Spectral AI, Inc. quarterly report, Q2 FY2023

Business context and reporting period

This is Rosecliff Acquisition Corp I’s unaudited Form 10-Q for the quarter ended June 30, 2023, filed August 14, 2023—not an operating-company 10-Q for Spectral AI, Inc. Rosecliff is a blank-check company with no operating revenue or business operations before a business combination.

Rosecliff had agreed to combine with Spectral MD Holdings, Ltd. under an April 11, 2023 agreement. The proposed transaction remained subject to shareholder, regulatory, listing and other closing conditions; the filing does not report that it had closed.

Financial results and position

Results are materially affected by non-cash warrant remeasurement and trust-account interest. For the first half of 2023, the warrant fair-value change was a $394,200 loss and trust interest was $99,374; in the first half of 2022, the warrant change was an $8.83 million gain and trust interest was $424,529. The large year-over-year earnings swing therefore does not represent operating growth.

At June 30, 2023, cash outside the trust was $409,030, trust cash was $4.73 million, and total assets were $5.30 million. Current liabilities were $5.28 million, including $5.00 million of accrued expenses; working-capital deficit was $4.58 million. Warrant liabilities were $788,400 and deferred underwriting fees were $8.86 million. Stockholders’ deficit was $14.48 million. The filing reports no long-term debt.

The cash-flow statement reports six-month operating cash use of $376,008, while MD&A states $276,634. The filing text does not reconcile this discrepancy. No meaningful operating margin is applicable because the company reported no operating revenue.

Material changes versus the prior comparable period

• First-half net income of $8.51 million in 2022 turned to a $2.32 million net loss in 2023, largely because the prior period included a substantial warrant-liability fair-value gain while 2023 recorded a loss.
• First-half G&A expense rose to $2.00 million from $714,000.
• Operating cash declined to $409,030 from $785,038 at year-end 2022; trust assets increased modestly from $4.63 million to $4.73 million.
• After a December 2022 extension vote, approximately 98.2% of public shares were redeemed. At June 30, 2023, 458,716 Class A shares remained subject to redemption.

Outlook, risks and unusual items

• Rosecliff had until February 17, 2024 to complete a business combination; otherwise it must wind up and redeem remaining public shares. Management stated that substantial doubt exists about the company’s ability to continue as a going concern, citing limited liquidity, the transaction deadline and uncertain access to additional financing.
• The Sponsor and certain insiders may provide working-capital loans but are not obligated to do so. The filing says no such loans were outstanding at June 30.
• Nasdaq deficiencies included the minimum publicly held-share requirement and the $35 million market-value-of-listed-securities requirement, as well as stated equity or income deficiencies. After the quarter, Nasdaq notified the company of delisting unless it requested a hearing; Rosecliff requested one and the hearing stayed further action pending the process. The filing describes an October 2, 2023 deadline to regain market-value compliance.
• The underwriters agreed to waive $8.105 million of deferred fees upon completion of the Spectral MD transaction, leaving $750,000 payable at closing.
• A shareholder demand letter dated May 10, 2023 alleged that the transaction registration statement omitted material information and sought corrective disclosure.
• The proposed transaction could fail to close; listed conditions include stockholder approvals, an effective registration statement, antitrust clearance and stock-exchange listing approval. The Sponsor also agreed to forfeit its private placement warrants, with sponsor-share retention dependent on transaction cash thresholds.

Most important facts for investors to verify

• Confirm the issuer and filing: this is Rosecliff Acquisition Corp I’s SPAC filing, not Spectral AI, Inc.’s operating-company filing.
• Check subsequent filings for the Spectral MD transaction’s status, final terms, closing conditions and available cash after redemptions and expenses.
• Confirm Nasdaq hearing and compliance outcomes, including whether the securities remained listed.
• Reconcile the $276,634 operating-cash-use figure in MD&A with the $376,008 shown in the cash-flow statement.
• Assess liquidity, accrued expenses, any financing from the Sponsor, and the risk of liquidation by February 17, 2024.
• Review the shareholder demand and any resulting amendments or disclosures regarding the transaction registration statement.