Spectral AI Q4 2024 Earnings Call Transcript

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March 27, 2025

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to the Spectral AI Fourth Quarter and Full Year twenty twenty four Financial Results Conference Call. All participants will be in 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 Sarah Prendergast, Assistant General excuse me, Assistant General Counsel.

Operator

Please go ahead.

Speaker 1

Thank you, Gary. Good afternoon, everyone, and thank you for joining us for Spectral AI's twenty twenty four fourth quarter and full year financial results conference call. Our speakers for today will be Doctor. Michael De Maio, M. D, Chairman of the Board of Spectral AI and Vincent Capone, the company's Chief Financial Officer.

Speaker 1

We also have Doctor. Jeffrey Carter, MD, who is the Principal Investigator in our burn validation study and Director of Trauma and Burns at the University Medical Center, New Orleans and Doctor. Jihong Wang, the company's Director of Data Science with us today. Before we begin, I'd like to remind everyone that during this call, certain statements made in this release are 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 this press release, the words estimates, projected, expects, anticipates, forecasts, plans, intends, believes, seeks, may, will, should, future, propose and variations of these words for similar expressions or the 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, listeners 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 the 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. 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 would now like to turn the call over to Doctor. DeMaio. Doctor. DeMaio, please go ahead.

Speaker 2

Thank you very much, Sarah,

Speaker 3

and good afternoon, everyone. We very much appreciate you joining today's call to discuss our fourth quarter and full year 2024 results and provide you an update on our progress. 2024 was a pivotal year of Spectral AI as we continued advancing our DeepView technology to transform the assessment and potential treatment of wounds and burns. Our efforts over the last year have positioned us for long term success marked by key milestones in our regulatory pathway, clinical validation and strategic partnerships. For those of you who don't know, I am the founder of Spectral AI.

Speaker 3

We founded the company as SpectralMD in 02/2009 and I was Spectral AI's I am the second largest shareholder. I once served as CEO, getting the BARDA contract and other matters and returned to the role of Chairman of the Board last October. In our third quarter earnings call, I said we would get back to basics and I said we would focus on the three Fs finance, focus and finish. Our efforts are indeed paying off. And earlier this month, we announced positive top line results of our burn validation study, which was led by Doctor.

Speaker 3

Jeff Carter from New Orleans. They demonstrate the exceptional performance of our DPU system and predicting burn healing potential. This study, one of the largest burn trials ever conducted in The U. S. Enrolled 164 patients for a potential de novo application across both adult and pediatric populations.

Speaker 3

The findings confirm that DBU significantly outperforms a clinical judgment of burn physicians in three key diagnostic metrics, sensitivity, dye score and specificity, which were all reviewed with the FDA. For sensitivity, DeepView identified non healing tissue with over twice the accuracy of burn positions, achieving eighty six point six percent at the image level compared to forty point eight percent from clinicians' judgment. The second measurement DICE score, diffuse system segmentation accuracy and AI algorithm reached sixty eight point five percent compared to thirty nine point two percent for the burn physicians. Finally, specificity, the D. Fuse system surpassed anticipated results in identifying non healing wound areas achieving sixty one point two percent versus the expected thirty six percent.

Speaker 3

These results reinforce D FUSE potential as a transformative tool in burn care. Our goals are to provide clinicians with an immediate objective assessment on day one of an injury, improving patient outcomes and potentially reducing healthcare costs. We plan to submit these results to the FDA by the end of Q2 twenty twenty five seeking de novo classification in 2026. We are very proud of this milestone due to the focus that we've achieved on delivering the items that we promised to BARDA, the U. S.

Speaker 3

Military and the population at large. We are now actively gathering real world clinical feedback across two continents further validating the systems impact. These global evaluations will provide critical insights as we prepare for our upcoming FDA submission and eventual commercialization of The U. S. And beyond.

Speaker 3

In The UK and Australia, the response to our system has been exceptional. Mer and specialists there have expressed strong enthusiasm for the technology recognizing its ability to improve patient care. We are committed to expanding our presence in The UK and further integrating DeepU into standard burn care protocols. At the end of our third quarter twenty twenty four conference call, I was asked if I could provide a timeline for bringing DeepU to Australia. At the time, I stated that we expected to have devices prepared and rolled out within the next few months with more details to share on this call.

Speaker 3

I am happy to report that we have delivered on that commitment. The momentum surrounding our technology has extended beyond The UK with partners in Australia actively integrating DFU into their hospitals. We successfully deployed three DFU systems in Australia at leading hospitals, including one, Concord Repatriation General Hospital in Sydney Two, the Royal Adelaide Hospital in Adelaide and third, Fiona Stanley Hospital in Murdoch, which is a suburb of Perth. These deployments were made possible through Australia's special access scheme in collaboration with Poly Noble Limited, a global leader in burn wound therapy. By expanding into The UK and Australia, we are gathering valuable real world clinical data that will strengthen our case for our FDA submission and support global commercialization strategies across The U.

Speaker 3

S. And beyond. In terms of DeepUSnapshot M, this is a fully handheld portable and wireless diagnostic tool built on the same AI powered platform as a regular DeepView system. It is designed to provide rapid real time wound assessment in military and emergency care settings, including battlefield triage, forward deployed medical units, ambulances and home healthcare environments. The development of Snapshot M has been heavily supported by government funding with total awards now exceeding $7,000,000 These awards include multiple grants from the Department of Defense, the Defense Health Agency and Emtek, the Medical Technology Enterprise Consortium, which most recently awarded an additional $850,000 to further its development.

Speaker 3

We anticipate Snapshot M to be ready for military deployment in 2027 with potential applications beyond combat medicine, including wound size measurement and expanded emergency and home healthcare use. These investments reinforce the broad potential of DPU technology, allowing us to address critical needs across multiple sectors. Discussing SIM IP. In March 2024, we announced the formation of Spectral IP, a dedicated intellectual property subsidiary focused on monetizing IP assets within the healthcare and AI driven technology sectors. Shortly after its formation Spectral IP secured a $1,000,000 investment with Eric Spangenberg, who is a leading figure in global IP investment as Spectral AI's largest shareholder appointed as its Chief Executive Officer.

Speaker 3

In November 2024, we took the next step by announcing our intention to spin off Spectral IP into an independent publicly traded company through a transaction with Sohrabarjor Investment Management. The following spin off, Sym IP Incorporated will focus on IP based financing and monetization strategies, including licensing, litigation investment, structured financing, royalty acquisitions and opportunistic transactions. While industry agnostic CIM IP will prioritize healthcare, semiconductors, AI and IoT sectors where intellectual property remains an underutilized yet valuable asset class. Spectral AI's thirty patents and 35 pending patent applications will remain with Spectral AI and not SIM IP. The spin off is expected to be executed through a distribution of Spectral IP stock to Spectral AI shareholders subject to final board and repertory approvals and other closing conditions.

Speaker 3

While we anticipate completing this transaction within the next ninety days, there can be no assurance regarding the ultimate timing or completion of this transaction. With that, I will turn over to our Chief Financial Officer, Vince Cabot. Vince?

Speaker 4

Thanks, Doctor. De Maio, and thank you all for joining us today. I would like to remind everyone that our press release issued this afternoon contains additional details on our operating results. We expect to file our Form 10 ks with the SEC later this week. With that in mind, I will focus my remarks on select financial highlights and key items.

Speaker 4

Starting

Speaker 3

with our fourth quarter results,

Speaker 4

research and development revenue was $7,600,000 as compared to $5,300,000 in the prior year period. This increase reflects the additional work we've done in the fourth quarter under the BARDA PBS contract. As a reminder, especially for those of you who may be new to Spectral, R and D revenue is driven by our research and development activities. We invoice the U. S.

Speaker 4

Government monthly to reflect our R and D expenditures with an added margin to cover expenses such as labor and third party contractors and consultants. We generally receive payment against these invoices from the U. S. Government shortly after our invoice submission, which produces a positive and predictable effect on our P and L and our cash flow. Gross margin in the fourth quarter declined to 44% as compared to 46.1 in the prior year period due primarily to a smaller percentage of direct labor as a proportion of the total work on the BARDA PBS contract for the quarter.

Speaker 4

General and administrative expenses in the fourth quarter decreased to $4,600,000 as compared to $5,400,000 in the prior year period, driven by a decrease in our non BARDA related development activities from 2023. Moving on to our full year results. I am proud to announce that our research and development revenue in 2024 was $29,600,000 a 63.5% increase from the $18,100,000 we recorded in 2023, representing the highest revenue reported in the company's history. The year over year increase reflects the expanded work on the BARDA PBS contract for the full year 2024. Gross margin rose to 44.9% from 43.6% in the prior year period, driven by the higher reimbursement rate under the current BARDA PBS contract as compared to the BARDA burn two contract, which was in place for most of 2023, therefore creating a positive impact on the company's gross margin.

Speaker 4

General and administrative expenses in 2024 was $19,900,000 as compared to $20,900,000 in 2023, primarily driven by a decrease in the non reimbursed work and the higher legal and accounting spend that we incurred in 2023 relating to the company's financial transactions. As a component of our general and administrative expenses, R and D '23. It's important to note that total R and D activity is reflected both in our general and administrative expense and in our cost of revenue. As a result, the increase in 2024 is primarily driven again by the increased work on our BARDA PBS contract. As of 12/31/2024, cash and cash equivalents totaled $5,200,000 Following the completion of the long term debt financing with Avenue Capital, which we announced earlier this week, I'm pleased to announce that our cash position currently exceeds over $14,000,000 Regarding our liquidity, I want to highlight the additional following items.

Speaker 4

Total monthly operating losses were reduced from 4,600,000 for the first half of twenty twenty four to approximately $2,000,000 in the second half of twenty twenty four as we focused on improving our operating efficiencies and the concentration on the DeepU system as part of the BARDA PBS contract. In 2024, we were also able to satisfy approximately $10,100,000 of our short term debt with an institutional lender, which was fully satisfied in February 2025. We believe that our recent long term debt financing agreement and the smaller equity raise completed in connection therewith, in combination with the multi year non dilutive funding provided by our U. S. Government contracts with approximately $113,000,000 left to utilize, provides us with a sound financial foundation to pursue our strategic objectives and bring our DPU system to commercialization.

Speaker 4

The company is forecasting revenue of approximately $21,500,000 for fiscal year twenty twenty five, and the financial guidance for fiscal year twenty twenty five does not reflect any contributions from the sale of the DPU system for burn in The UK or in Australia or any additional material financial contributions that may result from the commercialization of our DView system. With that, I will turn it back over to Doctor. De Maio.

Speaker 3

Thank you, Vince. Before turning to your questions, I want to thank our team for their focus and dedication and commitment to our promise to develop and commercialize our DeepU system. As I said, when I took over as Chairman, I wanted to focus on three Fs I mentioned earlier and the team has responded very well to that motivation. Their achievements to date and those on the horizon drive our success. The management team has coalesced around these goals and are excited to leverage the sound financial foundation that Vince has described in supporting the team's efforts.

Speaker 3

Operator, let's open the call for questions from the analyst, please.

Operator

We will now begin the question and answer session. Our first question today is from Carl Burns with Northland Capital Markets. Please go ahead.

Speaker 5

Thanks. Congratulations on your progress. I'm wondering what your thoughts are or your plans with respect to commercial readiness and launch obviously around the corner with respect to staffing, regions, if you're contemplating any co promotion partners and the like? Thanks.

Speaker 3

Thank you. Great question, Mary. So if I heard you said, what are plans for commercialization? So let me go half step back, of course. We're going to anticipate the FDA clearance with the denodovo submission that should yield a commercially viable product that we will begin to commercialize.

Speaker 3

We're going to precondition the market with a number of ways. There are a number of studies that we're going to be utilizing in that time period between the submission and the clearance, the de novo submission. We have presentations, papers, publications, etcetera, in addition to mobilizing a sales force that we'll begin to accumulate as well. But as I mentioned in the discussion with the devices in The UK and Australia, we're getting RWE or real world evidence to support the devices in those countries can support and be and help the care of the patients in those countries. Therefore, we plan on abstracts and writing and other matters to be able to discuss that to be able to have the excitement around commercializing it more broadly.

Speaker 3

As you asked as well about other matters and co products and all that, that's currently being discussed, but I can't report anything at this time that would be material to disclose.

Speaker 5

Got it. Thanks. That's helpful. I'm wondering though kind of going back if you were to complete go alone strategy, what would you envision in terms of how many sales reps would you need and how many medical specialists would you need from liaisons in regions? Thanks.

Speaker 3

We already have a number of service people out there taking care of the devices that are out there for the research purposes of the validation study. I would be I don't want to stretch out and say exactly how many I would have at this time, that'd be premature, but we're looking at approximately 170 more units being rolled out by the federal government contract in the PPS contract. So we would need the appropriate number at this time, which I wouldn't be free to give at this time. There's no sales force necessarily, because the BARDA the device that BARDA plans to rollout will not need a sales force to roll those out. So it will

Speaker 6

be

Speaker 3

beginning small sales force necessary to get those initial 170 units to The U. S.

Speaker 5

Got it. Thanks.

Speaker 3

Thank you. Thanks, Carl.

Operator

The next question is from Ryan Zimmerman with BTIG. Please go ahead.

Speaker 7

Hey, guys. Can you hear me okay?

Speaker 2

We can hear you great.

Speaker 7

Okay, good. Sorry for the background noise at the airport. Maybe on the $21,000,000 in BARDA R and D revenue this year for 2025. I think before we thought about it kind of similar to twenty twenty four. Million dollars Vince, just kind of bridge us from what was the $28,000,000 guidance in twenty twenty four million dollars to the $21,000,000 in twenty twenty five million dollars And then with that and not including any commercial revenue, but then the comment that you made that you do expect commercial revenue potentially this year.

Speaker 7

Just want to understand kind of how you're thinking about your commercial launch in terms of contribution?

Speaker 4

Yes, Ryan, that's a good question here. I mean, we have always seen 2025 as a little step back in revenue as we position for the FDA submission. And obviously, we can't roll out in The U. S. Until we get the de novo clearance.

Speaker 4

So 2025 will be a step back in revenue, but we're really going to be in the process of providing additional developments to the device, so that when we get clearance from the FDA, we'll be in a position to really reach commercialization very quickly for the BARDA contract first and then for other indications throughout. Again, and we talked about this in earlier calls, revenue generating from The UK and or Australia, while it would be nice to see it's not going to be dispositive for us as far as a significant portion of overall revenue. But we've only seen 2025 as kind of a little retreat from 2024 as we pause to get commercialization and FDA clearance. And we look to see that ramp up in 2026.

Speaker 7

Okay. And then Doctor. DiMeo, what's left to submit to SCA? The results were really good. They're really encouraging a few weeks ago.

Speaker 7

What do you got to do? What do you got what other boxes do we have to check just to get that final submission?

Speaker 3

It's all the things you might expect. It's the SAP, the statistical plan, the all the hardware and software requirements, the validation and VND that goes along with all that, the clear results of the clinical trial that I described the results to is an entire package of how many sections would that be? Fourteen. Fourteen secondtions for the FDA application. I might also add to that because of our BARDA relationship and other U.

Speaker 3

S. Government agency, all of the sections will be previewed and reviewed by BARDA first and then go to the FDA. So we'll have another set of eyes, if you will, and brains reviewing everything before it goes into the FDA.

Speaker 7

Thank

Operator

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

Speaker 8

Great. Thank you. And hello, Doctor. DeMille and Vince. You released the data a short time ago and there was the DICE score mentioned.

Speaker 8

And I wanted to see if you could give us some additional context in terms of what that means and how the FDA looks at it? And then also the importance in measuring at the image level versus the pixel level?

Speaker 3

John, that is a fantastic question and anticipating that coming, I have two of our experts here, Doctor. Huang, Jihang Huang, who is our Data Science Chief and Doctor. Jeffrey Carter, who has run the PI trial. So I'm going to turn over to Doctor. Huang to give us a couple of answers on your questions, which are excellent.

Speaker 3

Thanks, Doctor. Myo. So, John, this is

Speaker 6

a good question. So for Dice, basically it's a widely used metric in data science field for evaluating the segmentation task, including non healing mode segmentation in our case. Basically, it measures the overlap between the DEI model segmentation and with versus the ground truth of the non healing region. The benefits I feel that we FDA requires DICE here is because FDA not only wants to understand our algorithms sensitivity, but it also wants to understand the DICE score, which is kind of like a balance, which are going to provide some balanced results for both the precision and recall. Because if you know, assessivity, basically, it will provide you how good you actually segmenting a target, but it won't penalize if the algorithm makes some mistakes or have some force positive.

Speaker 6

While Dice actually tried to balancing both the precision and recall, which actually gives a more comprehensive view of the model's performance, especially in the cases of the imbalance datasets. And regarding your next question here, during discussion with FDA, do you think when we actually report our segmentation performance, it's also a natural reporting about its detection performance because if you think about segmentation, it's a more advanced way to report the results, right, you get a count core of the firm. But I think the first step FDA wants to understand is whether your TPU device is able to actually identify the non healing area in the image. So that's why, follow FDA's suggestion, we have the two paths of the validation process. One is focused on the detection performance and another one is focused on the segmentation.

Speaker 8

Okay, great. Another question is on additional deployments in Australia and The UK. You mentioned there were three in Australia. What's on tap for 2025 for the rest of the year there? Do we think we're going to keep up that pace or is that, yes, I'm just wondering what the pace might be for the rest of the year?

Speaker 3

Well, we don't plan on putting in any more units, if that's your question in terms of pace. At those three centers, the pace would be that they would they've been trained to begin to utilize it, just like The UK Physicians begin to understand how to utilize it, when to utilize it, the and give us a feedback that we look forward to with the real world application. So we don't expect to expand the number of sites, we just expect to be able to do a deeper dive at each of them to understand better how it's used and as we make serial improvements, which we expect to make and with the feedback how we loop that back in.

Speaker 8

Okay. So we have the expected number of units both in The UK and Australia right now?

Speaker 3

Yes, sir. That is correct. In the

Speaker 8

foreseeable future. Okay. Thank you.

Speaker 3

Thank you. Thanks, John.

Operator

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

Speaker 7

Thank you. Good afternoon, Michael and Vince. Couple of quick questions. So in terms of the pediatric study that got initiated recently, what's the timeline for data from that study? And how would you use that data to expand your label?

Speaker 3

Hey, RK. Thank you very much. The data on the study has been I discussed it in this call, and we also had issued a press release a week or so ago, two weeks ago with the top line numbers. We hit the performance metrics that were asked and cleared by the FDA. So the answer to your question is the data has been preliminarily processed in truth and that's what we have planned to release.

Speaker 3

That's locked down. I can repeat the numbers if you want.

Speaker 7

No, I'm talking about the pediatric study.

Speaker 3

It's all RK is all merged into one. There's no separate studies. Both the burn centers and emergency department centers merge as well as the pediatric and adult populations. It's all merged into one big data set. Does that answer RK?

Speaker 3

I mean, we may do some analysis, it's not the requirement of the FDA. I

Speaker 7

did see that press release. Okay.

Speaker 3

Yes, I'm sorry. Yes. And then That's a good question though, because that we did I'm sorry to interrupt you. We did enroll 115 adults and 49 pediatric patients for a total of 164. So we feel we have a representative sample to again merge all this data.

Speaker 3

And to repeat what I said, we'll be doing sub analyses, but that is not the requirement that we anticipate for the FDA submission that we will submit.

Speaker 7

Okay. And then in terms of the DPU snapshot M, so is there any milestones that we can expect in terms of how the development is going during 2025?

Speaker 3

So there are some soft milestones. Actually the team went down to the San Antonio Burns Center, the military, got some preliminary feedback from the military down there. Those who are incorporated right now, we'll be submitting some of those plans for the remainder of 2025. So this is kind of a completion, I would say in 2025 to get that to the point of a more formal, I want to call it clearance, but we're looking at ruggedness testing, what other changes we need to make based upon the military using it and the preliminary assessment. In 2026, I believe it is, I can't quote the date right now, we'll be sending in another application, I think it's in March of twenty twenty six through September of next year, getting the next tranche of money from the federal government or the military to be able to complete the processing.

Speaker 3

Of course, what the military wants is for us to be able to design and develop it to be able to use in more austere settings. Again, as we know, the world is a very difficult place and so higher altitudes and temperature extremes, all of that will be further developed with the device.

Speaker 7

Okay. And then in terms of the product that has been placed in UK, it's been I think it's been little bit little over a year now. So what are the learnings from that? And from what you're learning from there, do you think there has to be any protocol changes or any development on the software or hardware side?

Speaker 3

Okay. Let me turn over to Doctor. Carter, who is our bird expert, has been watching all this data.

Speaker 2

You're asking a very prudent question, more about implementation science. Our users in The UK are giving us a lot of very helpful input. This is the first time they've had a diagnostic tool for burn of this quality and caliber. They've historically used laser Doppler imaging in The UK and they are comparing this to that tool. That technology has not taken off in The United States due to many limitations with it.

Speaker 2

Our device is designed to not have those limitations. And so it will be interesting how it compares in The U. S. But a lot of what we're learning right now is how the device performs relative to their previous experiences. We've had very positive feedback.

Speaker 2

I anticipate that there will be data shared at several of the upcoming scientific meetings as early as one in April from our colleagues in The UK. As for guidelines, yes, there's a lot of work that will need to be done for guidelines and usage. There's already been some work done to establish coding for this product of this caliber. There's going to be a lot of work that's going to be needed to change care paradigms because we've never had a tool like this. You can imagine as an orthopedic surgeon, you had a broken arm, you never had an x-ray, it'd be very different than once you got an x-ray.

Speaker 2

So, we anticipate that this is going to have a beautiful adoption, but that there's going to be a need to really study the implementation and do it in a constructive well educated way.

Speaker 7

Thank you all. Thank you for taking my questions.

Speaker 3

Thank you.

Operator

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

Speaker 3

Thank you very much. So thank you again for your participation and continued interest in Spectral AI. We are very pleased with the progress we've made and remain optimistic about our prospects for growth. We hope to speak with some of you in the future events, including upcoming meetings that are coming both locally and abroad, as well as the annual American Bird Association meeting. I really want to thank Doctor.

Speaker 3

Carter and Doctor. Wong for the time with us today as well. I thank everyone and I wish you a very good evening.

Operator

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

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