Spectral AI, Inc. Q1 FY2024 Earnings Call

Good day, and welcome to the Spectral AI First Quarter 2024 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Devin Sullivan, Managing Director of the Equity Group. Please go ahead.

Thank you, Chad. Good afternoon, everyone, and thank you for joining us for Spectral AI's 2024 first quarter financial results conference call. Our speakers for today will be Peter Carlson, Chief Executive Officer of Spectral AI; and Vince Capone, the company's Chief Financial Officer. Before we begin, I'd like to remind everyone that during this call, certain statements may be made that constitute forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995, including statements regarding the company's strategy, plans, objectives, initiatives and financial outlook. When used in these discussions, the words estimates, projected, expects, anticipates, forecasts, plans, intends, believes, seeks, may, will, should, future, propose and variations of those words or similar expressions or the negative versions of such words or expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, conditions or results and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside the company's control, and can cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements and listeners should carefully consider the foregoing factors and other risks and uncertainties described in the Risk Factors section of the company's filings with the SEC including the registration statement and other documents filed by the company. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those contained in the forward-looking statements. With that said, I'd now like to turn the call over to Pete Carlson, Spectral AI's Chief Executive Officer. Pete, please go ahead.

Thank you, Devin, and good afternoon, everyone. We appreciate you joining us today for our first quarter financial results conference call. We had a strong start to the year with significant accomplishments in the areas of product advancement and deployment, clinical studies and executive appointments. We also strengthened our financial profile and created a well-defined cash runway to support our growth initiatives. We are continuing to evolve from the clinical environment to commercialization and have a well-defined business focus for 2024 and beyond. As previously announced, in February 2024, we received UKCA authorization to commence sales of DeepView AI-Burn in the U.K. We are excited to share the deployment of DeepView systems at 3 U.K. hospitals; Royal Victoria Infirmary in Newcastle, Stoke Mandeville Hospital in Buckinghamshire, and Broomfield Hospital in Essex. First and foremost, we believe these deployments help professionals at these facilities provide more effective and more efficient care to patients. Additionally, having machines deployed increases clinician familiarity with the device, integrates our technology into the facility's workflow and provides real-world data related to its usage and outcomes. We will deploy a total of 6 DeepView devices at locations across the U.K. this summer. After a period of customer evaluation, we expect to initiate commercial transactions in the second half of this year. While we do not expect these transactions to represent a significant contribution to revenues in 2024, we are pleased to begin commercial activities. Our clinical work to develop the DeepView platform continues, and let me share these updates. For burn, we are enrolling patients for a pivotal study at multiple burn centers and emergency departments across the U.S. The study is expected to enroll 240 patients, both adult and pediatric. As of today, we are approximately 20% towards our enrollment goal. This is expected to be the final clinical trial for burn before seeking FDA approval in 2025. For diabetic foot ulcers or DFUs, we are advancing our training and validation clinical studies in both the U.S. and the U.K. To date, we have enrolled 470 patients across 14 total sites and anticipate completing enrollment in both studies this year. We are often asked about timing of cash flows from the contracts with BARDA, and I want to take a few minutes to summarize this critical partnership. Through March 31, 2024, we have received approximately $113 million in cash payments from BARDA, most of which related to the Burn I and Burn II contracts that were completed in 2019 and 2023, respectively. This total includes approximately $11 million under the first portion of the Project BioShield or PBS contract awarded in September 2023. The initial award of nearly $55 million from the PBS contract will take us through the first quarter of 2026, in support of the clinical validation and FDA approval processes for the burn indication. The next award, which we expect to commence in the first half of 2026, is estimated to be $95 million for procurement and deployment of devices to burn centers and select emergency departments across the U.S. along with funding several years of annual license fees for the devices deployed. Final amounts under this next award are subject to discussions with BARDA. In summary, to date, BARDA has awarded contracts to Spectral AI totaling $250 million, and since 2013, has paid $113 million to the company under these contracts. Turning to updates on the continued strengthening of our leadership team and the Board. We welcome Jeremiah Sparks as Chief Commercial Officer beginning April 1, and I am pleased to say he hit the ground running, including joining our team in Chicago at the Annual Meeting of the American Burn Association. Jeremiah was an executive at AVITA Medical prior to joining Spectral AI and brings more than 20 years of medical device marketing and business strategy, including experience in launching new products, both nationally and globally. Prior to AVITA, Jeremiah worked at Johnson & Johnson, Healthpoint and Allergan. Additionally, we named Stan Micek as Interim Chief Operating Officer on April 8, providing continuing leadership to our engineering teams. Stan brings extensive experience in product deployments along with strong project management skills. As disclosed in our proxy filing last month, we nominated Marion Snyder to our Board of Directors. Marion is a highly accomplished healthcare executive, currently serving as Senior Director Corporate Accounts at Shockwave Medical, a medical device focused on the treatment of cardiovascular disease. Her prior experience is in both med device and pharmaceuticals with executive positions at MiMedx and Pfizer. My last update is about our newly formed healthcare intellectual property-focused subsidiary, Spectral IP. We are fortunate to have a well-known expert in intellectual property, Erich Spangenberg, as our largest shareholder. As you saw, we named Erich as CEO of this subsidiary, and his primary focus will be identifying assets for this entity to acquire and exploring the potential spin-off of Spectral IP to shareholders, providing additional value for our current investors. It is important to know that the activities of this IP-focused subsidiary require limited management resources and no additional capital from the company. Additionally, no core operating assets of the company will be involved in the subsidiary. Before turning things over to Vince, I want to stress that we believe we are on the proper path to deliver reduced pain and suffering, faster and more appropriate treatment plans and reduced risk from complications for patients, better information for treatment decisions by clinicians, improved efficiencies and lower healthcare delivery costs for facilities, meaningful economic benefits for payers through objective and validated assessments and long-term value for our shareholders. With that, I will have Vince Capone, our Chief Financial Officer, provide an update on our financial results. Vince?

Thanks, Pete, and thank you all for joining us today. We issued our press release this afternoon, which contains additional detail of our operating results, and we are filing our 10-Q with the SEC today as well. With that in mind, I will focus my remarks on select highlights and key items. We are pleased to report that research and development revenue for the first quarter rose 24.6% to $6.3 million from $5.1 million in the first quarter of last year. This growth reflects an increased level of activity under the BARDA Project BioShield contract, which was awarded to the company in September 2023. Gross margin also improved, rising to 46.6% from 42.9% in the first quarter of last year due to the higher reimbursement rate under the BARDA Project BioShield contract as compared to the reimbursement rate in the BARDA Burn II contract under which we operated in last year's first quarter. General and administrative expenses in the first quarter were flat at $5.1 million. Nonrevenue-generating research and development activities decreased by approximately $100,000 and for the 3 months ended March 31, 2024, compared to the first quarter of 2023, and that's offset by an increase of approximately $100,000 related to other administrative expenses for the 3 months ended March 31, 2024, as compared to the first quarter of 2023. Other expenses for the first quarter of 2024 were up approximately $500,000 from the first quarter of 2023 and reflected borrowing-related costs of $300,000 and transaction costs of $1 million each related to the company's previously announced financing arrangements. We trimmed our net loss for the quarter to $3.2 million or $0.19 per share as compared to a net loss of $3.6 million or $0.27 per share last year. At March 31, 2024, we had 17,482,333 shares outstanding. Moving to the balance sheet. As of March 31, 2024, cash and cash equivalents totaled $10.2 million, up from $4.8 million at year-end. We enhanced our access to capital by completing a common stock purchase agreement with an investment bank, under which the company netted $2.7 million. The company still has the ability to draw down an additional $3 million under this facility. In addition, we entered into a standby equity purchase agreement with a long-time investor. That includes $12.5 million of prepaid advances. As of March 31, 2024, the company received $4.6 million net from the standby equity purchase agreement, and the company anticipates receiving $5 million shortly after our May 14, 2024, Annual Meeting and the final advance of $2.5 million, 60 days thereafter. As a reminder, any drawdowns above the prepaid advances of $12.5 million is solely at the discretion of the company. For 2024, we are reaffirming our revenue guidance of approximately $28 million, an expected increase of 55% from the $18.1 million we reported in 2023. This growth reflects our work on the BARDA Project BioShield contract with additional contributions from the ongoing handheld contract. As a reminder, we recently announced a new contract with the Defense Health Agency that provides significant additional support for the development of the handheld version of our DeepView system device valued at over $500,000, bringing the total for the development of this device to greater than $6 million. This guidance does not include contributions from sales of the DeepView system for burn in the U.K. in the second half of 2024, which is not expected to be material. Thank you for your time. And with that, I will turn the conversation back over to Pete.

Thank you, Vince. We are pleased with our progress in the first quarter as we welcome both Jeremiah and Stan to our leadership team and strengthened our financial position. I want to thank our entire team for their dedication and commitment to our promise to develop and commercialize our DeepView system. Their achievements to date and those on the horizon drive our success. Chad, let's open the call for questions.

And the first question will be from Ryan Zimmerman from BTIG.

Pete, Vince, this is Izzy on for Ryan. Congrats on the progress so far. So just to start out, it's great to see that you guys have these initial placements in the U.K. And I was wondering if you could provide any feedback on what you guys are hearing from those initial placements, just qualitatively what are surgeons thinking about the system?

Good to talk to you. We've had positive reactions from the field. Surgeons are excited about the opportunity to use the tool. The interesting aspect is in the U.K., with the single payer system, they are very focused on the quality of care. And the economics are just so different than here in the U.S. So as we've talked to them and as we hit and receive this feedback, it is all about improving quality of care. They find the device easy to use, and it is usable by all people in the clinics. Nurse practitioners and nurses are able to take these images and get the diagnosis back from the device, which essentially gives them the ability to get that critical diagnosis regardless of how skilled they are in assessing a burn. So the facilities enjoy the consistency and the quality of the assessment that happens by using the device.

Good. That's helpful to hear. And next on the U.S. burn trial, I heard you guys say that enrollment is up 20%, which is great to see. We've heard some commentary from others in the industry saying that the incidence of burns was down in the first quarter for the U.S. So I was just wondering if you guys have seen any impact in terms of the pace of enrollment so far?

We would agree with that about the incidence of burns. We hear the same industry analysis and updates. For us, the other aspect is we were just getting going in the quarter. But yes, we did see that there were fewer burns. There is some seasonality to burns; some holiday weekends and things like that can be indications of it. One of the things we've seen is, unfortunately, a greater concentration of burns in pediatrics. So that's gone quicker than we anticipated. But I do think your assessment is correct that the burn incidence rate was lower in the first quarter, and we would expect it to be higher here in the second and summer months in the U.S.

Got it. And then last one for me before I jump back in the queue. Your BARDA revenue for the quarter came in just a little bit shy of our estimates. So given you guys are still expecting to see that $28 million for the full year, I was just wondering if you could provide some commentary around how you're thinking about the cadence of revenue for the rest of the year.

One of the key factors driving our revenue is enrollment in the trial, which plays a significant role in our billings. The ramp-up period during the first quarter was slightly slower than we had expected, but we are very pleased with our current position and momentum. We believe that revenue will be somewhat back-loaded to the second half of the year. Looking ahead to the next quarter, we anticipate a slight increase, though it may not reach the pro-rata amount for the remaining three quarters. We expect that more than half of our revenue will be generated in the second half of the year.

And the next question will come from RK, Ramakanth from H.C. Wainwright.

This is RK from HCW. Continuing on the clinical trials, the DFU training study has been completed, and you plan to finish the validation study in the second half of the year. What kind of data should we expect from these two studies? Also, will the data from these studies be sufficient for any filings, or do you plan to use this data for pivotal studies to file with the FDA?

I appreciate the questions, and it's good to talk. Regarding the training study, the work we've done so far has provided us with the data needed to prepare a submission for the U.K., and we're on track for that. We expect to synthesize the data and prepare the submission in about two to three months. We already have sufficient data to begin this process. For the U.S. submission, we believe we need to complete the validation study, which we aim to finish this year. This will allow us to prepare for the diabetic foot ulcer submission by the end of this year or early next year. Additionally, we are considering whether submitting for burns might be the better option first, given our extensive data of over ten years on that. Therefore, we are evaluating our submission strategy, but we will ensure we have all necessary data for both the burn and diabetic foot ulcer submissions, and we'll coordinate with the FDA on the timing.

Very good. And then I'm assuming from what you just said, the 76 patient study that is being conducted up in Ireland, that also kind of plugs into what you're just talking about the study that's going on in the U.S. Is that how we should think about it? And the other question is at a later point, once you get through the burn indication in the U.S., can you take some of this data and use it for U.S.? Or do you need to kind of do separate studies?

We can use the data from the U.K. for activities in the U.S. associated with reimbursement and procurement. So with payers and with buyers, the FDA does look for us to have U.S. data. And again, we think we have a robust set of the training data. We have more work to do on the validation side to meet what we think is the threshold here in the U.S. with U.S. specific data. The way to think about that work in the U.K. is it's a subset of the overall study but it does give us a concentrated group on which to think about, assess and maybe potentially do some publications.

Okay. Now that you have Jeremiah on board, so I'm sure he is kind of tasked with kind of watching the deployment in the U.K. And as you stated, the U.K. is kind of weird in terms of reimbursement because we only have one entity to work with. But what sort of learnings would Jeremiah be looking from that experience because once we come back to this side of the pond, things are quite different, both in terms of commercialization and also in terms of reimbursement?

Yes. So there are several aspects of it, a couple of which were in my prepared remarks. It's how clinicians and facilities are using the device. It's capturing the real-world data. It also is a start to commercial transactions. And so understanding the ebb and flow or puts and takes of entering into commercial transactions with facilities and caregivers. And that certainly is a good help for us. Anytime you can begin commercial, get through terms and conditions, get financial terms in place. All of those are very helpful input into our strategy here in the U.S. And we do look to leverage the continuing real-world data we receive in the U.K. for payers and for facilities as we have those conversations. We think that will be very useful, while also leveraging the trial here in the U.S. for the FDA discussions.

Okay. One last question from me. BARDA is a significant support for the company, which is excellent. I'm trying to understand how BARDA can assist you. Is it part of the plan regarding their involvement not only in the regulatory process but also in the commercial process? Specifically, in the regulatory process, are they involved in ensuring that you conduct your studies in a way that facilitates product approval?

BARDA is an excellent partner, and we truly appreciate our collaboration with them. Our interactions have instilled a strong discipline within our company when working with a federal agency, preparing us well for engagements with the FDA. BARDA is ensuring that we meet the standards they deem necessary for our clinical trials, drawing on their experiences with other companies involved with the FDA. They have a formalized relationship with us, which we value, especially the guidance they provide regarding our clinical trial work. For example, they emphasize the importance of including pediatric participation and the need for the device to be available in both burn centers and emergency departments. We believe these considerations not only support BARDA's mission but also enhance our chances of receiving FDA approval. Additionally, we see BARDA as a distribution channel since they not only provide funding but also encourage facilities and users to adopt the device. We anticipate that this next phase of the Project BioShield contract will cover a number of facilities, and we plan to collaborate with BARDA to expand our reach across emergency departments in the U.S.

And the next question will be from John Vandermosten from Zacks.

Great. Pete and Vince, I've been exploring how providers diagnose diabetic foot ulcers and burns, and how they prioritize cases. Do we understand the factors that the AI systems consider when making a diagnosis, and how that compares to what the system and the provider do? Have you identified any correlation between the two?

I don't know that I'd say there's been a correlation we've been able to tease out as we're still in our early days of working with the payers here in the U.S. Obviously, the care setting matters; just even the difference between a burn center and an emergency department is going to be important on reimbursement. Those are 2 different reimbursement schemes, if you will, or approaches. What we believe this tool device does is better informs existing diagnoses. So the process is still going to be the same, I think, for once you get into the caregiving. What we're doing, what this device will do is allow practitioners to be better informed in a couple of ways, just a more consistent, we think, and certainly, as you get away from experts into the emergency departments a better informed assessment of viability of the skin as well as some pretty specific measurements of where the viability, nonviability edge is. So how much of a burn, for instance, needs to be addressed through skin grafts or something else. And what's important there is the more precise you can be there the less impact you have to the patient; generally, these skin grafts are autologous, so the less impact you have to the patient somewhere else in their body at what is already a traumatic time.

Okay. And it's been my sense, AI, we're still in kind of the early days of approval for AI ML type products. In my sense has been that regulatory authorities and payers, they kind of want to know how it works and what it's looking at. I mean, do you have that same sense as well? Or are they just looking for kind of the end result looking at those high percentage of accurate assessments?

I think they very much want to understand what is going on. The thing that's important for people to understand about our device is, this is a closed-loop AI. It is not an iterative AI so it does not have some of the risks and concerns you have with a different approach to AI, such as some of these chatbots or things like that. Said a different way, our artificial intelligence tool is running an algorithm against a closed database, and it is making an instantaneous assessment considering millions and millions of data points within that database. And that's what the power of the algorithm is. So this is helping practitioners see what the human eye cannot see. But again, it's within a closed, I call it closed loop. I don't think that's the most technical term. But within a finite amount of data and there is not iterative learning where the device starts going different ways. There is iterative learning from adding additional data into the database, but it is still a closed environment. That being said, I do think, to your point, the regulators very much want to understand what is going on. And it's even where there's really an approval process needed per indication because they want to understand as we understand it now, they want to know what's going on with each data set in each indication.

I wanted to ask about how sales will proceed. As I understand it, there are BARDA sales and non-BARDA sales in the U.S. related to burn. Could you explain that? I would like to understand better. I assume there are certain hospitals you would target first, and then you could expand to other suitable locations for sales. Is that how it works, or do you have another approach in mind when it's approved and ready for deployment and sales?

You're generally correct, John. I would emphasize that this is a collaborative effort with them. The upcoming phase of the PBS contract includes revenue typically considered commercial sales due to the deployment of a device and annual licensing fees. We will collaborate with BARDA to determine which centers and emergency departments will receive the devices. They will have substantial input on the initial sites they will fund. The aim is to achieve significant penetration in the 5,000 emergency departments across the U.S. That's what BARDA expects from us. We will partner with them, even if it isn’t directly funded, to strategize priority locations and utilize their connections in those areas. We view our relationship with the emergency department network as a strong opportunity.

Would you prioritize selling all the additional units to the BARDA contract targets before addressing the other non-contract targets, or would you handle them simultaneously? There may be capacity constraints that could affect this decision. What are your thoughts on how this situation might unfold?

We don't anticipate any capacity issues in getting these devices distributed. We believe we can collaborate with our manufacturing partner to create the necessary devices for both the locations specified in the BARDA contract and additional ones. I expect the process will be fairly simultaneous; there may be a period where we focus solely on the BARDA deployment for a quarter or two, but in general, I see it as a parallel effort.

Okay. And last one for me is on the IT subsidiary. I think you alluded a little bit to this in the call that there wouldn't be any cash, I guess, exchanging hands. So will that entity, I guess, raise cash separately after it spun off, or will they allocate any cash to you maybe in terms of debt or something like that? I just was wondering how the cash flow might work between the 2 entities when it spins off.

We do not expect any cash flow between the two entities. It appears to be self-funding, demonstrated by $1 million funding from an affiliate of Erich, our major shareholder. As part of his role as CEO, he will also secure additional funding for the activities of that subsidiary, which will come from sources distinct from those we pursue for capital for our organization. Therefore, we do not foresee any cash flow moving between the two entities.

The next question is from Christopher Recouso from Partner Cap Group.

Peter and Vincent, I have a couple of brief questions. First, aside from the efforts you've made in the United States and the U.K., can you share any updates on your activities in other regions of the world? I know you've dedicated considerable time to the Middle East. How are those efforts progressing, and when might we see any potential results from them? Also, I understand you've provided guidance for the full year 2024. Can you share your thoughts on growth beyond that, or at least your aspirations for the company's revenue growth rates over the next few years?

Chris, it's great to have this discussion. I appreciate your questions. You've asked about a couple of topics. First, regarding our geographic focus, we are primarily concentrating on the U.S. and the U.K. However, we are also engaging with parties in the Gulf Council countries. While I wouldn't say we're dedicating a significant amount of time there, we have made connections and attended some conferences. We see potential to introduce some devices in that region, initiate testing, and explore market opportunities. The regulatory landscape in the Gulf Council countries often references U.K. approvals, like the CA mark we have, which simplifies some aspects of the process. Nonetheless, each country has its own regulatory environment, particularly in Saudi Arabia, where individual decision makers can influence device approval in the region. Our initial steps would be cautious, aimed at starting trials and gauging interest. We are also considering other markets, but our primary emphasis remains on the U.S. and the U.K. Another area where you'll hear us discuss pursuing approval is Mainland Europe with the CE mark. That process is lengthier compared to the U.K. process and requires additional steps country by country afterwards. Our goal is to keep our focus on the timelines we have set for the U.S. and the U.K. Secondly, I forgot the other part of your question; I didn’t write it down.

The other part of the question was I know that you...

I wouldn't consider the current situation as compounded growth rates because our revenue is expected to change. We have discussed an R&D revenue of $28 million for 2024. I want to remind you that the initial phase of the Project BioShield contract is valued at $55 million, running through the first quarter of 2026. You can estimate the 2025 revenues based on that. The $95 million will also span several years as we begin commercialization, particularly adding revenues in the U.K. alongside our activities under the BARDA Project BioShield contract. The revenue is quite chunky and driven by contracts, so it's not ideal to discuss growth rates, but we do expect some growth. There will be initial R&D revenue in the first quarter of 2026, followed by growing commercial revenue. Additionally, we anticipate new commercial revenue from the U.S. for burn care and DFU, as well as revenue from DFU in the U.K. There are multiple revenue streams, and it's really once we enter commercial transactions that we can start properly assessing growth rates.

See. And one more brief question, if I may. In terms of this spin-off announcement that you gentlemen made. Should I be conceptualizing this as almost like a holdco opco structure or somewhat of a area if you think about it from a schematic perspective, is it essentially like a sidebar subsidiary where MDAI holds either a significant minority or majority stake in it?

It would be a brother-sister type arrangement within an org chart. So no, it's not a holdco opco. Spectral AI is the holding company. Spectral MD is our U.S. operating company. There's a U.K. company in the U.S., and then there is a Spectral IP. So they're all that one tier down from the holding company.

And ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back over to Pete Carlson for any closing remarks.

Thank you, Chad, and thank you, everyone, for your participation and continued interest in Spectral AI. We're very pleased with the progress we continue to make and remain optimistic about our prospects for growth. We hope to speak with some of you at the upcoming events, including the Sidoti Microcap Virtual Conference on May 8 to 9 later this week, at our Annual Meeting of Shareholders next week on May 14, at the Northland Virtual Growth Conference in late June and various other investor conferences that we will announce throughout the year. Thank you, and have a good evening.

And thank you, sir. The conference has now concluded. Thank you for joining today's presentation. You may now disconnect.