Spectral AI Inc

Previous wording

On September 11, 2023, we consummated a business combination, pursuantto the business combination agreement dated April 11, 2023 by and among the Company (previously, Rosecliff Acquisition Corp I (“Rosecliff”)), Ghost Merger Sub I (a wholly owned subsidiary of Rosecliff), Ghost Merger Sub II (a wholly owned subsidiary of Rosecliff) and Spectral MD Holdings, Ltd. (“Legacy Spectral”). Upon the closing of the Business Combination (the “Closing”), in sequential order: (a) Ghost Merger Sub I merged with and into Legacy Spectral, with Legacy Spectral continuing as the surviving company as our wholly owned subsidiary (the “Spectral Merger”) and then, (b) Legacy Spectral merged with and into Ghost Merger Sub II (the “SPAC Merger”, together with the Spectral Merger (the “Business Combination”)), with Ghost Merger Sub II (renamed Spectral MD Holdings LLC) surviving the SPAC Merger as our direct wholly-owned subsidiary. Upon the Closing, we changed our name from Rosecliff Acquisition Corp I to Spectral AI, Inc. In addition to our Common Stock, we currently have 8,433,333 redeemable warrants (the “Public Warrants”) and 73,978 warrants (“SP Angel Warrants”) to SP Angel Corporate Finance LLP (“SP Angel”) remaining outstanding.

Current wording

On September 11, 2023, we consummated a business combination, pursuantto the business combination agreement dated April 11, 2023 by and among the Company (previously, Rosecliff Acquisition Corp I (“Rosecliff”)), Ghost Merger Sub I (a wholly owned subsidiary of Rosecliff), Ghost Merger Sub II (a wholly owned subsidiary of Rosecliff) and Spectral MD Holdings, Ltd. (“Legacy Spectral”). Upon the closing of the Business Combination (the “Closing”), in sequential order: (a) Ghost Merger Sub I merged with and into Legacy Spectral, with Legacy Spectral continuing as the surviving company as our wholly owned subsidiary (the “Spectral Merger”) and then, (b) Legacy Spectral merged with and into Ghost Merger Sub II (the “SPAC Merger”, together with the Spectral Merger (the “Business Combination”)), with Ghost Merger Sub II (renamed Spectral MD Holdings LLC) surviving the SPAC Merger as our direct wholly-owned subsidiary. Upon the Closing, we changed our name from Rosecliff Acquisition Corp I to Spectral AI, Inc. In addition to our Common Stock, we currently have 8,433,333 redeemable warrants (the “Public Warrants”) and 73,978 warrants (“SP Angel Warrants”) to SP Angel Corporate Finance LLP remaining outstanding.

Previous wording

The following table summarizes these metrics for the years ended March 31, 2024 and 2023 (in thousands):

Current wording

The following table summarizes these metrics for the three and six months ended June 30, 2024 and 2023 (in thousands):

Previous wording

The following table summarizes of our results of operations for the three months ended March 31, 2024 and 2023 (in thousands):

Current wording

The following table summarizes of our results of operations for the three and six months ended June 30, 2024 and 2023 (in thousands):

Previous wording

Research and development revenue was $6.3 million for the three months ended March 31, 2024, an increase of 24.6% compared to the comparable period in 2023, reflecting more activity as we completed work under the PBS BARDA Contract.

Current wording

Research and development revenue was $7.5 million and $13.8 million for the three and six months ended June 30, 2024, respectively, an increase of 75.9% and 48.0%, respectively, compared to the comparable periods in 2023, reflecting more activity as we completed work under the PBS BARDA Contract and in the awards and work performed under the Company’s other U.S. governmental contracts.

Previous wording

For the three months ended March 31, 2024 and 2023, the Company’s revenues disaggregated by the major sources was as follows:

Current wording

For the three and six months ended June 30, 2024 and 2023, the Company’s revenues disaggregated by the major sources was as follows:

Previous wording

Cost of revenue for the three months ended March 31, 2024 was $3.4 million, an increase of 16.7% compared to the comparable period in 2023, due to increased activity to fulfill our U.S. governmental contracts, consistent with increased research and development revenue.

Current wording

Cost of revenue for the three and six months ended June 30, 2024 was $4.2 million and $7.5 million, respectively, an increase of 69.3% and 40.8%, respectively, compared to the comparable periods in 2023, due to increased activity to fulfill our U.S. governmental contracts, consistent with increased research and development revenue.

Previous wording

Gross margin for the three months ended March 31, 2024 was 46.6%, an increase of 3.6% as compared to the comparable period in 2023, due to a higher reimbursement rate under the PBS BARDA Contract, executed in September 2023, than the rate in the BARDA Burn II contact.

Current wording

Gross margin for the three and six months ended June 30, 2024 was 44.3% and 45.3%, respectively, an increase of 2.2% and 2.7%, respectively, as compared to the comparable periods in 2023, due to a higher reimbursement rate under the PBS BARDA Contract, executed in September 2023, than the rate in the BARDA Burn II contact.

Previous wording

General and administrative expense was $5.1 million for the three months ended March 31, 2024, a decrease of 0.2% as compared to the comparable period in 2023. Non-revenue generating research and development activities have decreased by approximately $0.1 million for the three months ended March 31, 2024 compared to the comparable period in 2023 offset by an increase of approximately $0.1 million related other administrative expenses for the three months ended March 31, 2024 compared to the comparable period in 2023.

Current wording

General and administrative expense was $5.8 million and $10.8 million for the three and six months ended June 30, 2024, respectively, an increase of 20.4% and 10.0%, respectively as compared to the comparable periods in 2023. Non-revenue generating research and development activities have decreased by approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2024 compared to the comparable periods in 2023 offset by an increase of approximately $1.1 million and $1.2 million related other administrative expenses for the three and six months ended June 30, 2024, respectively, compared to the comparable periods in 2023.

Previous wording

Net interest income for the three months ended March 31, 2024 primarily relates to cash interest received by us from our deposit accounts.

Current wording

Net interest (expense) income for the three and six months ended June 30, 2024 primarily relates to cash interest received or (paid) by us from our deposit accounts.

Previous wording

Borrowing related costs increased $0.3 million for the three months ended March 31, 2024 due to debt issuance costs related to the Yorkville Convertible Notes that were expensed during the period.

Current wording

Borrowing related costs increased $0.7 million and $1.0 million for the three and six months ended June 30, 2024, respectively, due to debt issuance costs and payments of the discount and premium related to the Yorkville Convertible Notes that were expensed during the period.

Previous wording

Change in fair value of warrant liability increased by approximately $4,000 for the three months ended March 31, 2024 as compared to the comparable period in 2023. The increase reflects changes in the fair value of the SP Angel Warrants.

Current wording

Change in fair value of warrant liability increased by $0.4 million for the three and six months ended June 30, 2024 as compared to the comparable periods in 2023. The increase reflects changes in the fair value of the Public Warrants, which were issued in September 2023.

Previous wording

Change in fair value of notes payable decreased by approximately $66,000 for the period ended March 31, 2024 as compared to initial fair value as of March 20, 2024. The decrease reflects the change in the fair value of the Yorkville notes.

Current wording

Change in fair value of notes payable decreased by approximately $0.2 million and $0.1 million for the three and six months ended June 30, 2024, respectively, which reflects the total change in the fair value of the Yorkville notes issued 2024.

Previous wording

Other expenses, including transaction costs, for the three months ended March 31, 2024 primarily relate to legal, professional, and service fees incurred in connection with the Yorkville transaction and B. Riley purchase agreement. Transaction costs for the three months ended March 31, 2023 primarily relate to non-recurring legal, accounting, and consulting costs expended for the Business Combination.

Current wording

Other income (expenses), including transaction costs for the three and six months ended June 30, 2024 primarily relate to legal, professional, and service fees incurred in connection with the Yorkville transaction and B. Riley purchase agreement. Other income (expenses), including transaction costs for the three and six months ended June 30, 2023 primarily relate to non-recurring legal, accounting, and consulting costs expended for the Business Combination.

Previous wording

The following table presents our Adjusted EBITDA for the three months ended March 31, 2024 and 2023 (in thousands):

Current wording

The following table presents our Adjusted EBITDA for the three and six months ended June 30, 2024 and 2023 (in thousands):

Previous wording

As of March 31, 2024 we had approximately $10.2 million in cash, notes payable of $5.8 million, and no long-term debt. We had an accumulated deficit of approximately $36.0 million. Included in our cash balance is $1.0 million in cash in the Company’s newly-formed wholly-owned subsidiary Spectral IP, Inc., a Delaware corporation (“Spectral IP”) which was formed on March 7, 2024.

Current wording

As of June 30, 2024, we had approximately $6.9 million in cash, notes payable of $8.0 million, and no long-term debt. We had an accumulated deficit of approximately $38.9 million. Included in our cash balance is $0.9 million in cash in the Company’s newly-formed wholly-owned subsidiary Spectral IP, Inc., a Delaware corporation (“Spectral IP”) which was formed on March 7, 2024.

Previous wording

On March 20, 2024, the Company also entered into a Standby Equity Purchase Agreement (“SEPA”) with YA II PN, LTD, a Cayman Islands exempt limited partnership (“Yorkville”) pursuant to which the Company has the right to sell to Yorkville up to $30.0 million of its shares of Common Stock, subject to certain limitations and conditions set forth in the SEPA. In connection with the SEPA, and subject to the conditions set forth therein, Yorkville has agreed to advance to the Company in the form of convertible promissory notes an aggregate principal amount of up to $12.5 million (the “Pre-Paid Advance”), which will be paid in three tranches. The first Pre-Paid Advance was disbursed on March 20, 2024 in the amount of $5.0 million with a fixed conversion price of $3.16. The Company received $4.6 million in cash, net of the 8% original issue discount. The second Pre-Paid Advance shall be in a principal amount of $5.0 million and advanced two business days following the later of the registration statement registering the resale of the shares of Common Stock issuable under the SEPA being declared effective and shareholder approval to exceed the 19.99% threshold of the aggregate number of shares of Common Stock issued pursuant to the SEPA (the “Exchange Cap”) (the “Second Pre-Advance Closing”), and the third Pre-Paid Advance shall be in a principal amount of $2.5 million and advanced sixty days following the Second Pre-Advance Closing. In connection with the execution and delivery of the SEPA, the Company is authorized to drawdown an additional $3.0 million from the ELOC prior to utilizing the SEPA.

Current wording

On March 20, 2024, the Company also entered into a Standby Equity Purchase Agreement (“SEPA”) with YA II PN, LTD, a Cayman Islands exempt limited partnership (“Yorkville”) pursuant to which the Company has the right to sell to Yorkville up to $30.0 million of its shares of Common Stock, subject to certain limitations and conditions set forth in the SEPA. In connection with the SEPA, and subject to the conditions set forth therein, Yorkville has agreed to advance to the Company in the form of convertible promissory notes an aggregate principal amount of up to $12.5 million (the “Pre-Paid Advance”), which will be paid in three tranches. The first Pre-Paid Advance was disbursed on March 20, 2024 in the amount of $5.0 million with a fixed conversion price of $3.16. The Company received $4.6 million in cash, net of the 8% original issue discount. On May 14, 2024, the shareholders voted to approve the reservation and issuance of shares to Yorkville to exceed the Exchange Cap and the second Pre-Paid Advance was disbursed on May 16, 2024 in the amount of $4.6 million, which is the $5.0 million second Pre-Paid Advance net of $0.4 million of the 8% original issue discount, with a fixed conversion price of $2.03. The third Pre-Paid Advance was disbursed on July 17, 2024 in the principal amount of $2.5 million. In connection with the execution and delivery of the SEPA, the Company may also drawdown $3.0 million from the ELOC prior to utilizing the SEPA.

Previous wording

Our future capital requirements will depend on many factors, including the revenue growth rate, the success of future product development and capital investment required, and the timing and extent of spending to support further sales and marketing and research and development efforts. In addition, we expect to incur additional costs as a result of operating as a U.S. public company. There can be no assurance that we will be successful in raising any additional capital. If additional financing is required from outside sources, we cannot be sure that any additional financing will be available to us on acceptable terms, if at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected.

Current wording

Our future capital requirements will depend on many factors, including the revenue growth rate, the success of future product development and capital investment required, and the timing and extent of spending to support further sales and marketing and research and development efforts. In addition, we expect to incur additional costs as a result of operating as a U.S. public company. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected.

Previous wording

The following table summarizes our cash flows for the three months ended March 31, 2024 and 2023 (in thousands):

Current wording

The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023 (in thousands):

Previous wording

Net cash used in operating activities decreased by approximately $1.1 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023 primarily driven by lower net loss and changes in operating assets and liabilities. The lower net loss is a result of higher research and development revenue due to increased BARDA activity, partially offset by higher non-operating transaction costs in the three months ended March 31, 2024 compared to the same period in 2023.

Current wording

Net cash used in operating activities increased by approximately $2.5 million for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023 primarily driven by changes in operating liabilities including accrued expenses and deferred revenue, partially offset by a decrease in net loss. The lower net loss is a result of higher research and development revenue due to increased BARDA activity, partially offset by higher non-operating transaction costs in the six months ended June 30, 2024 compared to the same period in 2023.

Previous wording

Net cash provided by financing activities increased approximately $8.2 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. This was primarily attributable to the proceeds of $2.8 million from the ELOC and proceeds received from notes payable of $5.6 million principally from the Pre-Paid Advance under the SEPA.

Current wording

Net cash provided by financing activities increased approximately $10.6 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This was primarily attributable to the proceeds of $2.8 million from the ELOC, proceeds received from notes payable of $9.2 million principally from the Pre-Paid Advances under the SEPA and $0.3 million of payments for deferred offering costs in 2023, partially offset by $2.7 million of repayments of notes payable.

Previous wording

On March 20, 2024, the Company entered into the SEPA with Yorkville pursuant to which the Company has the right to sell to Yorkville up to $30.0 million of its shares of Company Common Stock, subject to certain limitations and conditions set forth in the SEPA, from time to time during the term of the SEPA (such transaction, the “Yorkville Transaction”). In connection with the SEPA, and subject to the conditions set forth therein, Yorkville has agreed to advance to the Company in the form of convertible promissory notes (the “Convertible Notes”) an aggregate principal amount of up to $12.5 million (the “Pre-Paid Advance”), which will be paid in three tranches. The first Pre-Paid Advance was disbursed on March 20, 2024 in the amount of $5.0 million with a fixed conversion price of $3.16. The Company received $4.6 million in cash, net of the 8% original issue discount. The second Pre-Paid Advance shall be in a principal amount of $5.0 million and advanced two business days following the later of the registration statement registering the resale of the shares of Common Stock issuable under the SEPA being declared effective and shareholder approval to exceed the 19.99% threshold of the aggregate number of shares of Common Stock (the “Exchange Cap”) issued pursuant to the SEPA with a fixed conversion price equal to 120% of the average VWAP during the three trading days immediately prior to the issuance of the note (the “Second Pre-Advance Closing”), and the third Pre-Paid Advance shall be in a principal amount of $2.5 million and advanced sixty days following the Second Pre-Advance Closing with a fixed conversion price equal to 120% of the average VWAP during the three trading days immediately prior to the issuance of the note. The purchase price for the Pre-Paid Advance is 92.0% of the principal amount of the Pre-Paid Advance. Interest shall accrue on the outstanding balance of any Pre-Paid Advance at an annual rate equal to 0%, subject to an increase to 18% upon an event of default as described in the Convertible Notes.

Current wording

On March 20, 2024, the Company entered into the SEPA with Yorkville pursuant to which the Company has the right to sell to Yorkville up to $30.0 million of its shares of Company Common Stock, subject to certain limitations and conditions set forth in the SEPA, from time to time during the term of the SEPA (such transaction, the “Yorkville Transaction”). In connection with the SEPA, and subject to the conditions set forth therein, Yorkville has agreed to advance to the Company in the form of convertible promissory notes (the “Convertible Notes”) an aggregate principal amount of up to $12.5 million (the “Pre-Paid Advance”), which will be paid in three tranches. The first Pre-Paid Advance was disbursed on March 20, 2024 in the amount of $5.0 million with a fixed conversion price of $3.16. The Company received $4.6 million in cash, net of the 8% original issue discount. On May 14, 2024, the shareholders voted to approve the reservation and issuance of shares to Yorkville to exceed the Exchange Cap and the second Pre-Paid Advance was disbursed on May 16, 2024 in the amount of $4.6 million, which is the $5.0 million second Pre-Paid Advance net of $0.4 million of the 8% original issue discount, with a fixed conversion price of $2.03. The third Pre-Paid Advance was disbursed on July 17, 2024 in the principal amount of $2.5 million with a fixed conversion price equal to 120% of the average VWAP during the three trading days immediately prior to the issuance of the note. The purchase price for the Pre-Paid Advance is 92.0% of the principal amount of the Pre-Paid Advance. Interest shall accrue on the outstanding balance of any Pre-Paid Advance at an annual rate equal to 0%, subject to an increase to 18% upon an event of default as described in the Convertible Notes.

Previous wording

Beginning on the forty-fifth (45th) day following the issuance date of the Convertible Note issued in connection with the first Pre-Paid Advance, and continuing on the same day of each successive month thereafter, (each, an “Installment Date”), the Company shall repay a portion of the outstanding balance of the Pre-Paid Advance in an amount equal to (i) $1,750,000,provided however, in respect of any Installment Date prior to the closing of the second Pre-Paid Advance, $750,000 (the “Installment Principal Amount”), plus (ii) the a payment premium of 7% of such Installment Principal Amount, and (iii) accrued and unpaid interest hereunder as of each Installment Date. The maturity date of the Convertible Notes issue in connection with each Pre-Paid Advance will be 12 months after the issuance date of such Convertible Notes.

Current wording

Beginning on the forty-fifth (45th) day following the issuance date of the Convertible Note issued in connection with the first Pre-Paid Advance, and continuing on the same day of each successive month thereafter, (each, an “Installment Date”), the Company shall repay a portion of the outstanding balance of the Pre-Paid Advance in an amount equal to (i) $1,750,000, plus (ii) the a payment premium of 7% of such Installment Principal Amount, and (iii) accrued and unpaid interest hereunder as of each Installment Date. The maturity date of the Convertible Notes issue in connection with each Pre-Paid Advance will be 12 months after the issuance date of such Convertible Notes. As of June 30, 2024, the Company has made aggregate installment payments on the first and second Pre-Paid Advances in the amount of $2.7 million, of which $2.3 million relates to the repayment of the principal, $0.2 million relates to the 8% original issue discount and $0.2 million relates to the 7% payment premium.

Previous wording

On March 7, 2024, the Company formed a new wholly-owned subsidiary, Spectral IP, to be utilized to advance artificial intelligent intellectual property with a specific emphasis on healthcare. On March 19, 2024, the Company announced that Spectral IP received a $1.0 million investment from an affiliate of its largest shareholder for the development of its artificial intelligence intellectual property portfolio. The investment is structured as a note payable with a one-year maturity, an interest rate of 8%, and requiring earlier prepayment if the Company spins off Spectral IP to the Company’s shareholders or if Spectral IP is sold to a third party.

Current wording

On March 7, 2024, the Company formed a new wholly-owned subsidiary, Spectral IP, to be utilized to acquire artificial intelligent intellectual property with a specific emphasis on healthcare. On March 19, 2024, the Company announced that Spectral IP received a $1.0 million investment from an affiliate of its largest shareholder for the development of its artificial intelligence intellectual property portfolio. The investment is structured as a note payable with a one-year maturity, an interest rate of 8%, and requiring earlier prepayment if the Company spins off Spectral IP to the Company’s shareholders or if Spectral IP is sold to a third party.