Spectral AI, Inc. Q3 FY2024 Earnings Call

Thank you, Gary. Good afternoon, everyone, and thank you for joining us for Spectral AI's 2024 third quarter financial results conference call. Our speakers for today will be Dr. Michael DiMaio, Chairman of the Board; 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 during these discussions, the words estimates, projected, expects, anticipates, forecasts, plans, intends, will, should, future, propose, 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 sections of the company's filings with the SEC, including the registration statement and other documents filed by the company. These filings identify and address 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 Dr. Michael DiMaio, Spectral AI's Chairman of the Board of Directors. Dr. DiMaio, please go ahead.

Good afternoon to you and everyone. I cannot tell you how happy and excited I am to be here. I am here kind of chuckling while calling it Spectral AI. Some of you may know, some of you may not. I'm actually the founder of this company. We founded Spectral MD in 2009, and I represent the second largest shareholder in the company to this date. We're getting back to basics. Just like our recent election, we're kind of getting back. We've had a renewal and refresh of what's going on in the country, and there's a renewal and refresher going on in this company as well. It's come full circle. I founded the company. I was the CEO for over a decade, and I'm back now as the Chairman of the Board and helping the office of the Chair. We have an outstanding leadership team, one of whom is Vince Capone, who's here, who is General Counsel and CFO. So I want to remind everyone why I founded the company and why we are here today with a focus on what we're trying to achieve. We are and continue to develop a revolutionary device based on basic science research that was founded on animal studies showing the best wavelengths of light that could be utilized to capture the most information from damaged skin. We progressed, and we have an outstanding partner in BARDA, the Biomedical Advanced Research Development Authority, which is a branch of the United States federal government, a worthy sponsor for our company. We continue to embark arm in arm on developing a device and product that will be able to revolutionize and treat burns and all kinds of wounds based on AI technology. We have nine wavelengths of light, which are being trained by algorithms that are using data from burns in real clinical studies with hundreds of patients and literally thousands of images that will inform doctors about the ability of a wound to heal or not heal. With that information, clinicians like myself can utilize that information and thus be able to triage and treat patients thoughtfully. Now that I'm back, I've been regrouping the team, which is outstanding. We have a leadership team, including Vince Capone, Lewis Percoco, Jeremiah Sparks, and Stan Micek, who are going to lead us to take this device to commercialization. It's quite a challenge. As a heart and lung surgeon, I certainly welcome any challenges. I have no problem taking those challenges on head-on. So what I've done is resumed command of this module to try to focus things clearly. Just like going into surgery, I'd like to imagine, verbalize, and focus on what we're going to do. To that end, I've focused on the 3 Fs: finance, focus, and finish. By finance, I mean we have the best reliable source of revenue and support, which is BARDA, right, from the U.S. federal government. Another source is called MTEC, which is a division of the Defense Health Agency focusing on our Miniaturization device. The second F is focus. We're regrouping and focusing to be laser-focused on completing these projects. We're focused on delivering those items promised to BARDA and to the population at large. We're focusing on getting the clearance from the FDA for this technology and this device. The company has embraced this change and embraced this focus. The team is intact. Nobody has left. Everyone remains excited about the mission. The third F is finish, completing the project that BARDA has requested, finalizing the miniaturization device from MTEC for the military or the war fighters. Finishing the FDA submission to get clearance and moving forward in the U.S. market. Finishing what we started in the U.K. Currently, we have devices in the U.K. that received tremendous response from burn doctors. A recent meeting at the ISBI presented preliminary data showing that this changed and improved patient care. We will continue that excitement and push in the U.K. I might add, it's become so exciting there that partners in Australia are looking to acquire the devices as well. Very soon, we will have a workflow to send devices to Australia under a special access program, allowing doctors and burn specialists in Australia to use the devices too. With that introduction, I'm excited to be back, excited to focus on the 3 Fs, and get this company and device, which aligns with the dream I had in 2009, with the eventual goal of commercialization and completion of this project. With that, I'd like to turn things over to Vince Capone for a review of our third quarter performance.

Thank you, Dr. DiMaio, and thank you all for joining us today. We recently issued our press release this afternoon, which contains additional details about our operating results. We have also filed our 10-Q with the SEC this evening. With that in mind, I will focus my remarks on select highlights and key financial metrics. For the third quarter of 2024, we are pleased to report outstanding operating results reflecting our focus on advancing the development of our DeepView system for burn centers and the reduction of non-supported operational expenses. Research and development revenue for the third quarter rose by 138% to $8.2 million from $3.4 million in the third quarter of last year. This growth reflects an increased level of activity under the BARDA Project BioShield contract, awarded to us in September 2023. Gross margin improved to 44.9% from 42.8% in last year's third quarter, reflecting both increased product development activity and the higher reimbursement rate under the BARDA PBS contract, compared to that in our BARDA Burn II contract, which accounted for most of our operating revenue in 2023. General and administrative expenses during the third quarter of 2024 declined to $4.6 million, or 55% of revenue, down from $5.6 million, or 164% of revenue in last year's third quarter. This was driven primarily by an approximate $1 million reduction in non-revenue generating research and development activities associated with the company's strategic focus on the BARDA PBS contract for the near term. Other expenses for the third quarter of 2024 also declined to just under $800,000 compared to $6.5 million in the same period last year. The primary driver of this decline was $7.6 million of non-recurring transaction costs recorded in the third quarter of 2023, associated with the September 2023 consummation of our business combination and our listing on NASDAQ. There were no such expenses in this year's third quarter. Our net loss narrowed to $1.5 million, or $0.08 per share, from a net loss of $10.6 million, or $0.77 per share, in the third quarter of last year, reflecting our focus on operational efficiencies. Adjusted EBITDA loss for the quarter was approximately $700,000 compared to an adjusted EBITDA loss of $3.9 million in last year's third quarter. As of September 30, 2024, we had approximately 18.5 million shares outstanding. Moving over to the balance sheet, as of September 30, 2024, cash and cash equivalents totaled $3.7 million compared to $4.8 million at year-end last year. Cash at September 30, 2024, included $900,000 in the company's wholly owned subsidiary, Spectral IP. As of September 30, 2024, the company had approximately $6 million in notes payable. With respect to our cash position, we believe we are positioned to support ongoing operations through improved operating efficiencies as well as our ability to raise additional opportunistic funding. We recently filed our S3 shelf registration, which was effective by the SEC on October 31 to support these efforts. For 2024, we are reiterating our revenue guidance of approximately $28 million, an expected increase of about 55% from the $18.1 million reported in 2023. This growth reflects our work on the BARDA Project BioShield contract as well as additional government funding in the continued development of our handheld device, DeepView SnapShot M. With that, I want to thank you again, and I turn the conversation back over to Dr. DiMaio.

Thank you, Vince. Well done. I want to tell everyone on the call, again, I'm happy to be here and have full confidence we're going to complete the tasks before us. I'm also happy to report that although it's not the most important metric at this point, the share price has increased by 30% in the couple of weeks since I became Chairman of the Board, going from about $0.93 a share to about $1.5 per share, a good sign of stability and confidence in our company and that the leadership is working very well together. With that, I'll ask the operator to open the call up for questions from our analysts.

Our first question is from Ryan Zimmerman with BTIG. Please go ahead.

Good afternoon. Thanks for taking my questions. So congrats on the progress on the burn study. I guess I want to ask how you're preparing for the FDA submission. It sounds like you still need to collect a little more data, if I'm not mistaken, on some of those burn patients as they finish up. I could be incorrect on that. But maybe, Dr. DiMaio, you could just talk about the next 6 to 9 months or so before you get that submission into the FDA and what we should be looking for.

Thanks, Ryan. So as you may know, I was talking to the doctors who are doing the truthing as we speak. There has never been more time or devotion to a single BARDA study to develop a product. They have spent hundreds of millions of dollars with other companies. The enrollment for the burn center portion of the study has been completed. The images are being reviewed. For those who may not understand, 'truthing' means using burn biopsies and the condition of the burns at 21 days to determine which parts of the burn wound heal and which parts do not. That information is then fed back to train the algorithm, which is being developed as we speak so that it can produce results that doctors can use. Once we complete all that—the truthing, the algorithm development, and we compile the information—then we'll send the submission to the FDA. I will share with you, Ryan, and everyone else that we're in talks with the FDA regularly, not quite daily, but pretty frequently. We have several meetings set up in the next few weeks. So we will receive interactive feedback from the FDA about what else they might need from us before we send in our submission. In summary, we are collecting the images, data, refining the algorithm, and organizing the submission in a manner that's conducive to the FDA in the first half of next year.

Okay. Very helpful. And then maybe turning to the U.K. for a bit. Last quarter, you had about five systems in U.K. hospitals that you were gathering feedback on. Any incremental update on either more systems in the field or feedback you've received, particularly when you might see some commercial revenue from those initial placements?

Good question. Thanks, Ryan. There are several devices in the U.K. We're expanding slowly. We continue to iterate the device and obtain the necessary improvements based on real-time feedback from the doctors in the field. This feedback is incredibly valuable both to me as a doctor and to them as doctors. The answer is a resounding yes; the machine is working as intended. A recent abstract has been created and presented demonstrating the improvement and satisfaction that the doctors have seen in the U.K. with the device. That said, we don't necessarily expect immediate revenue from this point because the value proposition is still being formed. Our ultimate goal is to obtain the NICE designation, a metric determined by the National Health Service (NHS) in the U.K. that assesses whether a device or a drug provides significant value to the U.K. population. Therefore, our primary goal is to perfect the device within the workflow, gather good feedback, and use that in further studies. As I mentioned earlier, the doctors in Australia have expressed interest in our device based on what's happening in the U.K., and we're rolling out devices there. This clinical use situation will greatly aid our FDA application in the U.S. burn community.

And just to follow up, Dr. DiMaio, regarding the Australian doctors expressing interest—are there any regulatory hurdles we need to consider, or any timelines for when you could be in Australia with DeepView?

I have some early feedback. I don’t want to jump the gun, as Vince likes to say, by stating exact timelines now. Within the next few months, we will have devices prepared and rolled out to Australia. In the next quarterly call, we should have more information on that. We're currently in memorandums of understanding with this special access pathway, and we're working through that. So to your question about hurdles, yes, they exist, but we're addressing those, and we anticipate success.

Okay. Thank you for taking my questions.

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

Thanks for the question, and congratulations on your progress. My questions regarding regulatory and U.K. commercialization were answered. But looking out a little bit, what do you expect regarding commercial readiness in the United States in terms of training and a dedicated sales force? I know that is a bit further out, but I am curious how you view that at this time.

Thank you for the question. If I understood correctly, the BARDA contract actually includes clauses that will help us begin to establish the sales force for the device. Additionally, the BARDA contract outlines plans to deliver approximately 200 devices via government pathways into burn centers across the United States. Simultaneously, we will conduct clinical applicability or workflow studies to identify and demonstrate the value proposition of the device in terms of metrics such as quicker operating room times, reduced lengths of stay, and improved efficiency in skin transplants. Once the devices are out there, we anticipate that hospitals and doctors will recognize the value, leading to increased sales. Our priority is to get the devices to the doctors first and then conduct clinical trials that will demonstrate the benefits to patients and doctors in hospitals.

The next question is from RK Ramakanth with H.C. Wainwright. Please go ahead.

Thank you. Thanks for taking the questions. With the 5 or 6 units you have in the U.K., are you able to collect enough data as you were discussing regarding workflow improvement and projected value? This is essential before you receive any NICE designation that you need for commercialization. Are these 5 units sufficient, or do we need more in the hands of U.K. doctors? Any commentary there?

Thank you for the question. I'm not going to provide an exact answer regarding how many units or images are needed to get the NICE approval. Let me be clear; I don't know right now. However, it's important to mention that the initial feedback from the units in the U.K. has been overwhelmingly positive. I'm not saying this to overstate things; the doctors have found it tremendously useful in their care processes. As you may know, there really isn't a device that comes close to what the DeepView device can offer in terms of predictive value for healing. The reason for its development over the years is to provide clinicians with an effective tool. To your point about the number of images or patients needed, I will find the answer, and we will have that for you.

Okay. Thank you for that. Also, would any of the data be publicly presented at some conference or similar event, so we can see how satisfied the physicians are with the patient care improvements?

RK, thank you. You're speaking my language. We've written many articles and have a publication plan in place that we will implement to fast track several articles, including those discussing the data I've mentioned. In the medical community, publications and presentations are vital, while on Wall Street, it's all about stock prices. Yes, we have data we're compiling now. In the U.S., we've also interviewed emergency room doctors, burn doctors, and trauma doctors to gauge their accuracy in assessing wounds. This has yielded very intriguing information, but I can't reveal it now as we plan to publish it. Expect many papers in the coming months that will showcase its usefulness, applicability, and the continued necessity for devices and technologies addressing the challenges in the burn community. Many thousands of patients enter emergency rooms each year, and expertise in burns is lacking across healthcare settings. A device that aids in accurate triage would be profoundly beneficial.

And the last question for me is about DFU wounds. I understand your current focus is squarely on burns, but is there any commentary on your approach regarding studies and data for that indication?

Yes, thanks, RK. My focus is on the 3 Fs, the second of which is focus. As of now, based on everything I've seen since returning, our priority will be on burns and BARDA because that is a significant funding source. We have a commitment to receive almost $0.25 billion from that funding, and we need to deliver that product. Therefore, DFU is temporarily in a holding pattern. We will lift it from this holding pattern once I'm confident, and the leadership team agrees that we are streamlined and ready to deliver the BARDA product to the FDA. So, in summary, yes, we will consider other indications, but how we do that—whether we focus on DFUs or a more broadly applicable indication to address burn and wound viability—may be a more reasonable approach to reaching a wider market.

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

Thank you. Hello, Dr. DiMaio and Vince. How are you guys doing?

Great.

Since the last quarterly update, you've announced another award from MTEC for the portable version of DeepView. Was that award part of the reason third quarter revenues were higher than the trend line for the year? Secondly, what major milestones do you expect for the snapshot device as we move towards getting in front of the FDA?

The question is on revenue; you want to go?

John, we've focused our efforts on the BARDA PBS contract, pivoting some resources to that contract. We're dedicated to delivering that product to the FDA submission in the first half of 2025, which has contributed to higher margins and revenue.

Regarding the MTEC, the miniaturization project, we will soon receive feedback from BAMC, the Brooke Army Medical Center, on the preliminary design of the miniaturization device. We’re iterating that based on their feedback. We're still in the development phase to ensure it meets the specifications set by the military for their war fighters.

Great. And on the revenue guidance for the year, I thought it was around $28 million for government contracts. Is that still the number we should be thinking about?

Yes, I believe $28 million is a reasonable and conservative estimate for us. We're 10 months into the year, and we hope to exceed that number.

Okay, great. Thanks for taking my question.

The next question is a follow-up from Ryan Zimmerman with BTIG. Please go ahead.

Just one quick question, I'll wrap up. I think we're slated to see top-line data from the burn study, which I believe is around December of this year. Is that still accurate, Dr. DiMaio? And could you remind us about what we're looking for regarding top-line data, outcomes, and what you consider successful?

Great question. Yes, we expect to have some top-line data out in December. I will be cautious with this, not because I'm apprehensive but to ensure we're aligned with the FDA's criteria. We're working iteratively with them right now. The metrics we are looking at include the Dice coefficient, sensitivity, specificity, accuracy, and various combinations of these metrics. We will also compare our results to what's called CJA, which is a clinical judgment annotation—essentially the doctors' analyses of what they believe about which parts of the burn will heal or not. We will compare this information to historical controls and literature data, and exact details are still evolving in discussions with the FDA. In summary, this will involve data on sensitivity, specificity, the Dice coefficient as a measure of true positives and false positives in identifying healing and non-healing pixels accurately. We want to ensure our findings align with what the FDA requires for our submission and clearance.

Very helpful. Thank you.

Again, I'd like to thank everyone on the call. I appreciate everyone on our team, our business partners, and investors. Their ongoing support is crucial for us to deliver on our commitment to develop and commercialize our DeepView system, which we believe will significantly improve patient outcomes. I'm glad to be back, and we will continue to focus on the 3 Fs: finance, focus, and finish all of this. Thank you all for your attendance and interest in our company, and I wish you all a good evening.

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