Spectral AI, Inc. (NASDAQ:MDAI) Q1 2024 Earnings Call Transcript

Spectral AI, Inc. (NASDAQ:MDAI) Q1 2024 Earnings Call Transcript May 11, 2024

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Operator: Good day, and welcome to the Spectral AI First Quarter 2024 Financial Results Conference Call. [Operator Instructions] 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.

Devin Sullivan : 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 estimate, 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.

Peter Carlson: 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.

A doctor in a medical lab using the latest diagnostic equipment to test a patient’s sample.

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?

Vincent Capone: 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-owned 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 a 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.

Peter Carlson : 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 in the horizon drive our success. Chad, let’s open the call for questions.

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Q&A Session

Operator: [Operator Instructions] And the first question will be from Ryan Zimmerman from BTIG.

Unidentified Analyst : Hi, 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?

Peter Carlson: 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 as 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 the improving quality of care. They find the device easy to use and easy to use it is usable by all people in the clinics. So nurse practitioners, nurses are able to do — 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 on assessing a burn. So the facilities enjoy the consistency and the quality of the assessment that happens by using the device.

Unidentified Analyst : 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 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 in enrollment so far?

Peter Carlson: We would agree with that about the incidence of burn. 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 we’re — 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.

Unidentified Analyst : Got it. And then last one for me before I jump back in 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. Thanks for taking the question.

Peter Carlson: Thanks Izzy again. One of the drivers of the revenue is enrollment in the trial. That is a specific trigger for the billings and so the ramp-up period in the first quarter was, as I said, just a touch slower than what we had anticipated, but we’re very pleased with where we are to date and the current momentum. That being said, we do think the revenue would be a little bit back-ended to the second half of the year. So as you think about the next quarter, I think we would see a slight — somewhat of an increase, but that may not get up to that pro rata amount for the remaining three quarters. And we think the second half would — so maybe there’s more than half of the revenue is in the second half of the year.

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

Ramakanth Swayampakula : Thank you. And this is RK from HCW. Good afternoon, Pete. So continuing on some of the thoughts on the clinical trials, so the DFU training study that got completed. And also, you plan to get the validation study completed in the second half. So what — 2 things. One is what sort of data should we expect from these 2 studies? And two, the data that comes out of these 2 studies, is that enough for any filings? Or you take this data and try to — try to plan for the pivotal studies so that you can use that to file with the FDA.

Peter Carlson: Okay. I appreciate the questions. It’s good to talk. A couple of different things here. The training study — well, the work we’ve done to date, kind of combined, the information we’ve done to date, we think prepared, provides us the data needed to prepare a submission for the U.K. So we’re on track for that. It’s probably a couple of months, 2, 3 months away as we synthesize that data and prepare the submission. But we do have enough data in hand to begin our preparation of that submission in the U.K. It is completion of the validation study that would be the information we believe we will need for a U.S. submission. So again, that’s something we look to complete this year and thus would be in a position to begin preparing that submission end of this year, early next year from — for the diabetic foot ulcer.

What I will say is, as we think about burn and diabetic foot ulcer, we very well may end up in a spot where we think burn is the better first submission to the FDA. We’re going for a de novo application here. And we have 10-plus years of data on burn. And so that’s our strong point to leverage the first Triple Crown race here in the U.S. You ride your good horse in. And so I think we’re considering the order, but separately, the data would be there and the information needed for also the diabetic foot ulcer submission and then we’ll work with the FDA on kind of timing of all of this.