
Integra Employer Health $ 17,614,650 |
|
Context Benefit Advisors $ 40,158 |
|
$ |
Workable Solutions |
Group Associates - $ 1,720,596 |
|
$ |
Eliminations |
Consolidated - $ 19,375,677 |
||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Personnel and related expenses |
21,744,095 |
|
11,482,318 |
|
- |
|
- |
|
- |
|
(1) |
|
33,226,412 |
||||
Other selling, general and administrative expenses |
7,510,264 |
|
3,818,322 |
|
134 |
|
(3,024) |
|
75,328 |
|
- |
|
11,401,024 |
||||
Depreciation and amortization |
3,073,566 |
|
242,503 |
|
- |
|
- |
|
13,620 |
|
- |
|
3,329,689 |
||||
Total Operating Expenses |
32,327,925 |
|
15,543,143 |
|
134 |
|
(3,024) |
|
88,948 |
|
(1) |
|
47,957,126 |
||||
Operating Income (Loss) |
(32,327,652) |
|
2,071,507 |
|
40,024 |
|
3,024 |
|
1,631,648 |
|
1 |
|
(28,581,449) |
||||
Other Expense (Income) |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
||||
Interest expense/(income) |
157,621 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
157,621 |
||||
Intercompany expense (income) |
(10,051) |
|
- |
|
10,051 |
|
- |
|
- |
|
- |
|
- |
||||
Other expense/(income) |
(281,653) |
|
- |
|
- |
|
- |
|
4,308 |
|
- |
|
(277,345) |
||||
Total Other Expense (Income) |
(134,083) |
|
- |
|
10,051 |
|
- |
|
4,308 |
|
- |
|
(119,724) |
||||
Equity in Earnings of Affiliates |
3,154,324 |
|
- |
|
- |
|
- |
|
- |
|
(3,154,324) |
|
- |
||||
Income (Loss) From Operations Before Income Taxes |
(29,039,245) |
|
2,071,507 |
|
29,973 |
|
3,024 |
|
1,627,340 |
|
(3,154,323) |
|
(28,461,724) |
||||
Income Tax Provision (Benefit) |
833,562 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
833,562 |
||||
Net Income (Loss) |
$ (29,872,807) |
|
$ 2,071,507 |
|
$ 29,973 |
|
$ 3,024 |
|
$ 1,627,340 |
|
$ (3,154,323) |
|
$ (29,295,286) |
||||
22
Maestro Health, LLC. and Subsidiaries
Consolidating Statement of Operations
Year ended December 31, 2020
|
Maestro Health |
|
Integra Employer Health |
|
Context Benefit Advisors |
|
Workable Solutions |
|
Group Associates |
|
Eliminations |
|
Consolidated |
Revenue, administrative service fees |
$ 1,042,277 |
|
$ 15,304,721 |
|
$ 80,778 |
|
$ - |
|
$ 2,932,982 |
|
$ - |
|
$ 19,360,757 |
Expenses Personnel and related expenses |
15,462,540 |
|
15,330,193 |
|
40,650 |
|
- |
|
3,956,230 |
|
- |
|
34,789,614 |
Other selling, general and administrative expenses |
10,058,064 |
|
3,755,140 |
|
1,748 |
|
- |
|
73,646 |
|
- |
|
13,888,597 |
Depreciation and amortization |
4,047,973 |
|
249,558 |
|
- |
|
- |
|
21,336 |
|
- |
|
4,318,867 |
Total Operating Expenses |
29,568,577 |
|
19,334,891 |
|
42,398 |
|
- |
|
4,051,212 |
|
- |
|
52,997,078 |
Operating Income (Loss) |
(28,526,300) |
|
(4,030,170) |
|
38,380 |
|
- |
|
(1,118,230) |
|
- |
|
(33,636,321) |
Other Expense (Income) Interest expense/(income) |
133,225 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
133,225 |
Intercompany expense (income) |
(3,826,735) |
|
3,846,318 |
|
23,144 |
|
- |
|
(42,727) |
|
- |
|
- |
Other expense/(income) |
8,158,872 |
|
11,997 |
|
- |
|
643,003 |
|
(139,923) |
|
- |
|
8,673,949 |
Total Other Expense (Income) |
4,465,362 |
|
3,858,315 |
|
23,144 |
|
643,003 |
|
(182,650) |
|
- |
|
8,807,174 |
Equity in Earnings of Affiliates |
(9,585,451) |
|
- |
|
- |
|
- |
|
1 |
|
9,585,451 |
|
1 |
Income (Loss) From Operations Before Income Taxes |
(42,577,113) |
|
(7,888,485) |
|
15,236 |
|
(643,003) |
|
(935,579) |
|
9,585,451 |
|
(42,443,494) |
Income Tax Provision (Benefit) |
10,793,510 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
10,793,510 |
Net Income (Loss) |
$ (53,370,623) |
|
$ (7,888,485) |
|
$ 15,236 |
|
$ (643,003) |
|
$ (935,579) |
|
$ 9,585,451 |
|
$ (53,237,004) |
23
www.mazars.us
Exhibit 99.2
Maestro Health, LLC.
and Subsidiaries
Consolidated Financial Statements
Nine Months Ended
September 30, 2022
(Unaudited)
Maestro Health, LLC. and Subsidiaries
Table of Contents
September 30, 2022
Page(s)
Independent Auditors’ Review Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 4
Consolidated Statement of Members’ Deficit 5
Consolidated Statements of Cash Flows 6
Notes to the Consolidated Financial Statements 7-16
Independent Auditors’ Review Report
To the Board of Directors and Members of Maestro Health, LLC
Results of Review of Interim Financial Information
We have reviewed the accompanying consolidated financial statements of Maestro Health, LLC and subsidiaries (the “Company”) which comprise the balance sheet as of September 30, 2022, and the related consolidated statements of operations, members’ deficit, and cash flows for the nine-month period September 30, 2022 and the related notes (collectively referred to as the “interim financial information”).
Based on our review, we are not aware of any material modifications that should be made to the interim financial information referred to above for it to be in accordance with accounting principles generally accepted in the United States of America.
Basis for Review Results
We conducted our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. A review of interim financial information is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is an expression of an opinion regarding the financial information as a whole, and accordingly, we do not express such an opinion. We are required to be independent of the Company and to meet our other ethical responsibilities in accordance with the relative ethical requirements relating to our review. We believe that the results of the review procedures provide a reasonable basis for our conclusion.
Responsibilities of Management for the Interim Financial Information
Management is responsible for the preparation and fair presentation of the interim financial information in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of interim financial information that is free from material misstatement, whether due to fraud or error.
Report on Consolidated Balance Sheet as of December 31, 2021
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2021, and the related consolidated statements of operations, members’ (deficit), and cash flows for the year then ended (not presented herein); and in our report dated May 20, 2022, we expressed an unmodified audit opinion on those audited consolidated financial statements. In our opinion, the accompanying condensed consolidated balance sheet of the Company as of December 31, 2021, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived.
/s/ Mazars USA LLP
Fort Washington, PA
January 6, 2023
Maestro Health, LLC. and Subsidiaries
Consolidated Balance Sheets
September 30, 2022 (Unaudited) and December 31, 2021
The accompanying notes are an integral part of these consolidated financial statements.
2
Maestro Health, LLC. and Subsidiaries
Consolidated Balance Sheets (Cont’d)
September 30, 2022 (Unaudited) and December 31, 2021
The accompanying notes are an integral part of these consolidated financial statements.
3
Maestro Health, LLC. and Subsidiaries
Consolidated Statements of Operations
Nine Months Ended September 30, 20222 (Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
4
Maestro Health, LLC. and Subsidiaries
Consolidated Statement of Members’ Deficit
Nine Months Ended September 30, 2022 (Unaudited), and Year Ended September 30, 2022
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2022 (Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
5
Maestro Health, LLC. and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
6
Maestro Health, LLC. and Subsidiaries
Notes to the Consolidated Financial Statements
Nine Months Ended September 30, 2022 (Unaudited)
Organization, Nature of Operations, and Management Plans
Maestro Health, LLC and Subsidiaries (the “Company”) is a Self-Funded Health Plan service provider which delivers a complete, all-in employee health and benefits solution to brokers, carriers, and employers.
Maestro Health, LLC is a Delaware domiciled limited liability company owned 100% by the AXA Group. It was formerly known as Maestro Health Inc., a Delaware domiciled corporation, which was organized on May 2, 2013. Maestro Health, Inc. converted to Maestro Health, LLC effective as of December 17, 2020. The Company’s services help employers control all aspects of the complex employee health and benefits system. The Company owns and operates self-funded insurance administration, benefits administration, enrollment, ACA compliance, consumer directed health care account administration, medical management, and consolidated billing solution applications, unifying them on a single, comprehensive mobile and web platform. In 2021, the Company added an Out of Network Repricing Solution and an Rx Patient Assistance Program to its service offerings. The Company provides services to clients throughout the United States from offices in Chicago, Illinois (headquarters); Charlotte, North Carolina; Southfield, Michigan; and Bethesda, Maryland.
The Company has experienced operating losses and negative cash flows from operations since inception and has been primarily funded with equity contributions and proceeds under credit facilities. At September 30, 2022, the Company has total members’ deficit of ($49,515,840) and a retained deficit of ($244,465,983), largely driven by the impairment of intangible assets in 2020 and 2019.
On August 4, 2022, it was announced that AXA S.A. agreed to sell all of its holdings in the Company to Marpai, Inc. (“Marpai”) a Self-Funded Health Plan service provider which delivers employee health and benefits solutions to brokers, carriers, and employers. It is expected that the synergies between the two organizations will result in profitable growth.
Marpai is traded on the NASDAQ under the symbol “MRAI”.
Following the acquisition, which was completed on October 31, 2022 the Company became a wholly owned subsidiary of Marpai and Marpai became the holder of the $59.9 million consolidated loan (see Note 6). As part of the agreement, AXA agreed to fund the operations of Maestro through the end of 2023 by guaranteeing a cash balance upon closing of $15,700,000. Of which, an amount of $14 million cash transfer was received on October 27, 2022.
It is expected that following the acquisition, the operations of the Company and Marpai will be consolidated so that they will operate as one single company, and the Company as presently constituted will no longer be an independent stand-alone business entity.
Consolidation
The consolidated financial statements include the financial results of Maestro Health, Inc. and its wholly owned subsidiaries. The wholly owned subsidiaries are Integra Employer Health, LLC, Context Benefit Advisors, LLC, Workable Solutions, LLC, and Group Associates, Inc. Intercompany balances and transactions have been eliminated in consolidation. A formerly wholly owned subsidiary, IntegraHealth Management, LLC, was dissolved as of September 26, 2019. Colton Groome Benefit Advisors, LLC was renamed Context Benefit Advisors, LLC as of October 16, 2019.
The accompanying notes are an integral part of these consolidated financial statements.
7
Maestro Health, LLC. and Subsidiaries
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions are used for, but not limited to, establishing the allowance for doubtful accounts, purchase price allocations, depreciation and amortization useful lives, capitalization of development costs, asset impairment evaluations, deferred tax assets and liabilities, rebate receivables, stock-based compensation, and other contingencies. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are maintained at financial institutions, and, at times, balances may exceed federally insured limits. The Company has never experienced losses related to these balances.
Accounts Receivable
The Company evaluates historical information and current economic conditions, as well as individual account histories when establishing the allowance for doubtful accounts. The policy for reserving for uncollectible accounts is to do so once accounts become over 180 days outstanding or the customer has filed for bankruptcy. As of September 30, 2022 and December 31, 2021, the Company recorded $50,276 and $6,375 in the allowance for doubtful accounts, respectively.
Miscellaneous Receivables
The Company accounts for other miscellaneous receivables for unsettled transactions and other monetary obligations owed by other debtors. The miscellaneous receivables classified in current assets are related to client activities due to the Company from other debtors for referral, commission, and rebate income.
Funds Held for Clients and Custodial Receivables (Payables)
The Company holds funds for clients in the form of custodial cash. These amounts are held to pay claims, stop loss premiums, and medical, dental, and voluntary insurance premiums on behalf of clients and participants. This custodial cash is shown on the Company’s consolidated balance sheets as part of funds held for clients and custodial receivables (payables) as an asset and a corresponding liability.
In its capacity as a third-party administrator, the Company bills and collects insurance premiums from benefits administration clients on behalf of insurance carriers and collects payments from self-funded clients for the purpose of paying health insurance claims of their employees. Billings and payments called are reflected as receivables with a corresponding liability recorded as part of funds held for clients and custodial receivables (payables). The Company will not pay the liability until the receivable has been fully funded.
Property and Equipment
Property and equipment, other than property and equipment acquired in acquisitions as described in Note 2, are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using a straight-line method applied to useful lives as follows:
Furniture and equipment |
7 years |
Marketing equipment |
7 years |
Computer equipment |
5 years |
Telephone systems |
5 years |
Leasehold improvements |
3 years or remaining life of lease |
Software |
3 years |
The accompanying notes are an integral part of these consolidated financial statements.
8
Maestro Health, LLC. and Subsidiaries
Repairs and maintenance are expensed when incurred and expenditures for improvements are capitalized. Upon sale or retirement, the related cost and accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in operations.
Software Development Costs
Software development costs are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 985-20 if the software is to be sold, leased or otherwise marketed, or by FASB ASC Subtopic 350-40 if the software is for internal use. For internal use software, capitalization of software development costs begins during the application development stage and concludes when the product is substantially complete and ready for its intended use. The ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future product revenue and related cash flows, estimated economic product lives, and changes in software and hardware technology. The capitalized software development cost at September 30, 2022 and December 31, 2021 was $12,300,719 and $11,494,627 respectively. The costs capitalized in 2021 and 2022 relate to various ongoing development projects related to the Company’s mobile and web platform. Once software projects become available for general release, the Company begins to amortize the costs over the related project’s estimated economic useful life to Depreciation and Amortization expense. Accumulated amortization was $6,688,735 and $4,904,962 as of September 30, 2022 and December 31, 2021, respectively.
Long-Lived Assets
The Company periodically reviews the carrying value of long-lived assets for recoverability or whenever events or changes in circumstances indicate that such amounts have been impaired. The Company’s method for measuring impairment of long-lived assets is an undiscounted cash flow basis. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated decline in revenue or operating profit, and a material decrease in the fair value of some or all of the assets. If such impairment exists, the carrying value of the asset is reduced to its estimated fair value based on discounted cash flows. As of December 31, 2020, management chose to impair its long-lived assets in full which amounts to $7,756,713. After this impairment, the Company does not have intangible assets.
Business Combinations
When the Company acquires businesses or business assets in a business combination, the total consideration paid is allocated to the fair value of the tangible assets, liabilities, and identifiable intangible assets acquired. Any residual purchase consideration is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired, and liabilities assumed. These estimates are based on the application of valuation models using historical experience and information from independent valuation consultants. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, the cost savings expected to be derived from acquiring an asset and estimated earn-out liabilities based on future results. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of these estimates. Acquisition-related costs are expensed as incurred. Refer to Note 2 for further information.
Goodwill and Indefinite Life Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. The Company elected to adopt Accounting Standards Update (“ASU”) 2014-02, “Intangibles – Goodwill and Other (Topic 350),” an alternative to the previously issued standard ASU 2011-08, which allows private companies to amortize goodwill. Upon adoption effective January 1, 2015, the Company began to amortize goodwill over ten years. Under the private company guidance, the Company has also elected to test goodwill for impairment at the consolidated level. Prior to the adoption of ASU 2014-02, the Company tested goodwill for impairment at the reporting unit level. Under ASU 2014-02, goodwill is tested for impairment if a triggering event occurs, or circumstances change that indicate that the fair value of the entity may be below its carrying amount. If an entity determines that there are no triggering events, then further testing is unnecessary. Upon the occurrence of
The accompanying notes are an integral part of these consolidated financial statements.
9
Maestro Health, LLC. and Subsidiaries
a triggering event, an entity may assess qualitative factors to determine whether it is more likely than not (i.e., a likelihood of more than 50%) that the fair value of the entity is less than its carrying amount, including goodwill. An entity may bypass the qualitative assessment and proceed directly to a quantitative assessment. If, after assessing the totality of events or circumstances, it is determined that it is not more likely than not that the fair value of the entity is less than its carrying amount, further testing is unnecessary. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of the entity is less than its carrying amount or if the entity elected to bypass the qualitative assessment, the fair value of the entity should be determined. The fair value of the entity is then compared with its carrying amount, including goodwill. A goodwill impairment loss is recognized if the carrying amount of the entity exceeds its fair value and is measured as the amount by which the carrying amount of the entity including goodwill exceeds its fair value. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis, which is amortized over the remaining useful life of goodwill. In 2019, the management decided to impair fully the goodwill, discussed further in Note 3. As of September 30, 2022 and December 31, 2021, goodwill remains zero.
Definite Life Intangible Assets
Client contracts and lists, developed technology, non-compete agreements, and certain other trade names were recorded at their estimated fair value at the date of each respective acquisition and are amortized over their estimated useful lives generally ranging from one to 15 years using the straight-line method. The Company evaluates definite life intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset might not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset are less than its’ carrying amount. At March 1, 2018, all intangible assets were marked to net book value and revalued at fair market value as a result of the AXA Acquisition. As of December 31, 2020, there were impairment charges fully impairing the remaining definite lived intangible assets, which is further discussed in Note 3. As of September 30, 2022 and December 31, 2021, the net book value of the intangible assets remains zero.
Employee Benefit Plan
The Company has established a voluntary investment plan that covers all eligible employees. Employees may elect to contribute up to 100% of gross salary to this plan, and the Company matches the employee contribution up to 2% of gross salary, up to the 2022 IRS limit of $20,500. Non-elective employer contributions vest immediately at the rate of 100%. Contributions made to or on the behalf of employees under these plans were $175,807 as of September 30, 2022. Contributions made by the employees amounted to $726,862 at September 30, 2022.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP. The revenue standard’s core principle is built on the contract between a vendor and a client for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled.
The Company’s policy is to begin to record revenue only when the following criteria are met:
The accompanying notes are an integral part of these consolidated financial statements.
10
Maestro Health, LLC. and Subsidiaries
The Company’s revenues are largely attributable to administrative service fees collected from employers on a per member basis, medical management fees charged on an hourly basis, as well as commission income on the repricing of out of network claims, the Rx savings achieved, and insurance products sold. In accordance with the above-outlined policy and with the various administrative service agreements with clients, fees associated with services are recognized in the period such services are rendered and earned.
The Company also has certain revenue associated with client agreements where services are provided over a contract period that spans multiple months. Revenue for these arrangements is recognized under the proportional performance method on a ratable basis over the period of the entire arrangement.
Income Taxes
The Company follows the provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” which seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. Under ASC 740-10-25, an organization must recognize the tax benefit associated with tax positions taken for tax return purposes when it is more likely than not that the position will be sustained. The Company recognizes any corresponding interest and penalties associated with its income tax positions in income tax expense.
Paid Time Off (PTO)
The Company accrues for employee vacation when the rights vest and accumulate and such amounts can be reasonably estimated.
Fair Value of Financial Instruments
The carrying values of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The Company believes that the current carrying amount of its notes payable approximates fair value because the interest rates on these instruments are subject to change with, or approximate, market interest rates.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.
The Company grants credit to clients of various sizes throughout the United States. For the period ended September 30, 2022, one client made up approximately 19% of total revenues. As of September 30, 2022 and December 31, 2021, one client made up approximately 31% and 16%, respectively, of accounts receivable. The Company does not have any significant suppliers.
Trust Assets and Liabilities
In its capacity as a third-party administrator, the Company bills and collects insurance premiums from benefits administration clients on behalf of insurance carriers and collects payments from self-funded clients for the purpose of paying health insurance claims of their employees. Billings and payments called are reflected as receivables with a corresponding liability recorded as premiums payable or as claims payable. The Company will not pay the liability until the receivable has been fully funded.
The accompanying notes are an integral part of these consolidated financial statements.
11
Maestro Health, LLC. and Subsidiaries
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, “Leases,” which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease and causes lessees to recognize leases on the balance sheets as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than one year. ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years, with early adoption permitted. ASU 2016-02 requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. FASB extended this deadline from 2020 to 2022 due to the coronavirus crisis. The Company implemented the new standard for all office leases in August, 2022, effective as of January 1, 2022. The Company plans to apply the standard to their equipment leases, effective as of January 1, 2022 before December 31, 2022.
Subsequent Events
The Company has evaluated subsequent events through January 6, 2023. Refer to Note 8 for a summary of significant subsequent events.
Transactions
The transactions below were accounted for as business combinations in accordance with ASC 805, “Business Combinations.” The 2022 and 2021 operating results include the effects of the acquisitions from the transaction date forward.
Context Benefit Advisors – Asset Sale
On May 21, 2020, an Asset Purchase Agreement was executed by and among Context Benefit Advisors, LLC (“Context Benefit Advisors”), a wholly owned subsidiary of Maestro Health, LLC, and The Hilb Group of North Carolina, LLC, (“Hilb”) whereby Context Benefit Advisors sold to Hilb a portfolio of brokerage contracts, for an upfront cash consideration of $36,000. All assets in scope were subsequently transferred to Hilb.
Group Associates – Asset Sale
On December 28, 2020, an Asset Purchase Agreement was executed by and among Group Associates, Inc. (“Group Associates”), a wholly owned subsidiary of Maestro Health, LLC, and Benefit Partner, LLC d/b/a Salus Group (“Salus”), whereby Group Associates sold to Salus a portfolio of benefit administration and brokerage contracts, for an upfront consideration of $200,000. The transfer of the assets was completed during the second quarter of 2021 and trailing commissions due were settled by December 31, 2021.
At September 30, 2022 and December 31, 2021, property and equipment were comprised of the following:
|
|
9/30/2022 |
|
12/31/2021 |
|
|
|
|
|
Furniture, fixtures, and equipment |
$ |
7,480,296
|
$ |
7,443,136 |
Less accumulated depreciation and amortization |
|
3,697,619
|
|
2,985,881 |
|
|
|
|
|
Net Book Value of Property and Equipment |
$ |
3,782,677
|
$ |
4,457,255 |
Depreciation and amortization expense was $711,739 for the period ended September 30, 2022.
The accompanying notes are an integral part of these consolidated financial statements.
12
Maestro Health, LLC. and Subsidiaries
The following is a description of principal activities from which the Company generates its revenue:
Self-Funded (SF) administrative services of the Company principally generate revenue from providing services such as coordination of benefits, large claims management and adjudication, Electronic Data Interchange (EDI), as well as medical, dental and vision administration. Fees are billed and collected from employers on a per member basis and recognized in the period such services are rendered and earned.
Clinical Care Management (CCM) revenues principally generate revenue from providing Utilization Review (UR), acute case management, chronic condition management, complex condition management and biometric screenings. Revenues are billed and recognized when the services are performed.
Cost Management (CM) revenues are generated from a variety of services. Included are Out-of-network repricing management, PBM maintenance, alternative reimbursement strategies, repricing administration, virtual care options, as well as pharmacy cost containment solutions. Revenues are billed and recognized when the services are performed.
Benefit Administrative revenues are primarily generated from Enrollment Only Services, and Cobra administration. Fees are billed and collected from employers on a per member basis and recognized in the period such services are rendered and earned.
Benefit Accounts revenues are generated primarily from FSA, HSA, and transit administration services. Fees are billed and collected on a per participant basis and recognized in the period such services are rendered and earned.
ACA Reporting (form 1094/1095 reporting) revenues are generated by either a full-service or self-service option for monthly updating. Under the self-service option, the customer accesses the platform and makes their monthly updates themselves. Under the full-service option, the customer provides the Company a file, and the Company updates the platform on their behalf. Revenue recognition for the ACA product is addressed differently for different components:
Billing for ACA services is done in two parts, therefore the Company uses unbilled A/R and deferred revenue accounts when the contract begins and utilizes revenue recognition schedules to the recognize appropriately over the reporting period.
The accompanying notes are an integral part of these consolidated financial statements.
13
Maestro Health, LLC. and Subsidiaries
The following table presents revenues disaggregated by services line for the period ended September 30, 2022:
The Company does not have Goodwill or Intangible Assets as of September 30, 2022.
Leases
The Company has various non-cancelable operating lease agreements for office space and other equipment through 2028. ASC842 was implemented for the three outstanding office leases in August 2022, effective January 1, 2022. Right of Use Assets of $3,187,587 and Lease Liabilities of $6,202,697 were created. As of September 30, 2022, the net book value of the Right of Use Assets and outstanding Lease Liabilities were $2,863,260 and $5,658,123 respectively.
On March 1, 2018, the Company entered into a lease agreement for premises, comprised of 10,019 rentable square feet, in Southfield, Michigan. The lease term commenced on July 2, 2018 and will continue through and expire on July 31, 2023. In accordance with the commencement of this lease agreement, the Company vacated its premises (and terminated its lease) in Bingham Farms, Michigan. The landlord was informed that the Company intends to vacate the premises at lease expiration.
On July 24, 2018, the Company entered into an amended lease agreement for the Company’s corporate headquarters in Chicago, Illinois, where the Company expanded its occupied premises, extended the lease term, and modified other general lease provisions. The Company expanded its occupied premises by an additional 4,905 rentable square feet. The lease term commenced on November 1, 2018 and will continue through and expire on September 30, 2028.
On July 8, 2019, the Company entered into a lease agreement with Regus, in Bethesda, Maryland, for Office 719. The lease term commenced on July 15, 2019 and the current extension will expire on January 31, 2023. The Company intends to terminate the lease at the end of the current extension period.
On October 25, 2019, the Company entered into a lease agreement for residential housing for one of the Company’s Executive Officers. The premises are comprised of 3,200 rentable square feet, in Chicago, Illinois. The lease term commenced on December 1, 2019 and will continue through and expire on November 30, 2023. This lease will be transferred to the Company Executive effective October 31, 2022.
The accompanying notes are an integral part of these consolidated financial statements.
14
Maestro Health, LLC. and Subsidiaries
On December 19, 2019, the Company entered into a lease agreement for premises comprised of 31,475 rentable square feet in Charlotte, North Carolina. The lease term commenced on June 1, 2020 and will continue through and expire on May 31, 2029. In accordance with the commencement of this lease agreement, the Company vacated its prior office premises in Charlotte, North Carolina and terminated that lease at its expiration date of September 30, 2021.
On May 20, 2020, the Company entered into a lease agreement with Regus, in Bethesda, Maryland, for Office 720. The lease commenced on July 1, 2020 and was on a month-to-month basis. This lease was terminated on September 30, 2021.
The future minimum lease payments required for each of the following fiscal years ending are:
Year Ending December 31, |
Amount |
2022 |
$ 1,452,642 |
2023 |
1,355,988 |
2024 |
1,266,301 |
2025 |
1,309,409 |
2026 and Beyond |
5,404,434 |
Total |
$ 10,788,774 |
Legal Proceedings
From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business.
The Company is under investigation as whether it is in compliance with the Privacy and Security Rules per the U.S. Department of Health and Human Services' Office for Civil Rights. The Company responded to several rounds of inquiries, the last being in October 2021. It remains unclear if further information will be requested or a penalty will be assessed.
Effective December 17, 2020, the Company elected to convert to a Limited Liability Corporation (LLC) owned by two partners. As a result, the Company will now be treated as a partnership and wrote off its deferred balances. For the 2021 and 2022 reporting periods, the Company’s net losses are absorbed by their owner/partners and reported within their financial statements. An agreement exists between the parties that any tax benefit that accrues to the partners from the Company’s net losses will be reinvested in the Company once those figures are finalized.
As of September 30, 2022, the Company did not have any material uncertain tax positions. The Company will be acquired by a public corporation effective October 31, 2022 and does not expect any material changes to its unrecognized tax benefits within the next 12 months. The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year or otherwise directly related to an existing deferred tax asset, in which case the uncertain tax position is recorded net of the asset on the balance sheets. Interest and penalties are recognized in income tax expense. As of December 31, 2021, there were no accrued interest and penalties related to uncertain tax positions. The Company has filed income tax returns in the U.S. federal jurisdiction for all years since inception in 2013. For taxation years before 2017, the Company is no longer subject to U.S. Federal or state income tax examinations.
The accompanying notes are an integral part of these consolidated financial statements.
15
Maestro Health, LLC. and Subsidiaries
On February 5, 2020, the Company entered into a $10,000,000 loan agreement with AXA S.A., with a termination date as of August 5, 2020. The loan was received in full by the Company on February 5, 2020. On August 5, 2020, the loan was subsequently increased to $21,400,000, with a new termination date as of August 5, 2021. The additional amount was received in full by the Company on August 5, 2020. On August 5, 2021, the loan was extended to a termination date as of July 5, 2022. On May 12, 2022, the loan was consolidated with all other outstanding loans and extended to a termination date of May 13, 2023.
On April 15, 2020, the Company entered into a $10,000,000 loan agreement with AXA S.A., with a termination date as of October 15, 2020. The loan was received in full by the Company on April 15, 2020. On October 15, 2020, the loan was extended to a termination date as of October 15, 2021. On October 13, 2021, the loan was extended to a termination date as of July 5, 2022. On May 12, 2022, the loan was consolidated with all other outstanding loans and extended to a termination date of May 13, 2023.
On February 24, 2021, the Company entered into a $10,000,000 loan agreement with AXA S.A., with a termination date as of February 28, 2022. The loan was received in full by the Company on February 26, 2021. On February 28, 2022, the loan was extended to a termination date as of July 5, 2022. On May 12, 2022, the loan was consolidated with all other outstanding loans and extended to a termination date of May 13, 2023.
On June 17, 2021, the Company entered into a $12,000,000 loan agreement with AXA S.A., with a termination date as of June 17, 2022. The loan was received in full by the Company on June 17, 2021. On May 12, 2022, the loan was consolidated with all other outstanding loans and extended to a termination date of May 13, 2023.
On May 13, 2022, the Company consolidated all outstanding loans with AXA S.A. and entered into a new loan agreement with AXA S.A. for $59.9m, with a termination date of May 12, 2023.
On December 17, 2020, Maestro Health, Inc. was converted into Maestro Health, LLC. As a consequence, all 948 outstanding shares of Common Stock were retired and converted into 948 Membership Units. The total membership units are held by the Company’s two owners. AXA Holdings U.S. Holdings, Inc. has 748 membership units and Seaview Re Holdings Inc. has 200 membership units. There have been no changes in common stock as of September 30, 2022.
Maestro Health, LLC Acquisition by Marpai, Inc.
On October 31, 2022, the acquisition of Maestro Health, LLC by Marpai, Inc. was closed. As part of the agreement, Marpai paid $100.00 to the Equity Seller (X.L. America, Inc. and Seaview Re Holdings, Inc.) and promised to pay the Debt Holder (AXA S.A.) $5,000,000 on 12/31/2024, $11,000,000 on 12/31/2025 and $19,000,000 on 12/31/2026 (inclusive of interest), thereby transferring the Debt Holder’s receivable of $59,900,000 to Marpai. The debt holder cancelled its claim against Maestro Health for the debt instrument and any interest accrued as of October 31, 2022. The agreement also required that AXA guarantee a cash balance upon closing of $15,700,000 to fund Maestro’s operations through 2023. Of which, an amount of $14 million cash transfer was received on October 27, 2022, as disclosed under Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
16
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Introduction
The following unaudited pro forma condensed combined financial information is based on the historical consolidated financial statements of Marpai, Inc. (“Marpai”) and Maestro Health, LLC (“Maestro”), after giving effect to Marpai’s acquisition of Maestro. The notes to the unaudited pro forma condensed combined financial information describe the reclassifications and transaction accounting adjustments to the financial information presented. Hereinafter, Marpai and Maestro are collectively referred to as the “Companies,” and the Companies, subsequent to the Acquisition, are referred to herein as the “Combined Company.”
The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X, as amended by the final rule, Release No. 33-10786, “Amendments to Financial Disclosures about Acquired and Disposed Businesses,” and presents the combination of the historical financial information of Marpai and Maestro adjusted to give effect to Marpai’s acquisition of Maestro.
The unaudited pro forma condensed combined balance sheet, which has been presented for the Combined Company as of September 30, 2022, gives effect to the transactions summarized below, as if they were consummated on September 30, 2022.
The unaudited pro forma condensed combined statements of operations, which have been presented for the nine months ended September 30, 2022, gives effect to the transactions summarized below, as if they had occurred on January 1, 2021, the beginning of the earliest period presented.
The unaudited pro forma condensed combined statements of operations, which have been presented for the year ended December 31, 2021, give effect to the transactions summarized below, as if they had occurred on January 1, 2021, the beginning of the earliest period presented. Additionally, the unaudited pro forma condensed combined statement of
operations for the year ended December 31, 2021 reflects the impact of the Continental Benefits, LLC (“Continental Benefits”) acquisition by Marpai as if it occurred on January 1, 2021.
Description of the Transaction
On August 4, 2022, Marpai, a Delaware corporation entered into a Membership Interest Purchase Agreement (the “Agreement”) by and among XL America Inc., a Delaware corporation, Seaview Re Holdings Inc., a Delaware corporation (XL America Inc. and Seaview Re Holdings Inc. are collectively referred to herein as the “Equity Sellers”), and AXA S.A., a French société anonyme (the “Debt Seller,” and, together with the Equity Sellers, collectively, the “Sellers”). Pursuant to the terms of the Agreement, the Company agreed to acquire all of the membership interests (the “Units”) of Maestro , a Delaware limited liability company (the “Acquisition”). The Equity Sellers own an aggregate of 100% of the issued and outstanding Units of Maestro.
Maestro is a third-party administrator for employee health and benefits, which offers an end-to-end health plan solution, integrating care management and cost containment for its customers. The Agreement contains representations and warranties customary for transactions of this nature negotiated between sophisticated purchasers and sellers acting at arm’s length, certain of which are qualified as to materiality and knowledge and subject to reasonable exceptions. The closing of the Acquisition is subject to certain customary closing conditions as contained in the Agreement, including: (i) that the Equity Sellers shall have sold, assigned, transferred, conveyed and delivered to Marpai all of the Equity Sellers’ rights, title, and interests in and to all of the Units; and (ii) the Debt Seller shall have irrevocably transferred and assigned to Marpai all of the Debt Seller’s rights and obligations with respect to receiving payments under that certain Term Loan Agreement, dated May 11, 2022, by and between the Debt Seller and Maestro, in the principal amount of $59,900,000 (the “AXA Note”).
In addition, the Sellers agreed that on the closing date Maestro’s free cash balance will be not less than $15,790,000, and that net working capital excluding cash will be between negative $1,485,128 and negative $2,758,094.
In consideration for Marpai’s acquisition of the Units, Marpai has agreed to pay the Sellers an aggregate purchase price (the “Purchase Price”) of $19,900,000 determined on the closing date (the “Base Purchase Price”), which shall be payable on or before April 1, 2024 (the “Payment Date”), and shall accrue interest until such time that is paid, such that on the Payment Date the Purchase Price, plus all accrued and unpaid interest, shall equal $22,100,000 (for clarity, the Base Purchase Price shall be adjusted, in each case, pursuant to the terms of the Agreement). Marpai agreed to pay the Equity Sellers an amount of $100 with the balance of the Purchase Price to be paid to the Debt Seller for the repayment of the AXA Note. In no event will Marpai be responsible for any further payments for the repayment of the AXA Note other than the repayment of the Purchase Price as provided in the Agreement. Following the Payment Date, any unpaid portion of the Purchase Price shall accrue interest at ten percent (10%) per annum, compounding annually, calculated on the basis of a 365-day year for the actual number of days elapsed (the “Specified Rate”), and shall be repaid as promptly as practicable to the Debt Seller. In addition, in the event Marpai or its subsidiaries receive proceeds from the sale of any securities in a private placement or public offering of securities (each an “Offering”), then Marpai shall pay to the Debt Seller an amount equal to thirty-five percent (35%) of the net proceeds of the Offering no later than sixty (60) days after the closing of Offering until such time as the Purchase Price has been paid in full.
Notwithstanding the foregoing, Marpai shall be required to make accumulated annual payments to the Debt Seller, representing the Purchase Price, as follows: (i) $5,000,000 to be paid by December 31, 2024, (ii) $11,000,000 to be paid by December 31, 2025, and (iii) $9,000,000 to be paid by December 31, 2026. In addition, Marpai shall be obligated to pay the full amount of any remaining unpaid Purchase Price (inclusive of any accrued interest at the Specified Rate) by no later than year-end 2027, and in no event shall the Company be required to pay total cash consideration equal to more than the aggregate amount of the Purchase Price (as adjusted pursuant to the terms of the Agreement).
Anticipated Accounting Treatment for the Acquisition
The Acquisition is accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“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 has deemed Marpai to be the accounting acquirer and determined a preliminary estimated purchase price, calculated as described in Note 2: Preliminary Estimated Purchase Price Allocation to the unaudited pro forma condensed combined financial information. The Maestro 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 Maestro that existed as of November 1, 2022, the date of the Closing. 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.
Basis of Pro Forma Presentation
The historical financial information has been adjusted to give pro forma effect to events that are directly attributable to the Acquisition. The adjustments presented on the unaudited pro forma condensed combined financial statements have been identified and presented to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the Acquisition.
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 as of September 30, 2022 and for the nine months ended September 30, 2022 and year ended December 31, 2021 and the related notes, which can be found in Marpai’s Form 10Q filing for the quarter ended September 30, 2022 and in Marpai’s Form 10K filing for the year ended December 31, 2021, respectively; and |
|
● |
Unaudited condensed consolidated financial statements of Maestro as of September 30, 2022 and for the nine months ended September 30, 2022 and year ended December 31, 2021 and the related notes, which are included elsewhere in this filing. |
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.
Marpai and Maestro have not had any historical relationship prior to the Acquisition. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.
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 September 30, 2022 and the final application of the accounting for the Acquisition, may occur and those differences could be material. In addition, differences between the preliminary and final adjustments may occur, as well as other changes in assets and liabilities between September 30, 2022 and the closing of the Acquisition.
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 September 30, 2022, 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, 2021, nor are they indicative of the results of operations of the Combined Company for any future period.
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 and Maestro been a combined company during the specified periods.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2022
|
(1) |
Derived from Marpai’s unaudited condensed consolidated balance sheet as of September 30, 2022. |
|
(2) |
Derived from Maestro’s unaudited condensed consolidated balance sheet as of September 30, 2022. |
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2022
|
(3) |
Derived from Marpai’s unaudited condensed consolidated statement of operations for the nine months ended September 30, 2022. |
|
(4) |
Derived from Maestro’s unaudited condensed consolidated statement of operations for the nine months ended September 30, 2022. |
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2021
|
(5) |
Derived from Marpai’s audited consolidated statement of operations for the year ended December 31, 2021. |
|
(6) |
Represents the addition of Continental Benefits pre-acquisition activity for the period January 1, 2021 through March 31, 2021 and pro forma adjustments related to the Continental Benefits acquisition which is derived from Marpai’s preliminary prospectus filing, dated October 25, 2021, for the period ended June 30, 2021. |
|
(7) |
Derived from Maestro’s audited consolidated statement of operations for the year ended December 31, 2021. |
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE ACQUISITION
On November 1, 2022, pursuant to the terms of the Membership Interest Purchase Agreement (the “Agreement”), Marpai, Inc. acquired all of the outstanding Units of Maestro. 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 consolidated financial statements of Marpai. and Maestro, after giving effect to transaction accounting adjustments related to the Acquisition and are intended to reflect the impact of such on the Combined Company’s historical consolidated financial statements.
The pro forma adjustments have been prepared as if the Acquisition had been consummated on September 30, 2022 in the case of the unaudited pro forma condensed combined balance sheet, and as if the Continental Benefits acquisition, which was consummated by Marpai on April 1, 2021, and the Acquisition had been consummated on January 1, 2021, the beginning of the earliest period presented, in the case of the unaudited pro forma condensed combined statements of operations.
The adjustments presented in the unaudited pro forma condensed combined financial information have been identified and presented to provide relevant information necessary for an accurate understanding of Marpai after giving effect to the Acquisition. Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented.
The unaudited pro forma condensed combined financial information has been prepared using the following:
|
● |
Unaudited condensed consolidated financial statements of Marpai as of September 30, 2022 and for the nine months ended September 30, 2022 and historical statement of operations for the year ended December 31, 2021 and the related notes, which can be found in Marpai’s Form 10Q filing for the quarter ended September 30, 2022 and in Marpai’s Form 10K filing for the year ended December 31, 2021, respectively;
Unaudited condensed consolidated financial statements of Marpai as of and for the period ended June 30, 2021 and the related notes, which can be found in Marpai’s preliminary prospectus filing, dated October 25, 2021; and |
|
● |
Unaudited condensed consolidated financial statements of Maestro as of September 30, 2022 and for the nine months ended September 30, 2022 and historical statement of operations for the year ended December 31, 2021 and the related notes, which are included elsewhere in this filing. |
The Acquisition is being accounted for as a business combination, with Marpai treated as the “acquirer” and Maestro treated as the “acquired” company for financial reporting purposes. 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 is the accounting acquirer and Maestro is deemed to be the acquired company for financial reporting purposes, as Marpai acquired all of the equity of Maestro for non-equity consideration and the Sellers do not hold any ownership and voting interest in Marpai.
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 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.
In consideration for Marpai’s acquisition of the Units, Marpai has agreed to pay the Sellers an aggregate purchase price (the “Purchase Price”) of $19,900,000 determined on the closing date (the “Base Purchase Price”), which shall be payable on or before April 1, 2024 (the “Payment Date”), and shall accrue interest until such time that is paid, such that on the Payment Date the Purchase Price, plus all accrued and unpaid interest, shall equal $22,100,000 (for clarity, the Base Purchase Price shall be adjusted, in each case, pursuant to the terms of the Agreement). Marpai agreed to pay the Equity Sellers an amount of $100 with the balance of the Purchase Price to be paid to the Debt Seller for the repayment of the AXA Note. In no event will Marpai be responsible for any further payments for the repayment of the AXA Note other than the repayment of the Purchase Price as provided in the Agreement.
The unaudited pro forma condensed combined balance sheet and statements of operations include certain reclassifications to align the historical financial statement presentation of Marpai and Maestro. See Notes (d), (e), (j), (l), (m), (n), (t), and (u) 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 financial information does not reflect the following:
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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. |
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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. |
In addition, 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.
2. PRELIMINARY ESTIMATED PURCHASE PRICE ALLOCATION
The Company has performed a preliminary valuation analysis and accordingly, the pro forma adjustments include a preliminary allocation of the purchase price of Maestro to the estimated fair values of assets acquired and liabilities assumed at the acquisition date based on certain currently available information and certain assumptions and methodologies that management believes are reasonable under the circumstances. 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.
The following table summarizes the allocation of the preliminary purchase:
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 and customer relationships as well as goodwill and (3) other changes to assets and liabilities. |
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ADJUSTMENTS TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION |
The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X.
Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The transaction accounting adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2022 are as follows:
Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations
The transaction accounting adjustments included in the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2022, and year ended December 31, 2021 are as follows:
