Full Press Release Details
SPECTRAL'S MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
otherwise indicated or the context otherwise requires, references in this section to "we," "our," "us"
or other similar terms refer to the business and operations of Legacy Spectral
MD Holdings, Ltd., and its subsidiaries prior to the business combination
with Rosecliff Acquisition Corp I ("Rosecliff"). The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with our unaudited quarterly condensed
financial statements and related notes included elsewhere in this Form 8-K, as well as our audited annual consolidated financial statements
and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" as of and for the years ended
December 31, 2022 and 2021 included in Rosecliff's final prospectus,
as amended, on form S-4/A filed with the Securities and Exchange Commission
("SEC") on August 10, 2023 (the Prospectus").
In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash
flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. Our actual results
could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include,
but are not limited to, those identified below and those discussed in the sections titled "Risk Factors" and "Cautionary
Note Regarding Forward-Looking Statements" included in the Prospectus. Additionally, our historical results are not necessarily
indicative of the results that may be expected for any period in the future.
We are an AI company focused
on predictive medical diagnostics. We operate in one segment. We are devoting substantially all of our efforts towards research and development
of our DeepView System, an internally developed MSI device which has designated FDA BDD status. 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. In 2022 and 2023, we expanded
our focus to include the diabetic foot ulcer ("DFU") indication.
In the case of DFUs, a non-healing assessment
would provide the physician with the appropriate justifications to use an advanced wound care therapy on "Day One", in seconds,
as opposed to the current approach that involves waiting up to 30 days to see how the wound develops before making such clinical assessment.
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. DeepView's
current accuracy for burn wounds is 92% for adults and 88% for pediatrics, compared with current physician accuracy of 50% to 75%, respectively,
at best, according to industry literature.1 In addition, in head-to-head clinical trial evaluations, our DeepView
System provided higher accuracy to "ground truth" on burn wound analysis than the accuracy of burn specialists, reporting
at 70-80% accuracy, and non-burn specialist physicians, reporting at 50-60% accuracy.2 We have conducted three large
clinical studies with multiple sites across the United States, enrolling 413 patients, including 329 adult burn patients and 84 pediatric
patients. Through these studies, we were able to identify the burn assessment accuracy in both surgery and non-surgical treatment.
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, including from agencies such as 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 NSF, NIH and the
DHA. Since 2013, we have received approximately $130.0 million in funding from government contracts, primarily from BARDA, which
accounts for $122.9 million. This has allowed us to develop our technology and further our clinical trials. We are currently in our
second contract with BARDA, referred to as BARDA Burn II, which was signed in July 2019 and is due to be completed in July 2024.
Under this contract, we expect to further the DeepView System design, develop the AI algorithm, and take the necessary steps to obtain
FDA approval for our DeepView GEN 3 System. However, approval from the FDA or other regulatory agencies, foreign or domestic, cannot be
guaranteed and may take longer than planned. In August 2022, we also received the Option 1B extension of the BARDA Burn II contract,
which is valued at an additional $8.2 million, bringing the total funding received from Option 1 of the BARDA Burn II contract to
a total of $47.6 million from July 2021 under Option 1A and 1B (including modification), to execute the adult and pediatric multi-center clinical
training study. This grant funding is non-dilutive to our shareholders, and we believe it validates the important nature of its mission
In April 2023, we received
a $4.0 million grant award from the Medical Technology Enterprise Consortium ("MTEC"), which, building on prior awards
from DHA, is to be used to support military battlefield burn evaluation via a handheld DeepView. The MTEC Agreement extends the DHA Phase
II contract for the development of the handheld device of the DeepView System. Under the terms of the MTEC Agreement, MTEC will pay us
a firm fixed fee based upon our achievement of certain milestones described in the agreement through April 5, 2025. The milestone
payment schedule is based on a three phased approach to the development of our handheld device. Phase 1 of the MTEC Agreement began in
April 2023 and is scheduled to extend through at least July 2023 and is focused on the planning, design and testing of the handheld device
for its intended applications. Phase 1 has a funding budget of $1,170,000. Once Phase 1 is completed, Phase 2 is intended to run through
October 2024 and encompasses the development, design modification and build-out of the handheld device to the U.S. government standards
as identified in the design and commercialization plans for the device. Phase 2 has a funding budget of $1,558,000. Phase 3 of the MTEC
Agreement addresses the complete manufacturing of the device, the process validation of the production and completion of up to thirty
handheld devices. Phase 3 begins following completion of Phase 2 and is intended to run through April 2024 with a funding budget of approximately
We anticipate that the DeepView System will have
two revenue streams, a SaMD (software as a medical device), and an imaging device component. The SaMD model applies a SaaS 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 April 11, 2023, we
entered into the Business Combination Agreement with Rosecliff Acquisition Corp I ("RCLF"), Ghost Merger Sub I Inc.
("Merger Sub I") and Ghost Merger Sub II LLC ("Merger Sub II"), which was consummated on September
11, 2023 (the "Closing"). Pursuant to the Business Combination Agreement, on the Closing, in sequential order: (a) Ghost
Merger Sub I merged with and into Spectral, with Spectral continuing as the surviving company and a wholly owned subsidiary of Spectral
(the "Spectral Merger") and then, (b) Spectral merged with and into Ghost Merger Sub II (the "SPAC Merger", together
with the Spectral Merger (the "Mergers")), with Ghost Merger Sub II surviving the SPAC Merger as a direct wholly-owned subsidiary
of Rosecliff. Rosecliff was renamed Spectral AI, Inc. ("Spectral AI" or the "Combined Company"), (the "Business
Combination"). On September 12, 2023, Spectral AI began trading its shares on the NASDAQ stock exchange under the ticker symbol
"MDAI" after delisting its shares from the AIM market of the London Stock Exchange on September 7, 2023.
In September 2023, prior to
the closing of the Business Combination, the Company issued 7,679,198 shares of common stock for $3.4 million (the "Equity Issuance").
The Business Combination is
expected to be accounted for as a reverse recapitalization in accordance with GAAP. Under the guidance in Accounting Standards Codification
("ASC") 805, Business Combinations, RCLF, which is the legal acquirer, will be treated as the "acquired"
company for financial reporting purposes and Spectral will be treated as the accounting acquirer. This determination was primarily based
Accordingly, for accounting
purposes, the Business Combination will be treated as the equivalent of a capital transaction in which we are issuing stock for the net
assets of RCLF. The net assets of RCLF will be stated at historical cost, with no goodwill or other intangible assets recorded. Historical
operations presented in future financial statements, prior to the Business Combination will be ours.
The most significant changes
in our future reported financial position and results are expected to be a net decrease in cash (as compared to our consolidated balance
sheet as of June 30, 2023) of approximately $0.3 million.
Public Company Costs
consummation of the Business Combination, the Combined Company has continued as an SEC-registered and
Nasdaq-listed company. We expect to hire additional staff and implement new processes and procedures
to address public company requirements in anticipation of and following the completion of the Business Combination. We also expect to
incur substantial additional expenses for, among other things, directors' and officers' liability insurance, director fees,
internal control compliance, and additional costs for investor relations, accounting, audit, legal and other functions.
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