Spectral AI, Inc. Q2 FY2024 Earnings Call

Good day, and welcome to the Spectral AI Inc. Second Quarter 2024 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Devin Sullivan of the Equity Group. Please go ahead. Thank you, Nick. Good afternoon, everyone. Thank you for joining us for Spectral AI's 2024 second quarter financial results conference call. Our speakers for today will be Peter Carlson, Chief Executive Officer; 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 provision of the United States Private Securities Litigation Reform Act of 1995 and including statements regarding the Company's strategy, plans, objectives, initiatives and financial outlook. When used during these discussions, the words estimates, projected, expects, anticipates, forecasts, plans, intends, believes, seek, may, will, should and variations of these 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 that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. As such, investors are cautioned not to place undue reliance on any forward-looking statements. Investors should carefully consider the foregoing factors and the 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 would now like to turn the call over to Peter 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 second quarter financial results conference call. We had strong revenues in the second quarter, and I'm pleased to say we are making significant progress in advancing our proprietary AI-driven DeepView System wound assessment platform technology. Our focus as a company is to achieve product commercialization for a technology that we believe will improve outcomes while providing tangible economic and operational benefits across the healthcare system. We expect more than 10 years creating the DeepView platform, which we believe is the only AI-driven predictive medical diagnostic tool that supports the delivery of a fast, accurate and informed wound assessment. The development of DeepView reflects more than $250 million of non-dilutive government awards, multiple successful clinical trials that validate the accuracy and utility of our technology and a commitment from a dedicated group of executives, engineers, clinicians and partner institutions. The evolution of our business from an exclusively clinical development stage company to one focused on development along with product commercialization will manifest with first commercial sales of our DeepView technology for the burn indication in the United Kingdom later this year. Although the initial impact of these commercial revenues will be modest, the validation provided by this landmark achievement should prove to be significant with respect to our plan submission to the FDA in 2025 and the long-term commercial success of the DeepView System as a platform technology. I'll spend some time discussing our recent achievements and highlighting the catalysts we expect over the next several quarters. In addition to preparing for the commercial availability of DeepView for burn in the United Kingdom, we are taking important steps to establish a commercial presence in the United States and over the longer term, in other geographies. We deployed a total of five DeepView AI burn devices at facilities across the U.K. following the February 2024 receipt of UKCA authorization. These initial deployments increased clinical familiarity with the device, provided real-world data that enhances the AI algorithm, and allowed us to partner with these institutions as we gain a better understanding of how to commercialize, train and deploy future units. I'm pleased to announce that we have exceeded 85% enrollment of our desired total subject count at burn centers for our U.S. burn pivotal study and expect to complete enrollment for this portion of the study shortly. As a reminder, it was just last month that we achieved 100% pediatric enrollment at burn centers. This burn pivotal study is one of the largest burn studies ever conducted in the United States. It is designed to validate the AI-driven algorithm used by DeepView and will be the final clinical trial before we seek FDA approval in 2025. We've expanded the total number of U.S. clinical sites to 16 comprised of both burn centers and emergency departments or EDs. Enrollment in EDs will continue into 2025 as some of those sites are just now beginning to enroll, and generally, conducting trials in EDs has longer enrollment periods than centers focused on a particular single practice. Why two different sites for the pivotal study? That reflects the structural limitations of wound care for burns in the United States and how we believe that DeepView can address this care gap. In a nation of more than 330 million people, there are approximately 125 burn centers across the U.S. and less than 250 burn surgeons. Conversely, while the number of emergency department facilities exceeds 5,000, they are generally limited in having burn care specialists on staff. To that end, the efficiencies that can be introduced to the workflow of the EDs by DeepView would yield significant operational and economic benefits, allowing the most severely injured patients to be more accurately triaged and quickly treated. At burn centers, we believe that the predictive assessment offered by the DeepView technology can accelerate time to surgery for patients who require such treatment while avoiding unnecessary surgeries for those patients who are likely to heal on their own. At emergency departments, where we estimate that most burn wounds are initially assessed, DeepView can avoid unnecessary transfers to burn centers or trauma units while adding confidence in deciding when a specialist should see a patient. In both scenarios, DeepView also provides uniform imaging documentation and standardized total body surface area, or TBSA measurements. Reflecting the enrollment momentum in burn centers, we expect to submit the request for a de novo classification for use of DeepView AI burn in burn centers in the first half of 2025. We believe this will result in commercialization in the U.S. early in 2026. After receipt of the de novo classification for use in burn centers, we plan to immediately submit the request for 510(k) approval for use in emergency departments, where we will have completed the remaining clinical trial work. We anticipate that the sequence of commercialization would begin with deploying the DeepView technology into those U.S. burn centers to promote expert adoption of the technology followed by the deployment into emergency departments where we would leverage this primary point of entry into the U.S. healthcare system. Beyond the U.K. and the U.S., we have an opportunity to establish a presence for DeepView in multiple geographies, such as in Australia through our recent memorandum of understanding with PolyNovo Limited, one of the world's most respected providers of burn treatment solutions and an established market leader. Under the MOU, PolyNovo will support our application to the Australian Special Access Scheme or SAS with a goal of allowing Spectral AI to deploy two devices to lay the groundwork for an eventual commercial rollout based on clinical evaluations and experiences. A significant benefit of our years of developing both the image capture technology and the AI algorithm is how DeepView can be applied to potential indications that extend beyond our current focus. To that end, we are making great progress in the development of DeepView Snapshot M, a handheld version of our cart-based DeepView technology that is intended for burn wound assessment in a combat and military setting. Earlier this year, we inked a new contract valued at over $500,000 that brings the total for just the DeepView Snapshot M to more than $6 million. DeepView Snapshot M is designed to be an integral part of the battlefield triage process by providing a quick and accurate wound care assessment, so that soldiers with more severe burn injuries can be prioritized for evacuation. We believe that the potential applications of DeepView Snapshot M expand well beyond military use to serve our first responders and other health care providers with that more mobile unit. We are presenting an abstract titled 'Advancing Combat Burn Assessment of DeepView's Handheld Device for Military Field Use' at the upcoming 2024 Military Health System Research Symposium. This event is the Department of Defense's foremost scientific meeting, and we look forward to sharing our progress with the attendees. Now, let's talk a bit about timing of revenue from our U.S. government contracts, which is helpful in assessing our future cash flows. Through the first six months of 2024, we have received approximately $12 million in cash payments from BARDA, primarily from the base phase of the Project BioShield contract awarded in September 2023. This base phase of nearly $55 million 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 phases, which we expect to commence no later than the first half of 2026, are estimated to be $95 million for feature enhancements, procurement, and deployment of devices to burn centers and select emergency departments across the U.S. Specific timing of amounts under these remaining phases are to be discussed with BARDA. In summary, to date, BARDA has awarded contracts to Spectral totaling almost $250 million, and since 2013 has paid over $113 million to the Company under these contracts. Total U.S. government contracts awarded to Spectral since 2013, which include Semtech and other government agencies, approximate $258 million. A couple more items to discuss before turning things over to Vince. We were very happy to announce that our stock was added to the Russell Microcap Index effective July 1. We continue to strengthen our intellectual property moat and increased our granted patents from 20 to 26, and we also have an additional 38 pending patent applications worldwide. Finally, regarding our newly formed healthcare IP-focused subsidiary Spectral IP, we continue to identify potential intellectual property for acquisition and to assess alternatives to leverage those assets. As a reminder, the activities associated with this subsidiary require limited management resources and no additional capital from the Company. Additionally, no core operating assets of the Company will be involved in this subsidiary. I'll now turn the conversation over to Vince.

Thanks, Pete, and thank you all for joining us today. We issued our press release this afternoon, which contains additional details of our operating results, and we filed our 10-Q with the SEC this afternoon as well. With that in mind, I will focus my remarks on select financial highlights and key metrics. We are pleased to report that R&D revenue in the second quarter rose 76% to $7.5 million from $4.3 million in the second quarter of last year. This growth reflects an increased level of activity on the BARDA Project BioShield contract, as previously noted, which was awarded to the Company in September of 2023. Gross margin also rose to 44.3% from 42.1% in the second 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, which accounted for most of our operating revenue throughout 2023. General and administrative expenses during the second quarter of 2024 rose to $5.8 million as compared to $4.8 million, reflecting higher headcount during the comparable periods. With that said, general and administrative expense as a percentage of revenue in the second quarter of 2024 decreased to 77% from 112% in last year's second quarter. Non-revenue-generating research and development activities decreased by approximately $100,000 for the three months ended June 30, 2024, as compared to the comparable period in 2023. This decrease was offset by an increase of approximately $1.1 million related to other administrative expenses for the three months ended June 30, 2024, as compared to the same period in 2023. Other expenses for the second quarter of 2024 were up approximately $314,000 from the second quarter of 2023, primarily reflecting our new borrowing related costs of $699,000 as compared to no costs in the second quarter of last year. This was due to debt issuance costs and payments from the convertible notes issued with the standby equity agreement announced in March that were expensed during the quarter. Lastly, we're pleased to announce we trimmed our net loss for the quarter to $2.9 million, or $0.16 per share as compared to a net loss of $3.1 million in the second quarter of last year, or $0.23 per share. As of June 30, 2024, we had 17 million, 606,367 shares outstanding. Moving now to the balance sheet. As of June 30, 2024, cash and cash equivalents totaled $6.9 million, up from $4.8 million on December 31, 2023. Cash at June 30, 2024, included $900,000 in the Company's newly formed wholly-owned subsidiary, Spectral IP. As discussed on our last call, we enhanced our access to capital by completing a common stock purchase agreement with an investment bank and entering into a standby equity purchase agreement with a long-only investor. The standby equity purchase agreement has a total capacity of $30 million, which included $12.5 million of prepaid advances. As of June 30, 2024, the Company received a net $9.2 million in these prepaid advances. The final advance of $2.5 million was received by the Company on July 15, 2024. As a reminder, any additional draws above the total prepaid advances of $12.5 million are at the sole discretion of the Company. For 2024, we are reiterating our revenue guidance of approximately $28 million, an expected increase of about 55% from the $18.1 million we reported in 2023. This growth reflects our work on the BARDA Project BioShield contract as well as the government lending in the continued development of our handheld device, DeepView Snapshot M. Our guidance does not reflect contributions from any sales of the DeepView system for the burn indication in the U.K. that are expected to begin later this year or any other contributions that may result from the commercialization of our DeepView system. With that, I thank you, and we'll turn the conversation back over to Pete.

Thank you, Vince. We are pleased with our progress through the first half of the year and are very optimistic about our future. Nick, let's open the call for questions. Thank you.

Thank you. We will now begin the question-and-answer session. The first question comes from Ryan Zimmerman with BTIG. Please go ahead.

Congrats on your progress. Maybe just to start, I have a couple of questions, guys. First, related to guidance. So, I think last time, Vince, you guys suggested that maybe the second half would see a little bit more revenue from BARDA relative to the first half. I just want to confirm if that's still your expectation as we move into the second half just based on the timing and the development milestones for the $28 million guidance?

Yes, Ryan, nice to talk to you. Yes, we continue to see the second half ramping up in our BARDA revenue really as the clinical trials continue to grow. I think as we sit here, with $13.8 million in the first half of revenue for 2024, we feel confident that $28 million is something we can reiterate to the market, and we're excited to continue with our clinical trial development in the second half of this year.

Okay. Very helpful. And then, Pete, as you think about—the commercial presence in the U.S.—as you think about going after that burn market, you talked about building that commercial presence. What does that look like to you at this stage, either from a cost standpoint or a size standpoint or any kind of early thoughts around targeting that burn market?

Ryan, good to talk. As you look at particularly the burn centers, we have a partner in our distribution to the burn centers in BARDA. We do not need to build a large commercial operation to service that market, or frankly, even the emergency department market. We need some resources, but this is a deployment of a device that's sort of a one-time transaction. And really where we'll have the volume of people will still only be moderate in field service as we get the devices out into the emergency department. So, we do not see the need to build a large commercial operation with a significant sales force.

Okay. Very helpful. And then just let me sneak one more in. The wound trial in the U.S., you guys reached 475 patients, it looks like. What is the current determination for what to do with that data, clearly prioritizing burns over wounds right now? Just help us understand what the timeline will be for diabetic foot ulcers potentially in the U.S. based on completing those 475 patients?

Yes. What we talked about assessing the insights of the study, we'll get the final readout internally here probably early fourth quarter as the last patients go through the full trial. And while we focus on the burn indication and application to the FDA, we do want to look at how the data set relates to our best approach going forward from a reimbursement standpoint. Is it a particular indication like diabetic foot ulcers? Is it a broader indication of wounds, wound bed preparedness, etc.? We believe we have a significant asset in this data set we are finalizing with this trial and that assessment we're going to look to do is to determine what's the best strategic path forward given the results of that trial and where the market stands today. When you look at it broadly, we see the vast majority of the economics coming from the burn indication that would mean not only the burn centers but meaningful penetration into the emergency department. So relative to our longer-term plans for that second indication, it's not a very significant change in timing as you look out three to five years.

The next question comes from Carl Byrnes with Northland Capital Markets. Please go ahead.

Congratulations on the progress as well. Most of my questions have been answered here. But maybe you can drill a little bit further on the U.K. I know you cited you had five deployments. What might you be looking for by the end of the year in terms of deployments in the U.K.? And I know that that's not included in the $28 million guidance in terms of contribution.

Thanks, Carl, good to talk. From a deployment standpoint there, one more deployment is possible here as the year goes on. What's going to be important is that we're going to convert those to some of these deployments in commercial revenues. We are not yet ready to further the impact of the rollout. But we also have a pretty neat opportunity coming up next week. The International Society of Burn is having an annual conference, and there will be attendees from across the burn wound care environment in the U.K., as well as a significant number of U.S. burn surgeons and healthcare providers in attendance. We'll have a significant presence there ourselves, including on stage, and are excited to share output from the device with these burn care participants. It's really going to be one of their first opportunities to see that output. I mention that because that will help inform our next steps in the U.K. as we visit with each of the sites we're already working with and get indications of interest from others.

Got it. Great. That's helpful. And then just a follow-up here. Are there any other partnerships or alliances in the works similar to PolyNovo in Australia that we might see in the next 6 to 12 months?

That's a very open-ended question. The answer would be yes, but that's about all we'll be able to say. Yes, we are talking with others, both domestically and elsewhere, and certainly hope to continue to have partnerships like that announced, both in new geographies as well as significant partners in current geographies. No, I don't want to make any commitment one way or the other, though.

Next question comes from RK Ramakanth with HC Wainwright. Please go ahead.

A couple of quick questions here. Regarding the U.K. deployment, just trying to understand how it is helping you in terms of designing your U.S. commercialization? Also, is it possible for some of the folks in the U.K. to publish any of the data that can be used for reimbursement here in the U.S.?

Okay. Thanks for the question. I'll give you my thoughts, and then I'll ask Jeremiah to share his thoughts, particularly leveraging his experience. We're excited about this early opportunity to work with clinicians. We're already receiving very positive and constructive feedback. So it's informing not only device performance but also our commercial rollout strategy, how we staff and support rollout, what types of skill sets we need, etc. Let me let Jeremiah give you his additional thoughts.

Thank you, Pete. So I would just echo what Pete said, the ability for us to start and do these evaluations in the U.K. is giving us very good feedback, constructive feedback, and helping us understand the device better and how we would start the commercialization process in the U.S. Specifically to your question about publications, that's definitely something that we're looking to work with these clinicians on as they move beyond the evaluation phase and publish their results so that we can get that information out to payers in the U.S., etc., which will help us with the reimbursement.

And then in terms of label expectations in the U.S., I'm just trying to understand the pediatric patients in the study—one, how—in terms of label expansion and also market expansion. How much of a market expansion do you get by including pediatrics into the label?

Thanks, RK. When you look at pediatrics in the burn environment, generally about 25% of admissions for burn situations are pediatrics, and it can even go higher than that at times. It has always been a focus of BARDA working with us to make sure we include pediatrics in our studies. One of the technologies that exists today is called Laser Doppler Imaging. That technology takes several minutes to capture its image and thus requires sedation often of the pediatric patients. You can imagine a young child with a burn in pain having to sit still. This is where the benefit of our less than one second image capture comes in, in a place where we see the opportunity to really be useful in burns. I don't know that it expands the market opportunity; I think it enhances the willingness and acceptance in the market. So, I would tell you the numbers we generally have talked about have included the expectation of the pediatric portion of the burn community. But similar to the measurement capabilities of the tool, we think the ease of use with a pediatric patient are things that will help increase interest in the market, thus help our deployment and our penetration opportunity, both in quantity and in speed.

One last question for me. This is regarding the Australian market. How long do you think it will take all in all to start commercializing your product? And also, I think you started talking about trying to place in a couple of centers initially in Australia. So, is that part of initiating the commercialization process? Or is that part of the application process such as Australia would give you that okay just to start?

Vince, do you want to take that, and we can—Jeremiah has something to add. We'll let him do that.

Yes, RK, good to hear from you. I think with respect to the work we're doing in conjunction with PolyNovo, their help to get us into the special access program is good for us to have a potential rollout there of at least two machines. That's probably a good 12 months away, I would say, as we have to work through not just the special access program but also get through each hospital's ethics committees to ensure that everybody is on board with introducing our device there. So, we see it as really a partnership, the initial starting of a partnership with them, more so and data gathering more so than the commercial opportunity that it may present subsequent to a 12-month period beyond that into 2026, 2027.

The next question comes from John Vandermosten with Zacks. Please go ahead.

I want to explore some of the opportunities and challenges for the Handheld Snapshot M. First of all, what are some of the challenges with developing that and getting that approved? By the time that's ready, you'll already have DeepView approved and deployed. So, what are the incremental challenges for the mobile version of the product to get approval?

John, it's Pete. Good to talk. Certainly, the miniaturization is the challenge. The current image capture device associated with the cart-based version is, I would refer to it as sort of the size of a large household iron. The images are captured with four separate cameras. Getting those four cameras into something that is affordable, sturdy, portable, and easy to manipulate in difficult environments is a challenge. It has been amazing to see the team and hear about the various ways and vendors they've worked with to get the cameras into smaller and smaller configurations. Maintaining the image capture quality while doing it in ultimately cameras that aren't much bigger, if not smaller than a push pin is the challenge. And again, these are four high-quality, high-resolution cameras capturing images, and then there is the ability to have both the dataset either in the device or accessible sort of by satellite technology. Those are the couple of engineering aspects of the device miniaturization. Yes, certainly, once we get one of these indications and uses through the regulatory approval process, we believe the subsequent 510(k) submissions with the predicates will have a shorter timeframe as it will be a more narrow aspect being assessed. What we want to demonstrate with the miniature or handheld version is that the image capture and that it is consistent, demonstrating that the ability of the AI to make their predictive wound assessment has similar performance statistics.

Okay. You mentioned the regulatory side of things there a little bit. What does that regulatory pathway look like for that machine? Will you be required to do a 200-patient trial? Or are you just making sure that what worked on the large scale works on a handheld scale as well in terms of just getting the regulatory nod from the regulators?

I think there's two folds to that: one is the regulatory path and one is the commercial acceptance path. We are very pleased and proud to be working with these agencies supporting the DoD in developing a device that can help the military. We think this is an outstanding use of the technology. But we also believe we have a really neat opportunity on behalf of our shareholders to take that technology and commercialize it in the field in multiple ways, particularly when you get into other indications that you might do in normal practice, like diabetic foot ulcers or other more chronic wound care that is done in private offices, enabling them to have access to a more affordable, smaller device with the capabilities of this technology, we believe is going to be very powerful. So, yes, we will need to conduct a trial. We don't think it has to be significantly large, but enough to demonstrate that the technology is working in a manner similar to the cart-based technology. We haven't, at this point, tried to size that, but I certainly don't believe it would be a 450-patient study like the current trial.

And last question is on the size of the market and areas of potential usage. You mentioned that ambulances might be a good place for these handheld items. What are some of the other areas that might be appropriate for this? And how is that market size compared to the ED and burn center market size? Is it equal? Is it just a fraction of it? Or maybe is it larger? Any sense of that?

A couple of points here. Part of it is how many—could we get into a situation where there might be multiple units at one site? A large hospital complex would want to have several of these smaller devices in various practice areas as well as a cart-based device in high-volume places like the emergency department or the burn center. The other opportunity opens up is in private practices. We have talked in some of our material about the chronic wound market, including diabetic foot ulcers, with 1,100 wound care clinics currently handling these situations, but also over 4,000 private practices as far as market opportunities. If it was cost-effective, it would indeed be very helpful for ambulances as well. Considering ambulances and areas where you have Level 1 trauma centers, that could justify this being carried on something like an ambulance so they could take someone directly to a burn center if there were no other factors involved. Let me let Jeremiah add his thoughts.

No, I think Pete said it very well. And when we assess this, we're looking at both the indication and the types of wound types we're looking at, also the side of service. There's the inpatient, the outpatient, and potentially even physician offices. When you look at those indications and potentially even ambulances, there really could be widespread adoption, but it really starts with what the right indication is and then how we get that into the clinician's hands. When you couple that with reimbursement, that will drive the overall market.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Carlson for any closing remarks.

We certainly appreciate everybody's participation and your continued interest in Spectral AI. I do want to let you know there are a number of upcoming events, including the H.C. Wainwright Conference in New York City September 9 through 11, where we will be available for meetings. As always, we're also available for shareholders to interact with outside of the normal meeting opportunities. With that, I'll say thank you, and have a good evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.