Spectral AI, Inc. (NASDAQ: MDAI) Fourth Quarter 2023 Earnings Call Transcript, March 27, 2024
Spectral AI, Inc. ne is among the top 30 most popular stocks among the hedging budget at the end of the third quarter (see main points here).
Trader: Hello and welcome to Spectral AI’s fourth quarter and full year 2023 financial results conference call. [Operator’s Instructions]. Now I’d like to turn the floor over to Devin Sullivan, CEO of The Equity Group. Please come in.
Devin Sullivan: Thank you, Gary, and good afternoon, everybody. Thank you for joining us at Spectral AI’s Q4 and FY 2023 Currency Bills. Today’s speakers will be Pete Carlson, President and CEO; and Vince Capone, the company’s chief financial officer. Before we begin, I would 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 U. S. Private Securities Litigation Reform Act. UU. de 1995, adding statements relating to the company’s monetary strategy, plans, objectives, initiatives, and prospects. When such discussions are used, the words estimate, project, expect, anticipate, forecast, plan, intend, believe, seek, possibly, should, in the future, propose and diversify such words or similar expressions, or negative versions of such words or words are intended to identify forward-looking statements.
These forward-looking statements are not promises of long-term performance, situations or effects and involve a number of known and unknown dangers, uncertainties, assumptions and other vital points, many of which are beyond the Company’s control, that may cause actual effects or material differences from those discussed in the forward-looking statements. As such, investors are cautioned not to place undue reliance on forward-looking statements. Investors deserve to be thoroughly aware of the foregoing and the other dangers and uncertainties described in the Risk Factors. segment of the Company’s filings with the SEC, adding registration statements and other documents filed through the Company. These documents identify and address other vital dangers and uncertainties that may cause actual occasions and effects to differ materially from those contained in the future. gaze statements.
With that said, I’d now like to turn the floor over to Pete Carlson, President and CEO of Spectral AI. Pete, please come in.
Peter Carlson: Thank you, Devin, and good afternoon, everybody. Thank you for joining us today for our earnings call. For some of you, this might be the first time you’ve heard of me as the company’s CEO and I’d like to take a moment to give you some background. . I joined Spectral AI this year as CFO in early January and was named CEO on February 29. Most recently, I served as CFO of MiMedx Group, a company dedicated to managing the treatment of chronic, hard-to-heal wounds, adding the help of the MiMedx Group. Foot ulcers. One of the key attributes that attracted me to Spectral AI, especially considering my reporting on the wound care aspect of MiMedx, is my confidence that the accurate and rapid assessment of wound care provided through our DeepView formula can provide more effective results. The entire health eco-formula, from patients to doctors, institutions and, of course, payers.
Through a combination of proprietary symbol capture hardware and software, a clinical knowledge base that now includes more than 340 billion clinically validated knowledge points, and an ever-learning synthetic intelligence algorithm, our DeepView formula provides a fast and accurate yes or no answer. whether a wound will heal on its own or require complex medical intervention. To the best of our knowledge, there is no burn diagnostic tool lately that utilizes the full width of the soft spectrum used through DeepView and can produce a validated, rapid, and predictive assessment. For burns, DeepView has a clinically validated accuracy of 92%. What does this all mean? For the burn patient, this means less pain and suffering, a faster and more appropriate treatment plan, as well as a reduced threat of headaches such as infections that can result from misdiagnosis or delay.
For clinicians, DeepView supports a quick and informed treatment decision, allowing them to act temporarily and with a high degree of confidence in their patient’s most productive interest. This is a vital point considering that there are less than 250 burn specialists worldwide. country. These people, despite years of education, have an accuracy rate of less than 75% in determining whether a burn will heal on its own or require medical intervention. For institutions, DeepView promotes quality of care and power on the floor. in the allocation of valuable health care resources. There are about 125 burn treatment centers in the U. S. By definition, it is a limited and dispersed resource. Most burns occur in local emergency departments, where doctors without burn education have a diagnostic accuracy rate of about 50%, which amounts to a random draw.
DeepView can put specialized burn expertise in the hands of all healthcare professionals, regardless of the facility’s rural or urban location. Finally, for payers, DeepView provides objective policy help and eliminates unnecessary procedures while justifying physicians’ decisions to treat patients faster through the help provided through our technology. Here’s an example. Research indicates that a typical stay in a burn center lasts 8 days. We believe that using DeepView can reduce this stay by up to 3 days, a relief of 37. 5%. For diabetic foot ulcers or UPDs, our largest market opportunity, similar benefits apply. As with our burn indication, to our knowledge, there is no diagnostic tool to evaluate UPUs, which are complex, have a nonlinear healing trajectory, and can result in amputation.
The type of care for UPUs, which are chronic in nature, is generally a four-week waiting technique that employs the types of care defined through payers, before the use of complex wound care therapy, such as bioengineered skin substitutes, is provided. From our point of view, this is four weeks too long and we believe that the use of DeepView by doctors can result in a suitable remedy from the first presentation of the wound. This brings us to the point where we are in the process of emergence and commercialization. I intentionally use the word platform because of the inherent flexibility of the technology. As noted, our current concentrate is burns and UPDs; However, we believe that the platform can, over time, help in multiple clinical indications.
Our goal remains to make the DeepView formula part of the clinical treatment flow in emergency decomponents, hospitals, burn centers, and diabetic foot ulcers and burn clinics. We have a well-defined business concentrate for 2024 and beyond and continue our studies. progression and clinical activities, as we move DeepView from clinical to commercialization. I’m pleased to say that the team has made smart strides on a number of fronts. I’m going to play some of them. For the burning, in September 2023, the U. S. government will not be able to use the fire. The U. S. Department of Homeland Security awarded us the largest contract in our history, the BioShield project, worth up to $150 million. This multi-year, non-dilutive contract includes an initial award of $54. 9 million to fund ongoing studies and progression activities through the first quarter of 2026, leading to the submission of a de novo application to the FDA.
This award brings the full non-dilutive support of the U. S. government. We have joined the U. S. Department of Homeland Security to expand our burn indication to approximately $250 million. In January 2024, we will begin enrolling for a pivotal study submitted in December to validate the DeepView system for burns, which is expected. it will be the last clinical trial before seeking FDA approval. This study is conducted in burn centers and emergency departments with the purpose of enrolling 240 subjects in adult and pediatric patients. In February, we got permission from the UKCA to start promoting our DeepView formula for recording in the UK. We launched our first recording device in March and expect to start generating ad revenue in the second part of 2024. This is a vital milestone for the company and a significant validation of our technology.
In March, we won a new contract worth $500,000 from the U. S. government. The U. S. Department of Homeland Security provides additional supplies for the development of the portable edition of our DeepView formula, called DeepView Snapshot M. more than $6 million. Let me now talk about our clients for regulatory filing. We continue to advance our existing contracts with the U. S. government. We are working with the U. S. Department of Health for our DeepView formula for the indication of burns and we expect to file regulatory filings for approval of this indication in the U. S. We continue to commercialize our DeepView formula for DFU assessment in the U. S. We plan to submit regulatory filings for approval of this indication in either country later this year.
Given the expected timelines related to those presentations, we expect to generate ad revenue across four platforms, burns in the U. S. , and more. U. S. AND U. K. diabetic foot ulcersFrom the U. S. and the U. K. to 2026. Me would like to talk briefly about some of the recent announcements. As you know, one of the most valuable assets that Spectral controls is our intellectual assets, or intellectual property, which our team has evolved over the years. We have 20 legal patents in the U. S. 3 U. S. and foreign patents and 3 four patents pending in the U. S. in the U. S. and abroad. The lifespan of key patent coverage for our core concepts exceeds four years. Earlier this month, we announced the creation of a wholly-owned subsidiary called Spectral IP that will focus on generating or sourcing intellectual assets applicable to the broader ecosystem of synthetic intelligence, namely healthcare.
We won a $1 million investment from an associate of our largest shareholder, who is also a globally identified leader in the intellectual assets industry. We, Spectral IP, have the ability to raise prices to our shareholders through openness programs within our own IP library and through acquisitions, strategic partnerships, and collaborations with AI generation vendors, healthcare institutions, and research organizations. A final point that Vince will highlight in his speech is our improvement in our monetary position, adding last week’s announcement related to capital accumulation with a long-only investor. This additional capital supports the strategic imperatives I mentioned, adding up our go-to-market efforts. With that, I’ll hand it over to our new CFO, Vince Capone.
Vince?
Vincent Capone: Thank you, Pete, and thank you all for joining us today. I would like to remind everyone that our press release issued this afternoon comprises more main points about our operating results. We plan to file our 10-K with the SEC later this week. With that in mind, I’ll focus my remarks on a few highlights and key elements. As of fourth quarter 2023 results, research and progression earnings were $5. 3 million, compared to $6. 1 million in the prior-year period. reflects the quarter’s cut-off activity as we finish work on the BARDA Burn 2 contract. This cut was expected as clinical trials were nearing completion by the end of the year. As a reminder, especially for those of you who are new to Spectral, the gains of r
We bill the government on a monthly basis to reflect our R expenditures
Let’s move on to our annual results. Research and development profit in 2023 was $18. 1 million, a 28. 8% cut from the $25. 4 million reported in 2022. The year-over-year cut reflects a cessation of activity due to the final touch of our work on the BARDA Burn 2 contract. During the fourth quarter, we started paints on the BARDA Project BioShield contract, as Pete mentioned. This contract represents the largest in the history of our corporation with a price tag of $150 million. Gross margin construction increased to 43. 6%, compared to 42. 7% last year, despite a reduction in our gross margin. This increase in gross margin percentage is due to the redemption rate under the BARDA PBS contract, which has a higher rate than the BARDA Burn 2 contract, thus creating a favorable effect on the company’s gross margin.
General and administrative expenses in 2023 were $20. 9 million, compared to $13. 5 million in 2022, primarily due to an increase in our headcount as we continue to prioritize our investments in a key body of workers who will expand the directions of our platform and our trajectory. to commercialization. Research and progression expenses in 2023 were minimized to $15. 1 million from $16. 5 million in 2022. It is vital to note that our overall revenue and progression activities are reflected in our general and administrative expenses and our revenue charge. As a result, the reduction in 2023 is due to a reduction in activity, i. e. , later in the year in our government contracts, primarily adding the completion of the Burn 2 contract and the acceleration of our Project BioShield contract.
As of December 31, 2023, money and cash equivalents amounted to $4. 8 million and the company still had no long-term debt. Currently, we have approximately $10 million in money, with an additional $1 million in our newly created subsidiary, Spectral IP. With respect to our liquidity, I would like to highlight the following: First, as Pete mentioned, the BioShield contract awarded in September provides up to $150 million in non-dilutive financing if all long-term characteristics are exercised. The initial $55 million commitment and contract execution will fund progression activities through the first quarter of 2026 of our DeepView burn formula, adding to our ongoing pivotal clinical trial. Then, earlier this year, the company made use of an existing committed capital fund, receiving net profits of approximately $2. 8 million.
This represents the issuance of approximately $1. 2 million with percentages at an average gross value of $2. 39 with consistent percentages. The Company would possibly withdraw another $3 million from the committed equity line of credit prior to implementing our new equity backup line of credit. Finally, as announced last week, we have entered into a $30 million prepaid advance and aggregate capacity support consistent with a percentage acquisition agreement, consisting of a $12. 5 million prepaid advance, of which $5 million was funded on March 20, 2024 at a constant conversion. . Price of $3. 16. We expect to budget for the additional $7. 5 million in prepaid advances in the second quarter of 2024. Conversion values for additional advances are set at the time of financing. For clarity, I would like to remind you that any financing under the Relief Portion of the Purchase Agreement beyond prepaid advances is at our sole discretion.
We believe that our recent monetary agreements, combined with our non-dilutive, multi-year financing provided through our contracts with the U. S. government, will be a good way to achieve this. In the U. S. , they provide us with a solid monetary base to pursue our strategic objectives. For 2024, we would like to reiterate our earnings guidance. of about $28 million, an expected accumulation of about 55% from $18. 1 million in 2023. Much of this expansion will come from the PBS contract with additional contributions from the ongoing portable contract. Proceeds from the commercialization of our DeepView AI engraving in the UK, which we expect to begin in the second half of 2024, will add to the $28 million address. With that, I’ll hand it over to Pete.
Peter Carlson: Thank you, Vince. Before I answer your questions, I must thank our team for their determination and commitment to our promise to expand and commercialize our DeepView system. Your accomplishments to date and those to come are the driving force behind our Success. The control team is excited to leverage the strong monetary foundation that Vince has defined to aid in the team’s efforts. Gary, we can now open the call for questions.
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Operator: [Operator’s Instructions]. Our first inquiry comes from Ryan Zimmerman of BTIG.
Ryan Zimmerman: Congratulations. I’m going to start with the United Kingdom. That’s a smart validation that you can run. Maybe, Pete, we want to get your first impressions of what you see in the UK, how technically there, where an adoption awaits. What about other incremental colors or anecdotal feedback you can provide at this time?
Peter Carlson: Ryan, we were given a series of programmed positions to deploy the machine, as we’re sitting here today, 2 are in the box and starting to be used. Early feedback on this deployment has been very positive, adding ease of use and particularly reduced scale and operational complexity compared to a laser-powered tool that is available in the UK. We’ve got one more series, five or six more slots, where we’re going to implement the device. And what’s going on? In these few months there is a kind of validation on the floor through those clinics. After this period, we will sign advertising agreements with those clinics and they will use the devices they have on the site. So we’re on the floor, we continue with our launch and we’re looking to work with those institutions, those clinics as they collect data, and then we move on to that advertising.
The merit here is that we will gain real-world knowledge. And this real-world knowledge can be useful in a number of ways. This is not just data for us as we continue our progression or device through our progression activities, but it is also data that we can use to help inform payers, institutions, and others about the good fortune of the tool.
Ryan Zimmerman: Okay. BARDA’s forecasts have been very clear: $28 million for this year. It’s pretty well known. There are rarely many updates on schedules, given that you are involved in your R&D efforts.
Peter Carlson: Ryan, we believe that those resources and monetary bases will allow us to get through to 2025. So even though our burnout is there, we feel like those resources have our back for the next 12 to 15 months, possibly 15 to 18 months. And that allows us to accelerate the business. We’re going to ramp up some hires. As a result, our fellow colleagues will see an increase in our numbers. And the specific domain will be our marketing effort. So we’ve planned some of them into our schedule and now we’re going to implement them. Over time, we may be able to push for other activities.
Ryan Zimmerman: Okay. Last for me and I’m back in line. Any feedback or updates you can provide on the progress of the etching test?Everything you have learned so far that would have possibly helped you to be more effective by signing up for this test. . We’re getting closer: we’re going to attend the American Burn Association meeting. I’m just curious to know what he’s most involved in.
Peter Carlson: Happy to answer questions. You talked about the Burn Conference the week of April 8th. It’s a great meeting. And we’ll have all of our sites represented and we’ll host a breakfast that we’ll anticipate for a chance to interact with all of our researchers. At this point, our records are progressing. We didn’t get to 10%. We are between five and 10% of registrations. And we anticipate that by the end of April, nearly a portion of our sites will be up and running and fully engaged, enrolling participants. We are pleased with the distribution of adult and pediatric participants. We have committed to having at least 25% of pediatric participants participate in the survey and potentially up to 40%. And that’s kind of a request from the government to adapt the indications for burns in the market, to what we’ve noticed across the country.
We are happy with the registrations. We take a look forward to see that the other sites are operational and we will proceed to be informed of them.
Operator: [Operator’s Instructions]. The following is posed by Carl Byrnes of Northland Capital Markets.
Carl Byrnes: Congratulations on your progress. I think most of my questions have been answered. But I’m wondering if you can give us a bit more detail about the UK launch, i. e. in terms of staffing and system implementation. I think he said he launched Out 1 system, you’d have 6 and then you’d make a profit in the second part of the year. Again, the devices and the staff. And then I just wanted to clarify, and I think, as you said, the $28 million didn’t come with any contribution from UK sales similar to the launch?
Peter Carlson: Carl, that’s right. The $28 million represents study and progression benefits. Admittedly, the advertising benefits of such deployments may not be very large. It’s additive. We would: 6 to 8 is the diversity of deployments we originally planned. Currently, we have a handful of workers in the UK and we don’t see the desire to bring them specifically into this business. I am sorry. The manufacturer of the devices here is done on the state side. We have the biomedical sector, we have a clinician, and we have an advertising resource there in the country, so we don’t see a major need. There will be a little, but nothing significant.
Carl Byrnes: Genial. La other was: they were similar to the DFU clinical trial, the increase, you talked about that. Congratulations again on the progress.
Operator: Next up is from John Vandermosten with Zacks.