Spectral AI Q3 2023 Earnings Call Transcript

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November 14, 2023

There are 5 speakers on the call.

Operator

Good day, and welcome to the Special AI Third Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. Please note that today's event is being recorded. I would now like to turn the conference over to Devin Sullivan of The Equity Group. Please go ahead, sir.

Speaker 1

Thank you, Rocco. Good morning, everyone, and thank you for joining us for Spectral AI's 2023 Q3 financial results conference call. Our speakers for today will be Wensheng Fan, Chief Executive Officer of Spectral AI and Niels Windler, 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, believes, seeks, may, will, should, future, propose and variations of these words or similar expressions or negative versions of such words or expressions are intended to identify forward looking statements.

Speaker 1

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 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 other important risks and uncertainties that could cause actual events and results to differ materially from those contained in forward looking statements. Management will also be discussing non GAAP financial metrics.

Speaker 1

A reconciliation of these non GAAP financial measures to the most comparable GAAP measures can be found in the company's press release. With that said, I'd now like to turn the call over to Wensheng Phan, Spectral AI's Chief Executive Officer. Wensheng, please go ahead.

Speaker 2

Thank you, Devin, and good morning to all. Thank you all for joining us today for our Q3 financial results conference call. This is our very first conference call as a NASDAQ listed company. I want to thank our executive team, Board members, advisors and investors for their support in allowing us to achieve our objective as a U. S.

Speaker 2

Public listed company and for their continuous belief in spectral AI and our mission. I will turn things over to Nils shortly to discuss our financial results. For now, given that this many of you guys maybe this is new to our company and I'd like to spend a few minutes discussing Special AI, our technology, our accomplishments and most importantly, the significant opportunities we're addressing to change the standard of care in wound assessment and treatments. Special AI is a Dallas, Texas based company. We specialize in predictive analytics with a platform that uses proprietary artificial intelligence AI to predict if a wound will heal.

Speaker 2

The name of our technology and our product is DeepVieW, with a current focus in predictive medical diagnostics. Our DeepView system is a platform technology that uses proprietary AI algorithms combined with multispectral imaging technology to determine if a wound will heal under routine care or will require advanced wound care products and treatments to do so. The imaging takes less than 200 milliseconds and the AI powered assessment is delivered in seconds. DeepView sees what the naked human eyes cannot. We think of it as rapid response test that provides an immediate, objective and statistically reproducible wound healing assessment that allows the physician to make an informed decision regarding next steps treatment decisions.

Speaker 2

Right now, D. V. U. Has 2 main area of clinical indications, burn wound and diabetic foot ulcer, DFU. Along with these 2 clinical indications, we're also working on productization of our 3 d wound size measurement tool for standardized digital documentation and compliance.

Speaker 2

In the case of a burn wound, DeepView would help determine the burn wound area that will not heal, the area that the regeneration capacity is lost. And for those burn wounds, such a non healing area will likely require excision and skin grafting. If you answer the most relevant question from a surgeon's perspective, where do I cut? And it will also help the emergency department to make the informed decision on which patients to be transferred to the burn centers for advanced care or keep them in the routine care. According to the American Burn Association, 1,100,000 Americans suffer from burn injuries each year, with over 500,000 presenting to emergency departments and the 40,000 are requiring surgeries and hospitalization.

Speaker 2

In contrast to this demand, only 2% of the U. S. Hospitals have burn centers, and there are only about 250 burn surgeons in all of the United States. The use of DeepView helps bridge this gap. We have conducted 3 large multi site clinical studies across United States that have validated DeepView's current accuracy for burn wounds at 92% for adults and 88% for children, compared with the current physician accuracy of 50% to 70% at the best of human performance.

Speaker 2

In addition, there are head to head clinical trials evaluations that have been demonstrating the DPU provides higher accuracy on the same burn wound than the accuracy of both burn specialists and the non burn specialists at burn centers as well as emergency medical professionals. Our initial studies also show that diffuse the length of stay, LOS, by more than 3 plus days from the current average of 8 days. Because CPU can offer the high accuracy assessment much earlier in the treatment flow, All of this lead to significantly lower cost, reduce the treatment time, reduce chances for infections and complications and reduce patients' pain and suffer. And in the mass casualty situations such as the unfortunate Maori fire earlier this year, if you can help save healthcare resources and greatly improve the utilization of both emergency departments as well as the burn centers in the hospitals. That is for the burn wound indication.

Speaker 2

Now for diabetic food ulcers, where the diffuse accuracy now sits at 86% based on our multiple clinical studies in the U. S. And EU. A non human assessment would justify the immediate use of advanced wound care products and therapies, including not limited to hyperbaric oxygen chamber, synthetic dressing, skin substitutes and vascular interventions. If you can provide the objective assessment and statistically sound justifications early on as opposed to the current wait and see approach that both physicians and patients have to wait as long as 30 days and sometimes 45 days to justify if a DFU will heal or not, so that the payers for this patients can approve the advanced wound care products and therapies.

Speaker 2

I don't think I needed to really fight anybody to say that the challenges around the diabetes is just on the rise. This is a global epidemic. In fact, I just returned from Saudi Arabia and UAE, the GCC region. More than 20% of their population are diabetic and it's growing. The local hospital systems get the benefits of D.

Speaker 2

V. U. In the DFU healing assessment as a diagnostic assistance right away. They also asked how DeepView can help on the prevention side. Well, to use DeepView is like taking a snapshot of pictures.

Speaker 2

Literally, under 200 milliseconds, it's down imaging and the AI results in seconds. It's non invasive, non radiation, non touch. If it can be used as a continuous monitoring tool for the wound and provide both physicians and patients the feedback information to therapies and compliance efforts and help prevent the recurrence of the ulcers. While Vernon has an estimated TAM of 3,700,000,000 through 2028, that bad food ulcer affects more than 5 200,000 patients per year that is in the U. S, U.

Speaker 2

K. And EU for while the global market of more than $11,000,000,000 DFU patients report an average of 15.5 doctor visits per year with a cost of up to $63,000 per patient per year. At present, there is no medical device that can determine if a DFU will heal. It is ironic that you and I can walk into many hospitals and clinics around the country and see an array of advanced treatment options to DFUs. However, new patients who present with a DFU have to wait up to 30 days to gain access to those advanced wound care products and therapies.

Speaker 2

Why? Because this is what the insurance companies require before authorizing treatments and needs 30 days, sometimes after 45 days of patient uncertainty, 30 days of unnecessary patient discomfort, 30 days of exposure to possible infection and 30 days closer to potential amputation. That is unacceptable and quite honestly, in our view, unnecessary. Our goal following receipt of the necessary regulation approvals is for the D. Vue platform to become part of the clinical treatment flows can result in appropriate treatment commencing the day on day 1.

Speaker 2

And the complementary aspect of diffuse wound assessment ability with a multitude of available and effective healing therapies suggests significant potential partnership opportunities between Special MD between Special AI and all those therapeutical companies would be viewed upon regulatory clearance. With respect to our regulatory pathway, we will first focus on DBU for diabetic food ulcer assessment given the size of the market opportunity. We intend to submit applications for FDA, UKCA and CE Mark approval for D. VUE DFE indication as well as for 3 d wound measurement capabilities in 2024, subject to the completion of ongoing studies. Potential product commercialization and revenues from DfU for DFU are also targeted for 2024.

Speaker 2

We anticipate FDA and CE Mark approval for the burn indication in 2025. Of note, our diffuse platform received breakthrough device designation for burn indication from FDA since 2017, allowing us to prioritize reviews and a dedicated line of communication with the FDA. Both diffuse GEN-one and GEN-two platform were cleared by FDA in 20132017, respectively, for our upcoming Gen 3 with all the AI indications actually in this quarter of Q3. Specifically on September 8, we held our 9th Q7 meeting with FDA and this one was our validation study design and data analysis needed for clearance. We actually believe in the classic open book approach with FDA and our plans towards clearance is part of our practices to derisk one of the most important milestones of our roadmap towards commercialization.

Speaker 2

We have a robust and scalable strategic partnership platform in place consisting of clinical alliances in the U. S. And European Union as well as key external development and manufacturing relationships for the production and delivery of our diffuse systems when appropriate. We're continuing to expand and strengthen these relationships in advance of anticipated FDA clearance. You will see in our press release, we have highlighted a variety of recent accomplishments, all of which we're very proud of.

Speaker 2

Before turning things over to Niels, I want to highlight one in particular. In late September of this year, September 28, 7:40 a. M. Eastern Time actually, We were awarded our largest contract to date from the U. S.

Speaker 2

Federal agency called BARDA, B A R D A, valued at up to US149 $1,000,000 Together with the previous contracts, this brings a total U. S. Government awards to the company since 2019 to more than US246 million dollars This latest multiyear contract includes an initial award of nearly US55 million dollars to support the clinical validation and FDA clearance of D. VUE for commercial marketing and distribution purposes. This is a major milestone that enables our technology to become a key component of the U.

Speaker 2

S. Government's preparedness efforts for burn meth casualty events. The initial award of this $55,000,000 placed deep field devices at various burn centers and emergency rooms to support the ongoing clinical validation study and facilitate the transition of DFU as a device for routine care upon FDA clearance. The contract also includes with an additional total value of approximately $95,000,000 and can be exercised for additional product development, procurement and deployment initiatives. This contract is under the project BioShield and this includes clinical studies necessary for FDA clearance, that's the $55,000,000 for and up to $95,000,000 for now for procurement and deployment of the FieldView technology.

Speaker 2

We're very excited about our prospects for continued growth. We're confident that we're on the verge of delivering a disruptive, tucking edge, AI driven wound healing assessment platform with the potential to significantly improve the current standard of care across multiple indications. We also believe D. F. U.

Speaker 2

Offers a wonderful diagnostic opportunities to build the strategic partnerships with other wound care product companies. We believe the benefits of Bivu to physicians, hospitals, patients, payers, advanced wound care products and all these relationships. With that, I now will turn things over to our CFO, Nils Windler. Nils, please go ahead for the financial results, please.

Speaker 3

Thank you, Wen Zheng, and thank you, everyone, for joining us today. I would also like to remind everyone that our press release issued yesterday evening and our Form 10 Q that will be filed with the SEC today both contain a good amount of detail on our operating results. With that in mind, I'll focus my remarks on selected highlights and key items. Research and development revenue was $3,400,000 compared to $7,000,000 in last year's Q3. This was primarily driven by the wind down of the BARDA burn 2 contract, which was expected as clinical trials were nearing its completion.

Speaker 3

Importantly, we have transitioned to work under the new BARDA BioShield contract, the largest in our history, with a value of up to $149,000,000 The initial $55,000,000 of this contract has been executed and will spread over a 30 month period ending in March 2026 with options valued up to $95,000,000 beyond that. We will see a full quarter of contribution from this new contract in the Q4. As a reminder, especially for those who are new to Spectral AI, R and D revenue is driven by our research and development activities. We invoice the government monthly for R and D expenditures with an added margin to cover expenses such as labor and third party contractors and consultants. We generally receive payments against these invoices from the government within 2 weeks after the invoice submission, which produces a positive and predictable effect on our P and L and cash flow.

Speaker 3

Our gross margin declined to 42.8 percent from 45.9 decline in gross margin was due to commencing the $4,000,000 Amtech contract that was awarded to Spectral AI in the Q2 of 2023 and is scheduled to continue through the Q1 of 2025. This contract has a lower gross lower margin than our BARDA contract. However, given its modest size compared to the BARDA BioShield contract, we do not expect work performed under the MTech contract to materially degrade overall gross margin in Q4 2023 as well as in 2024. The MTech award supports the ongoing development of DeepView's Net Shop M, a handheld fully portable version of our DeepView wound triage burn victims in combat situations. This represents the first of what we expect.

Speaker 3

Over time we will be adding several Horizon applications of our Deepu AI platform. General and administrative expenses in the Q3 were $5,600,000 compared to $3,500,000 related to increased headcount to support our growth, overall R and D initiatives and product commercialization efforts, specifically ongoing clinical trials in support of planned regulatory submissions related to our DFU indication. As previously announced, we completed our business combination in September 2023, which resulted in our NASDAQ listing. Nonrecurring transaction costs associated with the combination were $7,600,000 in the Q3 of 2023 as compared to no such cost in last year's Q3. Net loss for the quarter was $10,600,000 or $0.77 per share and excluded $7,600,000 in non recurring costs.

Speaker 3

This compared to a net loss of approximately $400,000 or $0.03 per share in last year's Q3. Adjusted EBITDA loss was $3,900,000 compared to adjusted EBITDA of about 0 in last year's Q3. As of September 30, 2023, cash and cash equivalents totaled $7,300,000 and the company had no long term debt. We are reiterating our revenue guidance of approximately $17,400,000 for the year 2023. This suggests an approximately 36% increase in revenue for the Q4 of 2023 from the 3 $400,000 in revenue we generated in the Q3.

Speaker 3

For 2024, we are reiterating revenue guidance of approximately 28,000,000 dollars an expected increase of roughly 60% from the estimated $17,400,000 in 2023. The majority of this growth will be derived from the BARDA BioShield contract. With respect to gross margin, for Q4, we expect an improvement driven by the new BARDA contract, which carries higher margins. For 2024, gross margin is expected to further improve as we ramp up the BARDA BioShield contract. Finally, on October 30, we filed an S-one registration statement with the SEC to register 8,400,000 shares of our common stock underlying the same number of warrants that we were issued in connection with our September 2023 business combination as well to register approximately 10,000,000 shares of common stock issued to certain shareholders in connection with the business combination.

Speaker 3

This filing was required as part of the business combination and the shares have been accounted for in our fully diluted share counts. Thank you for your attention. And I'll turn things back to Wen Zheng.

Speaker 2

All right. Thank you, Niels. And Rocco, if it's okay, can we open the call for questions from analysts, please?

Operator

Today's first question comes from Ryan Zimmerman with BTIG. Please go ahead.

Speaker 4

Good morning. Can you hear me okay?

Speaker 2

Yes, we can hear you, Ryan.

Speaker 4

Good. Thanks for taking the questions and congrats on the Q1 here as a NASDAQ listed company. I appreciate you guys giving all the color. It's very helpful as we think about kind of the progression of the business. In terms of the guidance for 2024, Neel, I appreciated all those comments.

Speaker 4

I'm just curious kind of what kind of revenue composition you are contemplating for next year. It sounds like most of that is barter related, but I think it does assume some commercial sales. And I'm just curious if you could comment specifically on kind of the thinking there as it relates to DeepView. Yes. Thank you, Ryan, for

Speaker 3

the question. No, I mean, like I said, the majority of our 2020 24 revenue will come from the BARDA BioShield contract. A further revenue source will be the continued Emtek contract, and we're also planning on starting commercial sales. But again, to reiterate, the majority of our 2024 revenue will come from BARDA.

Speaker 4

Okay. Very helpful. And it sounds like that's pretty predictable, so that's nice to hear. And then my other question is just around the technology itself, and this is probably more directed toward Wang Sheng. But when you think about the accuracy rates of DeepView, they're very impressive right now.

Speaker 4

But you're going to add another component, which is a 3 day wound feature, I think, in the years ahead. And so what do you how do you think about like what that can do for the technology, Wang Sheng, from an accuracy standpoint, if you can get that accuracy level higher or what that could do either from an adoption perspective, as you think about some of those features?

Speaker 2

Thank you, Ryan. Wonderful question. And the 3 d wound size measurement is actually a very complementary, almost a required feature in my humble opinion to DeepView for its clinical adaptations. Why would I say that? For the past years, I always ask the question, how many imaging technology you would see in the future of hospitals, ERs and wound care clinics, the production office for wound assessment.

Speaker 2

My answer always came back with just one. So the wound size measurement is a fundamental compliance issue. They need to better document the wound progression regardless of all these other perspectives because it's required. And the nurses' operators are very used, familiar with wound size measurement. Sadly, today, there are not many useful tools for this.

Speaker 2

Many, many of the clinics are still using the rulers and other fundamental technologies to measure it. Thank God that there are already some imaging tools on the market to offer the wound size measurement. There the trailblazers help us educate the markets already. I really appreciate their efforts and I believe our 3 d wound size measurement based upon our D View Imaging technology offers one of the most accurate, easy to use and really reliable measurements and it measures the dimension, the areas and the 3 d effects in volume, for example, for DFU wounds. And in that perspective, it provides the current clinical users a very familiar tool with analogy to the Internet.

Speaker 2

This almost adds the stickiness of the users' friendliness to our AI prediction side. In my Hong Kong opinion, I think Difu will provide the AI predictions as the true differentiating factor, while complementing that with the center of care using the 3 d wound sensor measurement for the standardized digital documentation and compliance efforts. To me, that's very, very much complementary for each other to ensure the diffuse clinical adaptations. I hope that answers your question, Ryan.

Speaker 4

Yes. No, very comprehensive. Thank you, Wang Sheng. And then I'll just sneak one more in and I'll hop back in queue. But you get $55,000,000 upfront on the $149,000,000 contract.

Speaker 4

Can you just remind us kind of what unlocks the remainder of that 100 and $49,000,000 contract from a milestone or development perspective as we think about some of the revenue that could come in from BARDA in the years ahead? Thanks for taking the questions and congrats again on the Q1 here out the gate.

Speaker 2

Thank you, Ryan. For the $149,000,000 up to $149,000,000 contract received, dollars 55,000,000 is already released and we're doing the monthly drawdown from that $55,000,000 right now. The clearance centered focus of that is FDA clearance of diffuse burn indication. Upon the FDA clearance of diffuse AI burn, the rest of the $95,000,000 will be triggered in a structured way so that we can start a federal procurement and deployment of our deep fuels into the ERs and the burn centers. That's how the contract is structured.

Speaker 4

Got it.

Speaker 2

Thank you. I hope that clarified. Thank you so much. Have a good day.

Operator

Thank you. And ladies and gentlemen, this concludes your question and answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Speaker 2

Thank you, Raquel, and thank you again for your participation and continued interest in Special AI. We are very pleased with our progress and look forward to keeping you updated. We hope to speak with some of you at our upcoming conference presentations, including the Benchmark Conference in December in New York City. We'll also be in San Francisco in January in connection with the JPMorgan Conference. Thank you all.

Speaker 2

Thank you for your support and have a great day. Thank you.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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