UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(MARK ONE)
For the quarterly period ended
For the transition period from to
Commission file number:
(Exact Name of Registrant as Specified in Its Charter)
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SPECTRAL AI, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2024
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
SPECTRAL AI, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Deferred offering costs | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Total Assets | $ | $ | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Lease liabilities, short-term | ||||||||
| Notes payable | ||||||||
| Notes payable - at fair value | ||||||||
| Notes payable - related party | ||||||||
| Warrant liabilities | ||||||||
| Total current liabilities | ||||||||
| Lease liabilities, long-term | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock ($ | ||||||||
| Common stock ($ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
1
SPECTRAL AI, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Research and development revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Net interest (expense) income | ( | ) | ||||||||||||||
| Borrowing related costs | ( | ) | ( | ) | ||||||||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ||||||||||||
| Change in fair value of notes payable | ( | ) | ( | ) | ||||||||||||
| Foreign exchange transaction (loss) gain, net | ( | ) | ( | ) | ||||||||||||
| Other income (expenses), including transactions costs | ( | ) | ( | ) | ||||||||||||
| Total other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share of common stock | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Weighted average common shares outstanding | ||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustments | $ | $ | $ | ( | ) | $ | ||||||||||
| Total comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements
2
SPECTRAL AI, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share data)
| Additional | Accumulated Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Deficit | |||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | | $ | ( | ) | $ | ( | ) | ||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Sale of common stock | ||||||||||||||||||||||||
| Cumulative translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2024 | $ | | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Issuance of common stock under the SEPA | ||||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||
| Cumulative translation adjustment | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Additional | Accumulated Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||
| Balance at December 31, 2022, after effect of Business Combination | $ | | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Stock option exercises | ||||||||||||||||||||||||
| Cumulative translation adjustment | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Stock option exercises | ||||||||||||||||||||||||
| Cumulative translation adjustment | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
3
SPECTRAL AI, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | ||||||||
| Stock-based compensation | ||||||||
| Amortization of right-of-use assets | ||||||||
| Change in fair value of warrant liabilities | ( | ) | ||||||
| Change in fair value of notes payable | ||||||||
| Costs from issuance of common stock | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ( | ) | ||||||
| Unbilled revenue | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Proceeds from notes payable | ||||||||
| Proceeds from notes payable - related party | ||||||||
| Payments of deferred offering costs | ( | ) | ||||||
| Payments for notes payable | ( | ) | ( | ) | ||||
| Stock option exercises | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ( | ) | ||||
| Cash paid for taxes | $ | $ | ||||||
| Noncash operating and financing activities disclosure: | ||||||||
| Recognition of Right-of-use assets and related lease liabilities upon lease amendment | $ | $ | ||||||
| Unpaid deferred offering costs | $ | $ | ||||||
| Broker receivable for stock option exercises | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
4
1. NATURE OF THE BUSINESS
Business Combination
Spectral AI, Inc., a Delaware corporation formerly known as Rosecliff Acquisition Corp I (“Spectral AI” or the “Company”) was formed as a blank check company on November 17, 2020. The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.
On September 11, 2023, the Company consummated a business combination (the “Business Combination”), pursuant to the business combination agreement dated April 11, 2023 by and among the Company, Ghost Merger Sub I, a Delaware Corporation, Ghost Merger Sub II, a Delaware corporation and Spectral MD Holdings, Ltd., a Delaware corporation incorporated on March 9, 2009 and headquartered in Dallas, Texas (“Legacy Spectral”). Upon closing of the Business Combination (the “Closing”), in sequential order: (a) Ghost Merger Sub I merged with and into the Legacy Spectral, with Legacy Spectral continuing as the surviving company as a wholly owned subsidiary of the Company (the “Spectral Merger”) and then, (b) Legacy Spectral merged with and into Ghost Merger Sub II (renamed Spectral MD Holdings LLC) (the “SPAC Merger”, together with the Spectral Merger (the “Business Combination”)), with Ghost Merger Sub II surviving the SPAC Merger as a direct wholly-owned subsidiary of the Company. See Note 3. Upon the Closing, the Company changed its name from Rosecliff Acquisition Corp I to Spectral AI, Inc.
In conjunction with the Business
Combination, the Company cancelled the redeemable warrants that it issued to Rosecliff Acquisition Sponsor I LLC, a Delaware limited liability
company (the “Sponsor”), in a private placement in connection with the Company’s initial public offering on February
17, 2021 (the “Initial Public Offering”) at Closing, but the
Prior
to the Business Combination, Rosecliff Acquisition Corp I (“Rosecliff”) had
Prior to the Business Combination,
Legacy Spectral’s shares of common stock, par value $
On September 12, 2023, the Company began trading the Company Common Stock and the Public Warrants on the NASDAQ Capital Market (“NASDAQ”) under the symbols “MDAI” and “MDAIW”, respectively. Prior to the Business Combination, the Company’s shares of Company Common Stock and Public Warrants were listed on the NASDAQ under the symbols “RCLF” and “RCLFW”, respectively.
5
Nature of Operations
Spectral AI is devoting substantially all of its efforts towards research and development of its DeepView® Wound Imaging System, currently focused on burn wounds and diabetic foot ulcer (“DFU”) indications, specifically engineered to allow physicians to make a more accurate, timely and informed decision for treatment options. The Company has not generated any product revenue to date. The Company currently generates revenue from contract development and research services by providing such services to governmental agencies, primarily to the Biomedical Advanced Research and Development Authority (“BARDA”) and under a contract with the Medical Technology Enterprise Consortium (“MTEC”).
In September 2023, the Company
executed its third contract with BARDA for a multi-year Project BioShield (“PBS”) contract, valued at up to approximately
$
In
April 2023, the Company received a $
On March 7, 2024, the Company
formed a new wholly-owned subsidiary, Spectral IP, Inc., a Delaware corporation (“Spectral IP”), to be utilized to advance
artificial intelligence intellectual property with a specific emphasis on healthcare. On March 19, 2024, the Company announced that Spectral
IP received a $
Risks and Uncertainties
The Company is subject to a number of risks common to development stage companies in the medical technology industry, including, but not limited to, risks of failure of preclinical studies and clinical trials, dependence on key personnel, protection of proprietary technology, reliance on third party organizations, risks of obtaining regulatory approval for any products that it may develop, development by competitors of technological innovations, compliance with government regulations and the need to obtain additional financing.
Liquidity
As
of June 30, 2024 and December 31, 2023, the Company had approximately $
On
December 26, 2023, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) and related Registration
Rights Agreement with B. Riley Principal Capital II, LLC (“B. Riley”). Upon the terms and subject to the satisfaction of the
conditions set forth in the Purchase Agreement, the Company has the right, in our sole discretion, to sell to B. Riley up to $
6
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 $
In
March 2024, the Company received an additional $
On
June 3, 2024, the Company received a letter from the Listing Qualifications Staff of the Nasdaq Stock Market, LLC (“Nasdaq”)
that the Company was not in compliance with the listing requirement relating to a minimum market value of its listed securities of $
Based on the Company’s current operating plan, the Company believes that its cash , together with the proceeds from the PBS BARDA Contract, the MTEC Agreement and availability under the B. Riley ELOC, and the Yorkville Transaction will be sufficient to fund operations for at least one year beyond the release date of these condensed consolidated financial statements. The Company has based this determination on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. The Company could utilize cost-savings measures to limit the expenditures of our DFU indication to conserve our working capital and to focus our efforts primarily on the burn indication. Changing circumstances could also cause us to consume capital significantly faster than we currently anticipate, and we may need to raise capital sooner or in greater amounts than currently expected because of circumstances beyond our control. Changes in the current equity markets may also limit our ability to utilize the B. Riley ELOC and Yorkville Transaction as currently structured. To the extent additional capital is necessary, there are no assurances that we will be able to raise additional capital on favorable terms or at all, and therefore we may not be able to execute our business plans and the continued work on indications beyond expanding our burn indication.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) or an Accounting Standards Update (“ASU”).
The Business Combination was accounted for as a reverse recapitalization in accordance with GAAP. Legacy Spectral was determined as the accounting acquirer and the Company as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination is treated as the equivalent of a capital transaction in which Legacy Spectral issued stock for the net assets of the Company. Upon the Closing, the net assets of the Company are stated at fair value, with no goodwill or other intangible assets recorded. See Note 3 – Recapitalization.
7
Legacy Spectral was determined to be the accounting acquiror based on evaluation of the following facts and circumstances:
| (i) | Legacy Spectral’s former shareholders have a majority of the voting power of Spectral AI; |
| (ii) | Legacy Spectral’s senior management comprises all of the senior management of Spectral AI; |
| (iii) | Legacy Spectral selected five of the six directors for the Board of Directors of Spectral AI; |
| (iv) | Legacy Spectral’s relative size of assets and operations compared to Rosecliff; and |
| (v) | Legacy Spectral’s operations comprise the ongoing operations of Spectral AI. |
All historical financial information presented in the condensed consolidated financial statements represents the accounts of Legacy Spectral at their historical values as if Legacy Spectral is the predecessor to the Company. The condensed consolidated financial statements following the Closing reflect the results of the combined entity’s operations.
All issued and outstanding shares of Legacy Spectral Common Stock and warrants, stock options, restricted stock units (“RSUs”), and restricted stock awards (“RSAs”) of Legacy Spectral and the per share amounts contained in the condensed consolidated financial statements for the periods presented prior to the Closing have been retroactively restated to reflect the Exchange Ratio (as defined in Note 1).
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Spectral MD Holdings LLC, Spectral MD Inc., Spectral MD UK Limited (“Spectral MD UK”), Spectral DeepView Limited, and Spectral IP. Significant inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amounts of expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, revenue recognition, warrant liabilities, the fair value of short term notes payable, fair value of the B. Riley and Yorkville derivative instruments, stock-based compensation expense, stock issued for transaction costs, the net realizable value of inventory, right-of-use assets, and income tax valuation allowances. Actual results could differ from these estimates.
Segments
Operating segments are defined as components of an enterprise for which separate and discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company has one operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on an aggregate basis for the purpose of allocating resources.
Cash
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. All cash is held in US, UK, & Ireland financial institutions.
8
Accounts Receivable, Net and Unbilled Revenue
Accounts receivable represent amounts due from US government agencies pursuant to research and development contracts associated with the Company’s DeepView® System.
The Company evaluates the collectability of its receivables based on a variety of factors, including the length of time the receivables are past due, the financial health of its customers and historical experience. Based upon the review of these factors, the Company recorded no allowance for doubtful accounts as of June 30, 2024 and December 31, 2023.
Certain third-party costs that are prepaid per the terms of the contract are billable to customers prior to recognition of related expenses. The Company records deferred revenue when the customers have been billed prior to recognizing revenue. The Company records unbilled revenue when revenue is recognized prior to billing customers.
Comprehensive Loss
Comprehensive loss includes net loss, as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to credit risk consist principally of cash and accounts receivable. Primarily all cash is held in US financial institutions which, at times, exceed federally insured limits. The Company has not recognized any losses from credit risks on such accounts. The Company believes it is not exposed to significant credit risk on cash.
Additional
credit risk is related to the Company’s concentration of receivables. As of June 30, 2024 and December 31, 2023, receivables were
concentrated from one customer (which is a US. Government agency) representing
One
customer (which is a U.S. government agency) accounted for
Inventory
Inventory is comprised of finished goods, purchased from a third-party manufacturer, and is stated at the lower of cost (average cost) or net realizable value. For the three and six months ended June 30, 2024 and the three and six months ended June 30, 2023, the Company did not have write-downs for obsolete inventory.
Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| Level 1 | Unadjusted quoted prices in active markets that are assessable at the measurement date for identical, unrestricted assets or liabilities. | |
| Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and | |
| Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
9
Foreign Currency
The reporting currency for the condensed consolidated financial statements of the Company is the US dollar. The functional currency of the Company and its wholly-owned subsidiaries Spectral MD Holdings LLC, Spectral MD, Inc., and Spectral IP is the US dollar. The functional currency of Spectral MD UK is its local currency, the British pound. The functional currency of Spectral DeepView Limited is its local currency, the Euro. The assets and liabilities of Spectral MD UK and Spectral DeepView Limited, are translated into US. Dollars at exchange rates in effect at the end of each reporting period, and the revenues and expenses are translated at average exchange rates in effect during the applicable reporting period. Translation adjustments are included in accumulated other comprehensive income as a component of stockholders’ equity. As of June 30, 2024 and June 30, 2023, the Company’s foreign exchange translation adjustments are not material.
Monetary
assets and liabilities denominated in currencies other than the US dollar are translated at exchange rates in effect as of the balance
sheet date. Resulting unrealized gains and losses are included in other income (expense), net in the condensed consolidated statements
of operations. For the three and six months ended June 30, 2024, the Company recorded approximately $
Property and Equipment, Net
| Estimated Useful Life | ||
| Computer equipment | ||
| Manufacturing equipment | ||
| Furniture and equipment | ||
| Laboratory equipment | ||
| Leasehold improvements |
Purchased assets that are not yet in service are recorded to construction-in-process and no depreciation expense is recorded. Once they are placed in service, they are reclassified to the appropriate asset class. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the Company’s condensed consolidated statements of operation and comprehensive loss. Expenditures for maintenance and repairs are expensed as incurred.
Impairment of Long-Lived Assets
Long-lived assets consist of property and equipment. The Company continually evaluates whether events or circumstances have occurred that indicate that the estimated remaining useful life of its long-lived assets may warrant revision or that the carrying value of these assets may not be recoverable. If circumstances require that a long-lived asset or asset group be tested for impairment, the Company first compares the estimated undiscounted future cash flows expected to result from the use or disposition of that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment loss would be recognized to the extent the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market prices and third-party independent appraisals, as considered necessary.
10
Leases
Under lease guidance, arrangements meeting the definition of a lease are classified as operating or financing leases. Operating leases are recorded in the condensed consolidated balance sheets as both a right-of-use asset and a lease liability, calculated by discounting fixed lease payments at the rate implicit in the lease or the Company’s incremental borrowing rate factoring the term of the lease. The incremental borrowing rate used by the Company is an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. Because the Company does not generally borrow on a collateralized basis, it uses the interest rate it pays on its noncollateralized borrowings as an input to deriving an appropriate incremental borrowing rate, adjusted for the amount of lease payments, the lease term and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset results in straight-line rent expense over the lease term. Variable lease expenses are recorded when incurred. In calculating the right-of-use assets and lease liabilities, the Company has elected to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the requirement to capitalize right-of-use assets and liabilities as an accounting policy election.
During the three and six months ended June 30, 2024 and 2023, the Company did not have any financing leases.
Warrant Liabilities
On September 11, 2023, in
conjunction with the Business Combination, the Company assumed the Public Warrants which have an exercise price of $
In September 2021, Legacy
Spectral issued
The Company accounts for its Public Warrants and the SP Angel Warrants as derivative liabilities. Accordingly, the Company recognizes the instruments as liabilities at fair value, determined using the closing price of the observable market quote in an active market (the NASDAQ) for the Public Warrants and the Black-Scholes option-pricing model for the SP Angel Warrants, and adjusts the instruments to fair value at the end of each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised, redeemed or expired, and any change in fair value is recognized in the Company’s condensed consolidated statements of operations within other income (expense).
Research and Development Revenue
The Company recognizes revenue when the Company’s customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services by analyzing the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the Company satisfies a performance obligation.
The Company generates research and development revenue, primarily from the contracts with BARDA and MTEC. Each contract for BARDA and MTEC has a single performance obligation.
The contracts with BARDA are cost-plus-fee contracts associated with development of certain product candidates. BARDA reimburses the Company based on allowable costs plus any recognizable earned fee. Revenues from these reimbursable costs are recognized as the costs are incurred.
11
The MTEC Agreement provides for installment payments after the completion of milestone events. The installment payments are considered variable consideration as the entitlement depends on successful completion of research. However, the payments are not constrained from inclusion in the transaction price as it is not probable that a significant reversal of cumulative revenue will be reversed when the underlying uncertainty is resolved. Revenue for the MTEC Agreement is recognized over time based upon the cost-to-cost measure of progress, using this input method to measure progress as the customer has the benefit of access to the development research under these projects and therefore benefits from the Company’s performance incrementally as research and development activities occur under each project. The Company measures progress of performance by comparing the actual costs incurred to-date to the total estimated cost of the project. The Company will adjust the measure of progress at the end of each reporting period and reflect any changes to the estimated cost of the project on a prospective basis.
The Company elected the practical expedient not to adjust the transaction price for the effects of a significant financing component as the period between performance (satisfaction of a performance obligation) and payment is one year or less. Payments from customers are generally received within 30 days of when the invoice is sent.
Research and Development Expense
The Company expenses research
and development costs as incurred. These expenses include salaries for research and development personnel, consulting fees, product development,
pre-clinical studies, clinical trial costs, and other fees and costs related to the development of the technology. For the three months
ended June 30, 2024 and 2023, research and development expense was $
Stock-Based Compensation
The Company accounts for all stock-based payments to employees and non-employees, including grants of stock options and RSUs based on their respective grant date fair values. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. The RSUs are valued based on the fair value of the Company’s common stock on the date of grant. The fair value of RSUs with market based vesting conditions were determined using a Monte-Carlo Simulation to reflect the effects of the market conditions. The assumptions used in calculating the fair value of the Company’s stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. The Company expenses stock-based compensation related to stock options and RSUs over the requisite service period. Forfeitures are recorded as they occur. Compensation previously recorded for unvested equity awards that are forfeited is reversed upon forfeiture. The Company expenses stock-based compensation to employees over the requisite service period, on a straight-line basis, based on the estimated grant-date fair value of the awards. For RSUs with market-based conditions, compensation is not reversed if these awards are forfeited based solely on failing to meet such market-based conditions.
Income Taxes
The Company records its deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company has no uncertain tax positions as of June 30, 2024 and December 31, 2023 that qualify for either recognition or disclosure in the condensed consolidated financial statements under this guidance.
The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the condensed consolidated statements of operations. The Company did not have any interest and penalties during the three and six months ended June 30, 2024 and 2023 and did not have any interest or penalties accrued as of June 30, 2024.
12
Net Loss per Share of Common Stock
Basic net loss per share of common stock is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share of common stock adjusts basic earnings per share for the potentially dilutive impact of unvested restricted stock, stock options and warrants. Securities having an anti-dilutive effect on diluted net earnings per share are excluded from the calculation. The dilutive effect of the unvested restricted stock and stock options is calculated using the treasury stock method. For warrants that are liability-classified, during periods when the impact is dilutive, the Company assumes share settlement of the instruments as of the beginning of the reporting period and adjusts the numerator to remove the change in fair value of the warrant liability and adjusts the denominator to include the dilutive shares calculated using the treasury stock method.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes foreign currency translation adjustments. For the purposes of comprehensive income (loss) disclosures, the Company does not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as it intends to indefinitely reinvest undistributed earnings of its foreign subsidiaries. Accumulated other comprehensive income (loss) is reported as a component of stockholders’ equity.
Recently Adopted Accounting Standards
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses, which was subsequently amended by ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, ASU 2019-10, ASU No. 2019-11, ASU No. 2020-03, and ASU No. 2022-02. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. This standard requires the measurement of expected credit losses for financial instruments carried at amortized cost held at the reporting date based on historical experience, current conditions and reasonable forecasts. The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The Company adopted this standard on January 1, 2023, with no impact on its condensed consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. The Company adopted this standard on January 1, 2024, with no impact on its condensed consolidated financial statements and related disclosures.
In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820 Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”). The FASB issued this update (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company adopted this standard on January 1, 2024, with no impact on its condensed consolidated financial statements and related disclosures.
In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842) — Common Control Arrangements, which require that leasehold improvements associated with common control leases be amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset. It also requires such leasehold improvements to be accounted for as a transfer between entities under common control through an adjustment to entity if, and when, the lessee no longer controls the use of the underlying asset. ASU 2023-01 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company adopted this standard on January 1, 2024, with no impact on its condensed consolidated financial statements and related disclosures.
13
Recently Issued Accounting Standards
In October 2023, the FASB issued ASU 2023-06 Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”), which modifies certain disclosure and presentation requirements of a variety of Topics in the Codification and is intended to both clarify or improve such requirements and align the requirements with the SEC’s regulations. The effective date for each amendment is the effective date of the removal of the related disclosure from Regulation S-X or Regulation S-K, with early adoption prohibited. The Company will apply the provisions prospectively as such provisions become effective and does not expect ASU 2023-06 to have a material impact on the condensed consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 updates reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance. This update is effective for the Company in the consolidated financial statements for the year ending December 31, 2024, and interim periods beginning after January 1, 2025. The Company is currently evaluating the impact that the adoption of this standard will have on its condensed consolidated financial statements and disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires more detailed income tax disclosures, requiring entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The disclosure requirements will be applied on a prospective basis, with the option to apply them retrospectively. This update will be effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its condensed consolidated financial statements and disclosures.
3. RECAPITALIZATION
As discussed in Note 1, on September 11, 2023, the Company consummated the Business Combination, with Legacy Spectral surviving the merger as a wholly-owned subsidiary of the Company.
On the date of the Business
Combination, the Company recorded net liabilities of $
| Cash | $ | |||
| Other current assets | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Warrant liabilities | ( | ) | ||
| Net liabilities assumed in exchange for common stock | ( | ) | ||
| Less: Cash | ( | ) | ||
| Non-cash net liabilities assumed in exchange for common stock | $ | ( | ) |
Upon the Closing, the Company
issued
The Company recorded transaction
costs, consisting of legal, accounting and other professional services incurred by Legacy Spectral related to the Business Combination,
of $
Prior to the Business Combination,
the Company incurred $
14
4. FAIR VALUE MEASUREMENTS
| Fair value measured as of June 30, 2024 | ||||||||||||||||
| Fair value at June 30, 2024 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant inputs (Level 3) | |||||||||||||
| Warrant liabilities | $ | $ | $ | $ | ||||||||||||
| Short-term notes payable – Yorkville | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Fair value measured as of December 31, 2023 | ||||||||||||||||
| Fair value at December 31, 2023 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Warrant liabilities | $ | $ | $ | $ | ||||||||||||
There were no transfers between Level 1, 2 or 3 during the six months ended June 30, 2024.
Fair values of cash, accounts receivable, accounts payable, accrued expenses, and short-term debt (other than the notes payable with Yorkville) are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The fair value of the Public Warrants, which trade in active markets, is based on quoted market prices and classified in Level 1 of the fair value hierarchy. The SP Angel Warrants are classified within Level 3 of the fair value hierarchy because their fair values are based on significant inputs that are unobservable in the market.
| Balance – January 1, 2024 | $ | |||
| Change in fair value | ( | ) | ||
| Balance – March 31, 2024 | $ | |||
| Change in fair value | ( | ) | ||
| Balance – June 30, 2024 | $ |
| Balance – January 1, 2023 | $ | |||
| Change in fair value | ( | ) | ||
| Balance – March 31, 2023 | $ | |||
| Change in fair value | ||||
| Balance – June 30, 2023 | $ |
Both observable and unobservable inputs were used to determine the fair value of warrants that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Strike price (per share) | $ | $ | ||||||
| Contractual term (years) | ||||||||
| Volatility (annual) | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Dividend yield (per share) | % | % | ||||||
15
Valuation of short-term notes payable – Yorkville
The Company elected the fair value option to account for the financial instrument with Yorkville signed on March 20, 2024 (see Note 7). The estimate of the fair value as of June 30, 2024 was determined using a binomial lattice model. The fair value measurement of the debt is determined using Level 3 inputs and assumptions unobservable in the market.
Changes in the fair value of debt that is accounted for at fair value, inclusive of related accrued interest expense, are presented as gains or losses as a component of other income (expense) in the accompanying condensed consolidated statements of operations and comprehensive loss under change in fair value of debt, with the exception of changes due to the Company’s credit risk, which are presented as a component of accumulated other comprehensive income in the accompanying condensed consolidated balance sheets. The actual settlement of the short-term debt could differ from current estimates based on the timing of when and if Yorkville elects to convert amounts into common shares, potential cash repayment by the Company prior to maturity, and movements in the Company’s common stock price.
| Balance as of January 1, 2024 | $ | |||
| Addition of short-term notes payable | ||||
| Fair value adjustment | ( | ) | ||
| Balance as of March 31, 2024 | ||||
| Addition of short-term notes payable | ||||
| Principal repayments | ( | ) | ||
| Fair value adjustment | ||||
| Balance as of June 30, 2024 | $ |
| June 30, | ||||
| 2024 | ||||
| Expected term (years) | ||||
| Volatility (annual) | ||||
| Risk-free rate |
Valuation of forward options in B. Riley ELOC and Yorkville SEPA
The B. Riley ELOC and Yorkville SEPA are accounted for as derivatives and will be recognized at fair value. Any changes in fair value between the carrying amount of the forward issuance contracts and the settlement amounts will be recognized in other income (expense) in the condensed consolidated statement of operations and comprehensive loss. For the three and six months ended June 30, 2024, the Company determined there were immaterial changes in derivative liability fair value related to the B. Riley ELOC the Yorkville SEPA. The Company recognized no change in derivative liability fair value for the three and six months ended June 30, 2024.
16
5. RESEARCH AND DEVELOPMENT REVENUE
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| BARDA | $ | $ | $ | $ | ||||||||||||
| Other U.S. governmental authorities | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 Balance | Additions | Reductions | June 30, 2024 Balance | |||||||||||||
| Contract liabilities: | ||||||||||||||||
| Deferred revenue | $ | $ | $ | ( | ) | $ | ||||||||||
| Total contract liabilities | $ | $ | $ | ( | ) | $ | ||||||||||
6. ACCRUED EXPENSES
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Salary and wages | $ | $ | ||||||
| Operating expenses | ||||||||
| Benefits | ||||||||
| Taxes | ||||||||
| Total accrued expenses | $ | $ | ||||||
7. NOTES PAYABLE
| Principal Repayments | Outstanding Balance | |||||||||||||||||||||||
| Amount | Six Months Ended June 30, | June 30, | December 31, | |||||||||||||||||||||
| Financed | Interest Rate | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Yorkville Convertible Notes | $ | % | $ | $ | $ | $ | ||||||||||||||||||
| Related Party Note | % | |||||||||||||||||||||||
| 2023 Insurance Note | % | - | ||||||||||||||||||||||
| 2022 Insurance Note | % | |||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||
17
Yorkville Convertible Notes
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 $
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) $
As the SEPA is an
equity-linked contract that does not qualify for equity classification, any expenses incurred will be recognized in the consolidated statements
of operations and comprehensive loss within borrowing related costs. For the three and six months ended June 30, 2024, the Company recognized
$
Related Party Note
On March 19, 2024, the Company
announced that Spectral IP received a $
Insurance Notes
The Company determined that the carrying amounts of all of the insurance notes approximate fair value due to the short-term nature of borrowings and current market rates of interest.
18
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is not a party to any material legal proceedings or pending claims. The Company is aware of a material threatened claim that it believes is without merit. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations.
9. LEASES
The Company leases office
space for its principal office in Dallas, Texas, which was amended in April 2024 to extend the lease term to expire in February 2028.
The lease amendment also included a landlord-provided tenant improvement allowance of up to $
During 2023, the Company
entered into a lease for office space in the United Kingdom for annual payments of $
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | ||||||||||||
| Right-of-use assets exchanged for operating lease liabilities | $ | $ | $ | $ | ||||||||||||
| Weighted average remaining lease term (in years) | ||||||||||||||||
| Weighted average discount rate | % | % | % | % | ||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating leases | ||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Variable lease cost | ||||||||||||||||
| Operating lease expense | ||||||||||||||||
| Short-term lease rent expense | ||||||||||||||||
| Total rent expense | $ | $ | $ | $ | ||||||||||||
Variable lease cost is primarily attributable to amounts paid to lessors for utility charges, parking, and property taxes under an office space lease.
| Remaining period ended December 31, 2024 | $ | |||
| Year Ended December 31, 2025 | ||||
| Year Ended December 31, 2026 | ||||
| Year Ended December 31, 2027 | ||||
| Year Ended December 31, 2028 | ||||
| Total | ||||
| Less: imputed interest | ( | ) | ||
| Less: tenant improvement allowance | ( | ) | ||
| Operating lease liabilities | $ |
19
10. STOCKHOLDERS’ EQUITY
In conjunction with the Closing,
the Company’s certificate of incorporation was amended and restated to authorize the issuance of
On
December 26, 2023, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) and related Registration
Rights Agreement with B. Riley Principal Capital II, LLC (“B. Riley”). Upon the terms and subject to the satisfaction of the
conditions set forth in the Purchase Agreement, the Company has the right, in our sole discretion, to sell to B. Riley up to $
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 $
11. STOCK-BASED COMPENSATION
Each option and warrant to
purchase common stock of Legacy Spectral was converted into an option and warrant, respectively, to purchase Spectral AI’s common
stock based on the Exchange Ratio, with corresponding adjustments to the exercise price. Accordingly, the options and warrants to purchase
2018 Long Term Incentive Plan
On July 24, 2018, Legacy Spectral’s Board of Directors adopted the 2018 Long Term Incentive Plan (the “2018 Plan”) which permitted granting of incentive stock options (which must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted stock, stock units, performance shares, performance units, incentive bonus awards, and other cash-based or stock-based awards. In May 2024, all awards outstanding under the 2018 Plan were replaced with corresponding awards to be issued pursuant to the 2023 Plan, as discussed below, and no new grants will be made under the 2018 Plan.
2022 Long Term Incentive Plan
On September 27, 2022, Legacy Spectral’s stockholders approved the adoption of the 2022 Long Term Incentive Plan (the “2022 Plan”) which permitted granting of incentive stock options (they must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted stock, stock units, performance shares, performance units, incentive bonus awards, and other cash-based or stock-based awards. In May 2024, all awards outstanding under the 2022 Plan were replaced with corresponding awards to be issued pursuant to the 2023 Plan, as discussed below, and no new grants will be made under the 2022 Plan.
20
2023 Long Term Incentive Plan
On May 14, 2024, the Company’s
shareholders approved the adoption of the 2023 Long Term Incentive Plan (the “2023 Plan”) which permits granting of incentive
stock options (they must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted stock, stock
units, performance shares, performance units, incentive bonus awards, and other cash-based or stock-based awards. The options, restricted
stock units and other securities issued pursuant to the 2018 Plan and 2022 Plan will be replaced with a corresponding award to be issued
pursuant to the 2023 Plan. No new grants will be made under the 2022 Plan and the 2018 Plan and all outstanding grants under the 2018
Plan and 2022 Plan will be assumed by the 2023 Plan. The maximum aggregate number of shares that may be issued under the Plan shall not
exceed
Restricted Stock Units
On January 3, 2024, pursuant
to the 2022 Plan, the Company granted its then-CFO a market condition RSU of up to
On February 29, 2024, pursuant
to the 2022 Plan, the Company granted both its CFO and CEO awards of RSUs up to
On February 29, 2024, the Company amended the terms of the January 3, 2024 RSU grant to its then-CFO to provide for identical vesting terms to those provided in the February 29, 2024 RSU grant. The Company determined the amended RSU grant represents a modification of the original award, however, the incremental compensation cost of the amendment was not material.
| Number of Shares | Weighted Average Grant Date Fair Value per Share | |||||||
| Nonvested as of January 1, 2024 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Nonvested as of June 30, 2024 | $ | |||||||
21
During the six months ended
June 30, 2024 and 2023, the Company granted
Stock Options
The fair value of each employee and non-employee stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Legacy Spectral’s stock became publicly traded on July 22, 2021 on the AIM Market of the London Stock Exchange, and lacks company-specific historical and implied volatility information. On September 11, 2023 the Company completed the Business Combination and was listed on NASDAQ under the symbol MDAI. Legacy Spectral estimated its expected stock volatility based on the historical volatility of a publicly traded set of peer companies. Spectral AI continues to estimate its expected stock volatility based on the historical volatility of a publicly traded set of peer companies. Due to the lack of historical exercise history, the expected term of Legacy Spectral’s and Spectral AI’s stock options for employees has been determined utilizing the simplified method by taking an average of the vesting periods and the original contractual terms for each award. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the US. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero based on the fact that Legacy Spectral and Spectral AI have never paid cash dividends and Spectral AI does not expect to pay any cash dividends in the foreseeable future.
| Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |||||||
| Exercise price (per share) | $ | $ | ||||||
| Expected term (years) | ||||||||
| Volatility (annual) | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Dividend yield (per share) | % | % | ||||||
| Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at January 1, 2024 | $ | $ | ||||||||||||||
| Options granted | $ | |||||||||||||||
| Options forfeited | ( | ) | $ | |||||||||||||
| Options cancelled | ( | ) | $ | |||||||||||||
| Options exercised | $ | |||||||||||||||
| Outstanding as of June 30, 2024 | $ | $ | ||||||||||||||
| Options vested and exercisable as of June 30, 2024 | $ | $ | ||||||||||||||
The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the common stock as of the respective date.
As of June 30, 2024, there
was approximately $
The Company recorded stock-based
compensation expense for stock options, RSUs, and restricted stock awards of $
During the year ended December
31, 2018, the Company granted
22
12. INCOME TAXES
The
Company recorded an income tax provision of approximately $
The tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items arising in that quarter. The Company’s effective tax rate differs from the U.S. statutory tax rate in the three and six months ended June 30, 2024 primarily due to changes in valuation allowances on deferred tax assets as it is more likely than not that the Company’s deferred tax assets will not be realized.
The Company evaluates its tax positions on a quarterly basis and revises its estimate accordingly.
13. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share attributable to common stockholders are the same for the three and six months ended June 30, 2024 and 2023, since the inclusion of all potential shares of common stock outstanding would have been anti-dilutive due to the Company’s net loss.
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| Common stock options | ||||||||
| Common stock warrants | ||||||||
| Unvested restricted stock units | ||||||||
| Unvested restricted stock | ||||||||
| Potentially dilutive securities | ||||||||
14. RELATED PARTY TRANSACTIONS
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 $
For the year ended December 31, 2023, the Company did not have any transactions with related parties.
15. SUBSEQUENT EVENTS
On July 17, 2024, the Company received the third
Pre-Paid Advance as part of the SEPA with Yorkville in the amount of $
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section titled “Risk Factors,” in our 2023 Annual Report and in other reports we have filed or may file with the SEC, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are an AI company focused on predictive medical diagnostics. We operate in one segment. Currently, we are devoting substantially all of our efforts towards research and development of our DeepView System, an internally developed multi-spectral imaging device that has FDA breakthrough device designation status. Given our recent receipt of the UKCA mark for burn indication on our DeepView System, we expect to begin commercialization activities in the United Kingdom in the second half of 2024. Our DeepView System uses proprietary algorithms to distinguish between damaged and healthy human tissue invisible to the naked eye, providing “Day One” healing assessments. DeepView’s output is specifically engineered to allow the physician to make a more accurate, timely and informed decision regarding the treatment of the patient’s wound. Our focus from 2013 through 2021 was on the burn indication, which we expanded to also include the diabetic foot ulcer (“DFU”) indication in 2022.
For burn wounds, a non-healing assessment could aid the clinician in making an immediate and objective determination for appropriate candidates for surgery, as well as determining what specific areas of the burn wound will require excision and skin grafting. We have conducted three large clinical studies with multiple sites across the United States, enrolling 413 burn patients, including 329 adult and 84 pediatric patients. Through these studies, we were able to quantify the burn assessment accuracy in patients undergoing both surgical and non-surgical treatment. In December 2023 we initiated a pivotal clinical study seeking enrollment of 240 patients, including 180 adult and 60 pediatric patients through multiple sites across the United States.
In the case of DFUs, our DeepView System provides an assessment in seconds as to the non-healing portions of a DFU. The non-healing assessment could provide the physician with an objective assessment to use an advanced wound care therapy on “Day One” as opposed to the current approach that involves waiting up to 30 days to see how the wound develops before making such clinical assessment.
We have not generated any product revenue to date. We have received substantial support from the U.S. government for our DeepView System’s application for burn wounds, particularly from the Biomedical Advanced Research and Development Authority (“BARDA”), which is part of the HHS Office of the Assistant Secretary for Preparedness and Response in the United States, established to aid in securing the United States from chemical, biological, radiological, and nuclear threats, as well as from pandemic influenza and emerging infectious diseases. We have also received funding from the National Science Foundation (the “NSF”), the National Institute of Health (the “NIH”) and the Defense Health Agency (the “DHA”). Since 2013, we have received approximately $280.2 million in funding awards from government contracts, primarily from BARDA, which accounts for $272.9 million. This has allowed us to develop our technology and further our clinical trials.
In September 2023, we executed our third contract with BARDA for a multi-year Project BioShield (“PBS”) agreement, valued at up to approximately $150.0 million (the “PBS BARDA Contract”). This multi-year contract includes an initial award of nearly $54.9 million to support the clinical validation and FDA clearance of DeepView® for commercial marketing and distribution purposes, which we expect to continue through the first quarter of 2026. This contract funding is non-dilutive to our shareholders, and we believe it validates the important nature of our mission and technology.
In addition to our PBS BARDA Contract, we received a $4.0 million grant award from the Medical Technology Enterprise Consortium (“MTEC”) in April 2023, which, building on prior awards from DHA, is to be used to support military battlefield burn evaluation via a handheld version of the DeepView System (the “MTEC Agreement”). The MTEC Agreement is currently intended to run through April 2025 with funding dependent on various milestones. In March 2024, we received an additional $0.5 million award from the Defense Health Agency to further this development.
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Once commercialized, we anticipate that the DeepView System will have two revenue streams, a SaMD (software as a medical device) model, and an imaging device component. The SaMD model applies a SaaS (software as a service) treatment for the DeepView System which will feature a software licensing fee that includes maintenance, image hosting, and access to algorithm updates. The proprietary imaging device accesses artificial intelligence algorithms and is a universal platform to house multiple clinical applications. Pricing for these components will be evaluated and strategically set per country and site-of-service for heightened customer adoption.
Business Combination
On September 11, 2023, we consummated a business combination, pursuant to 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.
On September 12, 2023, the Company began trading its shares of the Company Common Stock and the Public Warrants on the Nasdaq Global Market (the “Nasdaq”) under the symbols “MDAI” and “MDAIW”, respectively.
The Business Combination was accounted for as a reverse recapitalization in accordance with GAAP. Under the guidance in Accounting Standards Codification (“ASC”) 805, Business Combinations, Rosecliff, which is the legal acquirer, has been treated as the “acquired” company for financial reporting purposes and the Company has been treated as the accounting acquirer. This determination was primarily based on the following:
| (i) | Legacy Spectral’s former shareholders maintained a majority of the voting power of the Company; |
| (ii) | Legacy Spectral’s senior management comprises all of the senior management of the Company; |
| (iii) | Legacy Spectral selected five of the six of the directors for the Board of Directors of the Company; |
| (iv) | Legacy Spectral’s relative size of assets and operations compared to Rosecliff; and |
| (v) | Legacy Spectral’s operations comprised the ongoing operations of the Company. |
Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of a capital transaction in which Legacy Spectral issued stock for the net assets of Rosecliff prior to the Closing. Upon the Closing, the net assets of Rosecliff are stated at fair value, with no goodwill or other intangible assets recorded. All historical financial information presented in the consolidated financial statements represents the accounts of Legacy Spectral at their historical cost as if Legacy Spectral is the predecessor to the Company. Upon consummation of the Business Combination, Spectral AI has continued as an SEC-registered and Nasdaq-listed company. The consolidated financial statements following the Closing reflect the results of the Combined Company’s operations.
Key Operating and Financial Metrics
We regularly review a number of metrics, including the following key operating and financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions. We believe the operating and financial metrics presented are useful in evaluating our operating performance, as they are similar to measures by our public competitors and are regularly used by security analysts, institutional investors, and other interested parties in analyzing operating performance and prospects. Adjusted EBITDA is a non-GAAP measure, as it is not a financial measure calculated in accordance with GAAP and should not be considered as a substitute for net (loss) income, calculated in accordance with GAAP. See “Non-GAAP Financial Measures” for additional information on adopted non-GAAP financial measures and a reconciliation of these non-GAAP measures to the most comparable GAAP measures.
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Comparison of Three and Six Months Ended June 30, 2024 and 2023
The following table summarizes these metrics for the three and six months ended June 30, 2024 and 2023 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Research and development revenue | $ | 7,478 | $ | 4,251 | $ | 13,804 | $ | 9,329 | ||||||||
| Gross Profit | 3,314 | 1,791 | 6,259 | 3,972 | ||||||||||||
| Gross margin | 44.3 | % | 42.1 | % | 45.3 | % | 42.6 | % | ||||||||
| Operating loss | (2,442 | ) | (2,991 | ) | (4,585 | ) | (5,889 | ) | ||||||||
| Net loss | (2,864 | ) | (3,070 | ) | (6,069 | ) | (6,679 | ) | ||||||||
| Adjusted EBITDA | (2,038 | ) | (2,592 | ) | (3,895 | ) | (5,188 | ) | ||||||||
See “Non-GAAP Financial Measures” below for a reconciliation of net loss to Adjusted EBITDA.
Research and Development Revenue
We define research and development revenue as revenue generated from the research, testing and development of our DeepView System as utilized in connection with our burn indication. This research and development revenue reflects applied research and experimental development costs relating to our burn application as developed in connection with our BARDA, MTEC, and DHA contracts.
Gross Profit and Gross Margin
We define gross profit as research and development revenue, less cost of revenue, and define gross margin, expressed as a percentage, as the ratio of gross profit to revenue. Gross profit and gross margin can be used to understand our financial performance and efficiency and as we begin commercialization, it will allow investors to evaluate our pricing strategy and compare against our competitors. Our management uses these metrics to make strategic decisions, pricing decisions, identifying areas for improvement, set targets for future performance and make informed decisions about how to allocate resources going forward.
Adjusted EBITDA
We define adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”) as net loss excluding income taxes, depreciation of property and equipment, net interest income, stock compensation, transaction costs and any non-operating financial income and expense. See “Non-GAAP Financial Measures” for a reconciliation of GAAP net loss to Adjusted EBITDA.
Key Factors that May Influence Future Results of Operations
Our financial results of operations may not be comparable from period to period due to several factors. Key factors affecting our results of operations are summarized below.
Revenue Sources. As a pre-commercialization company, we currently generate revenue almost exclusively from two U.S. governmental agencies. We are highly dependent upon the continuation of the existing U.S. governmental contract awards, as well as future governmental procurement or other awards. Our operating results may not be comparable between periods as the timing and amount of awards or procurements from the U.S. government may be inconsistent with the timing of prior awards and the phasing of the development study schedules may be different. Our revenues may continue to be almost exclusively dependent upon the terms of those awards.
Gross Margin. When we begin commercial sales of the DeepView System, we may need to determine lower pricing and incentives to accelerate adoption and implementation of the DeepView System, which may negatively impact future revenue and gross margin percentages.
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Managing our Supply Chain. We are reliant on contract manufacturers and suppliers to produce our components. While we have not been subject to any disruptions in our current limited production, we may be subject to component shortages, which may cause delays in critical components and inventory, longer lead times, increased costs and delays in product shipments. Our ability to grow depends, in part, on the ability of our contract manufacturers and suppliers to provide high quality services and deliver components and finished products on time and at reasonable costs. While we do not maintain sole-source suppliers, there is a concentration of suppliers which could lead to supply shortages, long lead times for components and supply changes. In the event we are unable to mitigate the impact of delays and/or price increases in raw materials, electronic components and freight, it could delay the manufacturing and installation of our products, which would adversely impact our cash flows and results of operations, including revenue and gross margin.
Components of Consolidated Statements of Operations
Research and Development Revenue
Our primary source of revenue is research and development revenue. Currently, we are highly dependent upon the reimbursements from BARDA for the burn diagnostic testing of our DeepView System. Our research and development revenue is affected by the amount of research and development that is expended each month with respect to our PBS BARDA Contract and other U.S. governmental contract awards. During 2023, we received a grant under the MTEC Agreement, which we earn based on the achievement of milestones. Our revenue growth is dependent on a number of factors including expanding the research and development expense under the PBS BARDA Contract, research and development reimbursed expenses relating to other contract awards from U.S. governmental agencies and the intended future commercial sales of our DeepView System.
Cost of Revenue
Our cost of revenue consists primarily of direct and indirect costs associated with the research and development expenses relating to the PBS BARDA Contract and MTEC Agreement. Our cost of revenue is affected by the extent of research and development expenses as well as expansion of work on other U.S. governmental projects and the expanded applications for our DeepView System.
Gross Profit
Gross profit may vary from period-to-period and is primarily affected by the current reimbursement rates under the PBS BARDA Contract and other U.S. governmental contract awards, as well as the percentage of revenue related to the PBS BARDA Contract as compared to the MTEC project. These reimbursement rates are fixed under each contact award. Our gross profit represents this reimbursement rate plus a variable component relating to non-reimbursed expenses incurred in connection with the work completed on these contracts.
Operating Costs and Expenses
Operating costs and expenses consist of general and administrative expense. These expenses primarily relate to salaries and related costs of our organization’s support and operations staff, consulting fees, rent, insurance and office expenses, and our non-revenue generating research and development expenses, primarily related to salaries and related costs and consulting fees.
Other income (expense)
In 2024, other income (expense) consists of fees incurred in connection with the Yorkville transaction and B. Riley purchase agreement, net interest income, borrowing related costs related to the Yorkville convertible notes, change in fair value of notes payable, change in fair value of warrant liabilities, changes in fair value of derivatives, and foreign exchange transaction gains/losses. In 2023, other income (expense) consists of transaction costs related to the Business Combination, net interest income, change in fair value of warrant liabilities and foreign exchange transaction gain/losses. Historic foreign exchange transaction loss primarily relates to changes in the exchange rate between the U.S. dollar and the British pound sterling for our deposit accounts that are denominated in British pound sterling. In addition, this amount includes costs associated with buying British pound sterling for payment of our employees and vendors in the UK.
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Results of Operations
The following table summarizes of our results of operations for the three and six months ended June 30, 2024 and 2023 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Research and development revenue | $ | 7,478 | $ | 4,251 | $ | 13,804 | $ | 9,329 | ||||||||
| Cost of revenue | (4,164 | ) | (2,460 | ) | (7,545 | ) | (5,357 | ) | ||||||||
| Gross profit | 3,314 | 1,791 | 6,259 | 3,972 | ||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| General and administrative | 5,756 | 4,782 | 10,844 | 9,861 | ||||||||||||
| Total operating costs and expenses | 5,756 | 4,782 | 10,844 | 9,861 | ||||||||||||
| Operating loss | (2,442 | ) | (2,991 | ) | (4,585 | ) | (5,889 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Net interest (expense) income | (6 | ) | 42 | 8 | 86 | |||||||||||
| Borrowing related costs | (699 | ) | - | (975 | ) | - | ||||||||||
| Change in fair value of warrant liability | 348 | (81 | ) | 368 | (65 | ) | ||||||||||
| Change in fair value of notes payable | (167 | ) | - | (101 | - | |||||||||||
| Foreign exchange transaction (loss) gain, net | (9 | ) | - | (25 | ) | 13 | ||||||||||
| Other income (expenses), including transaction costs | 180 | - | (668 | ) | (738 | ) | ||||||||||
| Total other expense, net | (353 | ) | (39 | ) | (1,393 | ) | (704 | ) | ||||||||
| Loss before income taxes | (2,795 | ) | (3,030 | ) | (5,978 | ) | (6,593 | ) | ||||||||
| Income tax provision | (69 | ) | (40 | ) | (91 | ) | (86 | ) | ||||||||
| Net loss | $ | (2,864 | ) | $ | (3,070 | ) | $ | (6,069 | ) | $ | (6,679 | ) | ||||
Research and Development Revenue
| Three Months Ended June 30, | Change in | Six Months Ended June 30, | Change in | |||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||
| Research and development revenue | $ | 7,478 | $ | 4,251 | $ | 3,227 | 75.9 | % | $ | 13,804 | $ | 9,329 | $ | 4,475 | 48.0 | % | ||||||||||||||||
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.
For the three and six months ended June 30, 2024 and 2023, the Company’s revenues disaggregated by the major sources was as follows:
| Three Months Ended June 30, | Change in | Six Months Ended June 30, | Change in | |||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||
| BARDA | $ | 7,066 | $ | 4,020 | $ | 3,046 | 75.8 | % | $ | 13,167 | $ | 8,963 | $ | 4,204 | 46.9 | % | ||||||||||||||||
| Other U.S. governmental authorities | 412 | 231 | 181 | 78.4 | % | 637 | 366 | 271 | 74.0 | % | ||||||||||||||||||||||
| Total research and development revenue | $ | 7,478 | $ | 4,251 | $ | 3,227 | 75.9 | % | $ | 13,804 | $ | 9,329 | $ | 4,475 | 48.0 | % | ||||||||||||||||
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Cost of Revenues and Gross Profit
| Three Months Ended June 30, | Change in | Six Months Ended June 30, | Change in | |||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||
| Cost of revenue | $ | 4,164 | $ | 2,460 | $ | 1,704 | 69.3 | % | $ | 7,545 | $ | 5,357 | $ | 2,188 | 40.8 | % | ||||||||||||||||
| Gross profit | 3,314 | 1,791 | 1,523 | 85.0 | % | 6,259 | 3,972 | 2,287 | 57.6 | % | ||||||||||||||||||||||
| Gross margin | 44.3 | % | 42.1 | % | 45.3 | % | 42.6 | % | ||||||||||||||||||||||||
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.
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.
General and Administrative Expense
| Three Months Ended June 30, | Change in | Six Months Ended June 30, | Change in | |||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||
| General and administrative expense | $ | 5,756 | $ | 4,782 | $ | 974 | 20.4 | % | $ | 10,844 | $ | 9,861 | $ | 983 | 10.0 | % | ||||||||||||||||
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.
Other income (expense)
| Three Months Ended June 30, | Change in | Six Months Ended June 30, | Change in | |||||||||||||||||||||
| 2024 | 2023 | $ | 2024 | 2023 | $ | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Net interest (expense) income | $ | (6 | ) | $ | 42 | $ | (48 | ) | $ | 8 | $ | 86 | $ | (78 | ) | |||||||||
| Borrowing related costs | (699 | ) | - | (699 | ) | (975 | ) | - | (975 | ) | ||||||||||||||
| Change in fair value of warrant liability | 348 | (81 | ) | 429 | 368 | (65 | ) | 433 | ||||||||||||||||
| Change in fair value of notes payable | (167 | ) | - | (167 | ) | (101 | ) | - | (101 | ) | ||||||||||||||
| Foreign exchange transaction (loss) gain, net | (9 | ) | - | (9 | ) | (25 | ) | 13 | (38 | ) | ||||||||||||||
| Other income (expenses), including transaction costs | 180 | - | 180 | (668 | ) | (738 | ) | 70 | ||||||||||||||||
| Total other income (expense), net | $ | (353 | ) | $ | (39 | ) | $ | (314 | ) | $ | (1,393 | ) | $ | (704 | ) | $ | (689 | ) | ||||||
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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.
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.
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.
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.
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.
Non-GAAP Financial Measures
We use Adjusted EBITDA as a non-GAAP metric when measuring performance, including when measuring current period results against prior periods’ Adjusted EBITDA. This non-GAAP financial measure should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. In addition, Adjusted EBITDA should not be construed as an indicator of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that it fails to address.
Because of their non-standardized definitions, non-GAAP measures (unlike GAAP measures) may not be comparable to the calculation of similar measures of other companies. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Supplemental non-GAAP measures are presented solely to permit investors to more fully understand how Spectral AI’s management assesses underlying performance.
Adjusted EBITDA
We define Adjusted EBITDA as net loss excluding income taxes, depreciation of property and equipment, net interest income, stock compensation, transaction costs and any non-operating financial income and expense.
The following table presents our Adjusted EBITDA for the three and six months ended June 30, 2024 and 2023 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Net loss | $ | (2,864 | ) | $ | (3,070 | ) | $ | (6,069 | ) | $ | (6,679 | ) | ||||
| Adjust: | ||||||||||||||||
| Depreciation expense | 2 | 3 | 5 | 5 | ||||||||||||
| Provision for income taxes | 69 | 40 | 91 | 86 | ||||||||||||
| Net interest (income) expense | 6 | (42 | ) | (8 | ) | (86 | ) | |||||||||
| EBITDA | (2,787 | ) | (3,069 | ) | (5,981 | ) | (6,674 | ) | ||||||||
| Additional adjustments: | ||||||||||||||||
| Stock-based compensation | 402 | 396 | 685 | 696 | ||||||||||||
| Borrowing related costs | 699 | - | 975 | - | ||||||||||||
| Change in fair value of warrant liability | (348 | ) | 81 | (368 | ) | 65 | ||||||||||
| Change in fair value of notes payable | 167 | - | 101 | - | ||||||||||||
| Foreign exchange transaction (gain) loss | 9 | - | 25 | (13 | ) | |||||||||||
| Other (income) expenses, including transaction costs | (180 | ) | - | 668 | 738 | |||||||||||
| Adjusted EBITDA | $ | (2,038 | ) | $ | (2,592 | ) | $ | (3,895 | ) | $ | (5,188 | ) | ||||
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Liquidity and Capital Resources
Sources of Liquidity
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.
On December 26, 2023, we entered into a Common Stock Purchase Agreement and related Registration Rights Agreement with B. Riley Principal Capital II, LLC (“B. Riley”). Upon the terms and subject to the satisfaction of the conditions set forth in the Common Stock Purchase Agreement, the Company has the right, in our sole discretion, to sell to B. Riley up to $10.0 million in aggregate gross purchase price of newly issued shares of the Company’s Common Stock (the “ELOC”).
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.
We have historically funded our operations through the issuance of notes and the sale of preferred stock and common stock, along with payments under governmental contracts for research and development activity.
In September 2023, the Company executed its third contract with BARDA for a multi-year PBS BARDA Contract, valued at up to approximately $150.0 million. This multi-year contract includes an initial award of nearly $54.9 million to support the clinical validation and FDA clearance of DeepView® for commercial development and distribution purposes. The Company completed the second contract with BARDA, referred to as BARDA Burn II, which was signed in July 2019 and completed in November 2023. Under this contract, the Company furthered the DeepView System design, developed the AI algorithm, and took steps to obtain FDA approval.
In April 2023, the Company received a $4.0 million grant under the MTEC Agreement for a project that is expected to be completed by April 2025. The MTEC Agreement is for the development of a handheld version of the DeepView System which is to be used to support military battlefield burn evaluation. The project has three phases, beginning with planning, design and testing; followed by development, design modification and buildout of the handheld device; and then the manufacturing of the handheld device.
Based on our current operating plan, we believe that our cash and cash equivalents, together with the PBS BARDA Contract, the MTEC Agreement, the B. Riley ELOC, and the Yorkville Transaction, will be sufficient to fund operations for at least one year beyond the release date of these condensed consolidated financial statements We have based this determination on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. The Company could utilize cost-savings measures to limit the expenditures of our DFU indication to conserve our working capital and to focus our efforts primarily on the burn indication. Changing circumstances could also cause us to consume capital significantly faster than we currently anticipate, and we may need to raise capital sooner or in greater amounts than currently expected because of circumstances beyond our control. Changes in the current equity markets may also limit our ability to utilize the B. Riley ELOC and Yorkville Transaction as currently structured. To the extent additional capital is necessary, there are no assurances that we will be able to raise additional capital on favorable terms or at all, and therefore we may not be able to execute our business plans and the continued work on indications beyond expanding our burn indication.
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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.
Cash Flows
The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023 (in thousands):
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (8,042 | ) | $ | (5,527 | ) | ||
| Net cash provided by (used in) financing activities | 10,131 | (481 | ) | |||||
Cash Flows Used in Operating Activities
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.
Cash Flows Provided by (Used in) Financing Activities
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.
Current Indebtedness
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.
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.
Related Party Transactions
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.
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Off-Balance Sheet Arrangements
During the periods presented, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these condensed consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates which include, but are not limited to, accrued expenses, stock-based compensation expense, and income taxes. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.
Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on March 29, 2024.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, of the notes to our condensed consolidated financial statements included elsewhere in this Form 10-Q for recently adopted accounting standards and recently issued accounting standards as of the dates of the statement of financial position included in this Form 10-Q.
Emerging Growth Company
We are an emerging growth company, as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply more promptly with new or revised accounting pronouncements as of public company effective dates.
In addition, as an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
| ● | being permitted to present only two years of audited consolidated financial statements in addition to any required unaudited interim consolidated financial statements, with correspondingly reduced disclosure in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; |
| ● | an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended; |
| ● | reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; |
| ● | exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements; and |
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We may take advantage of these provisions until the last day of the fiscal year ending after the fifth anniversary of the Company’s initial public offering or such earlier time that we no longer qualify as an emerging growth company. We will cease to qualify as an emerging growth company on the date that is the earliest of: (i) December 31, 2026; (ii) the last day of the fiscal year in which we have more than $1.235 billion in total annual gross revenues; (iii) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and we have been a public company for at least 12 months and have filed one annual report on Form 10-K; or (iv) the date on which we have issued more than $1.0 billion of non-convertible debt over the prior three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens. Accordingly, the information contained herein may be different than you might obtain from other public companies in which you hold equity interests.
We are also a “smaller reporting company.” If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited consolidated financial statements in our Annual Report and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange, credit and inflation risks.
Interest Rate Sensitivity
We maintain a large amount of our assets in cash. Our cash is held primarily in cash deposits. The fair value of our cash would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of these instruments. Additionally, changes to interest rates will impact on the cost of any future borrowings. With respect to our current borrowings, the interest rates on the notes are fixed. Changes in prevailing interest rates could have a material impact on our results of operations.
Foreign Currency Risk
Our revenue is denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States and UK, with an insignificant portion of expenses incurred in our wholly owned subsidiaries in the UK and denominated in British pound sterling.
Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of cash and accounts receivable. The vast majority of our cash is held in U.S. financial institutions which, at times, exceed federally insured limits. We have not recognized any losses from credit risks on such accounts. We believe we are not exposed to significant credit risk on cash.
Additional credit risk is related to our concentration of receivables and revenues. One customer (which is a U.S. government agency) represents the majority of our research and development revenue and accounts receivable.
Inflation Risk
The recent increase in inflation partially contributed to the increase in the cost of our research and development as well as operating costs. If the cost of our products, employee costs, or other costs continue to be subject to significant inflationary pressures, such inflationary pressure may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expense. As a result, our inability to quickly respond to inflation could harm our cash flows and results of operations in the future.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on management’s evaluation as of the quarter ended June 30, 2024, our Chief Executive Officer and Chief Financial Officer have concluded that, as a result of the material weaknesses in our internal control over financial reporting as described below and in Part II, Item 1A. Risk Factors, our disclosure controls and procedures were not effective as of June 30, 2024. In connection with the preparation of our consolidated financial statements for the year ended December 31, 2023, we identified material weaknesses in: (i) lack of communication within management and internal departments regarding complex and unusual arrangements. This resulted in communication failures of relevant facts necessary for the accounting group to properly conclude and apply the required accounting treatment of certain stock transactions; (ii) the Company did not maintain adequately designed controls to ensure the proper recording of operating expenses, related accruals and unbilled revenue in the correct period. As a result, certain control activities in the accrual and unbilled revenue processes were not designed and implemented effectively; and (iii) our financial statement close process controls which relate to all financial statement accounts, did not consistently operate effectively or lacked appropriate evidence, to ensure account reconciliations, transactions, and journal entries were performed or reviewed at the appropriate level of precision and on a timely basis. These control deficiencies could result in a material misstatement of our accounts or disclosures that would not be prevented or detected on a timely basis, and accordingly, we determined that these control deficiencies in aggregate constitute a material weakness.
Notwithstanding the identified material weaknesses, our management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. GAAP.
Remediation Plan for Material Weaknesses
Remediation generally requires making changes to how controls are designed and implemented and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. In response to the material weaknesses, we implemented, and are continuing to implement, measures designed to improve our internal control over financial reporting. These efforts include:
| ● | engaging a professional accounting services firm to help us assess and document our internal controls for complying with the Sarbanes-Oxley Act of 2002; |
| ● | strengthening, formalizing, documenting and testing accounting processes and internal controls, specifically regarding accrued expenses and contract reviews and improving the information flow throughout the organization to allow for timely communication of new agreements and transactions; |
| ● | enhancing functionality of our enterprise resource planning system to support certain key financial processes and controls and enforce certain segregation of duties through automation and approval workflows. |
The measures we are implementing are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. Management and the Audit Committee remain committed to the implementation of remediation efforts to address the material weaknesses. We will continue to implement measures to remedy our internal control deficiencies, though there can be no assurance that our efforts will be successful or avoid potential future material weaknesses. In addition, until remediation steps have been completed and are operated for a sufficient period of time, and subsequent evaluation of their effectiveness is completed, the material weaknesses previously disclosed, and as described above, will continue to exist.
Changes in Internal Control over Financial Reporting
Except for the remediation efforts in connection with the material weaknesses described above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings or pending claims. The Company is aware of a material threatened claim that it believes is without merit. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities. To our knowledge, there is not any material legal proceeding threatened against any of our officers or directors in their corporate capacity.
Item 1A. Risk Factors
Factors that could cause our actual results to differ materially from those in this Quarterly Report include the risk factors described in our Annual Report on Form 10-K filed with the SEC on March 29, 2024 and in the Registration Statement on Form S-1 filed with the SEC on January 5, 2024, as amended. Any of those factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Quarterly Report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K filed with the SEC on March 31, 2024 and in the Registration Statement on Form S-4 filed with the SEC on January 5, 2024, as amended, except as listed below. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
The Company is not currently in compliance with the continued listing requirements for The Nasdaq Stock Market. If the Company does not regain compliance and continue to meet the continued listing requirements, the Common Stock may be delisted, which could affect the market price and liquidity for the Company’s Common Stock and reduce the Company’s ability to raise additional capital. On June 3, 2024, the Company received a letter from the Listing Qualifications Staff of the Nasdaq Stock Market, LLC (“Nasdaq”) that the Company was not in compliance with the requirement of Rule 5550(b)(2) relating to the maintenance of a minimum market value of its listed securities of $35.0 million for the last 31 consecutive business days. Pursuant to Nasdaq Listing Rule 5810(c)(3)(C), the Company has 180 calendar days from receipt of a notice from Nasdaq (the “Compliance Period”), to regain compliance with the market value of listed securities requirement. If at any time before December 2, 2024, the closing market capitalization of the Company’s Common Stock closes at or above $35.0 million for a minimum of 10 consecutive business days, subject to Nasdaq’s discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(G) to 20 consecutive business days, Nasdaq will provide written notification that the Company has achieved compliance with the minimum market capitalization requirement, and the matter would be resolved. If the Company does not regain compliance during the review period ending December 2, 2024, then Nasdaq may grant the Company a second 180 calendar day period to regain compliance, provided the Company meets the continued listing requirement for all other initial listing standards for the Nasdaq, other than the minimum market value of listed securities requirement, and notifies Nasdaq of its intent to cure the deficiency.
Although alternative public and private transaction structures may be available, these may require additional time and cost, may impose operational restrictions on the Company, and may not be available on attractive terms. The Company’s inability to continue to raise capital with its Common Stock as listed on Nasdaq will harm its business, financial condition and results of operations, and will likely cause the Company’s stock value to further decline.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Yorkville Standby Equity Purchase Agreement
On March 20, 2024, the Company entered into the Yorkville Transaction 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. 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 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.
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.
B. Riley Committed Equity Facility
On December 26, 2023, the Company entered into a Purchase Agreement with B. Riley, pursuant to which, upon the terms and subject to the satisfaction of the conditions contained in the Purchase Agreement, we have the right, in our sole discretion, to sell to B. Riley up to $10,000,000 of shares of the common stock (subject to certain limitations contained in the Purchase Agreement), from time to time during the term of the Purchase Agreement through a Market Open Purchase or an Intraday Purchase on any Purchase Date (each term as defined in the Purchase Agreement). Sales of Common Stock pursuant to the Purchase Agreement, and the timing of any sales, are solely at our option, and we are under no obligation to sell any securities to B. Riley under the Purchase Agreement.
Use of Proceeds
There has been no material change in the planned use of the proceeds from the Business Combination, as is described in the Company’s final prospectus (Registration No. 333-275218), as filed with the SEC on January 2, 2024. Additionally, there has been no material change in the planned use of proceeds from the ELOC or the Yorkville Transaction (Registration No. 333-278610), as is described in the Company’s final prospectus (Registration No. 333-276406), as filed with the SEC on February 1, 2024.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
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Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q:
| No. | Description of Exhibit | |
| 2.1 | Business Combination Agreement, dated as of April 11, 2023, by and among Rosecliff Acquisition Corp I, Ghost Merger Sub I Inc., Ghost Merger Sub II and Spectral MD Holdings Ltd. (incorporated by reference to the Company’s Form 8-K, filed with the SEC on April 17, 2023). | |
| 31.1* | Certification of Chief Executive Officer (Principal Executive Officer) | |
| 31.2* | Certification of Chief Financial Officer (Principal Financial and Accounting Officer) | |
| 32** | 18 U.S.C. Section 1350 Certification | |
| 101.INS* | Inline XBRL Instance Document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed herewith. |
| ** | Furnished herewith. |
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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 thereunto duly authorized.
| SPECTRAL AI, INC. | ||
| Date: August 12, 2024 | By: | /s/ Peter M. Carlson |
| Name: | Peter M. Carlson | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Date: August 12, 2024 | By: | /s/ Vincent S. Capone |
| Name: | Vincent S. Capone | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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