Earnings Transcript for RCLFU - Q3 Fiscal Year 2023

Operator: Good day, and welcome to the Spectral AI Third Quarter 2023 Financial Results Conference Call. [Operator Instructions]. Please note 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. :

Devin Sullivan: Thank you, Rocco. Good morning, everyone, and thank you for joining us for Spectral AI's 2023 Third Quarter Financial Results Conference Call. Our speakers for today will be Wensheng Fan, Chief Executive Officer of Spectral AI; and Nils 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. 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 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 forward-looking statements. Management will also be discussing non-GAAP financial metrics. 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 Fan, Spectral AI's Chief Executive Officer, Wensheng, go ahead. :

Wensheng Fan: Thank you, Devin, and good morning to all. Thank you all for joining us today for our third quarter 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, advisers and investors for their support and allowing us to achieve our objective as a U.S. public listed company and for their continued belief in Spectral AI and our mission.

I will turn things over to Nils shortly to discuss our financial results. For now, given that many of you guys, maybe this is new to our company, and I'd like to spend a few minutes discussing Spectral 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.:

Spectral 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. The name of our technology and our product is DeepView, D-E-E-P-V-I-E-W 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 winter 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 a rapid response test that provides an immediate objective and statistically reproducible on healing assessment that allows the physician to make an informed decision regarding next steps treatment decisions. Right now, DeepView has 2 main areas of clinical indications, burn and Diabetic Foot Ulcer, DFU. Along with these 2 clinical indications, we're also working on productization of our 3D wound size measurement tool for standardized digital documentation and compliance. In the case of a burn wound, DeepView would help determine the burnt wound area that will not heal, the area that the regeneration capacity is lost. And for those burn wounds, such a nonhealing area will likely require excision and skin grafting.:

If you answer the most relevant question from a surgeon's perspective, we're the white-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, 1.1 million Americans suffer from burning injuries each year with over 500,000 presenting to emergency departments and the 40,000 recurring surgeries and hospitalization. In contracts with 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 multisite clinical studies across the United States that have validated DeepView’s current accuracy for burn wound like 92% for adult and 88% for children compared with the current physician accuracy of 50% to 70% at the best of human performance. In addition, there are head-to-head clinical trials evaluations that have been demonstrating the DeepView provides higher accuracy on the same firm wound than the accuracy of both burn specialists and non-burn specialists at burn centers as well as emergency medical professionals. Our initial studies also show that if you reduce the length of stay LOS, by more than 3-plus days from the current average of 8 days. Because if you 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 pay and suffer. :

And in the mass casualty situations, such as the unfortunate [indiscernible] power of fire earlier this year, if you can help save health care 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. Now for diabetic foot ulcers, where the DeepView accuracy now sits at 86% based on our multiple clinical studies in the U.S. and EU. In nonhealing assessment, we justify the immediate use of advanced wound care products and therapies, including, not limited to, Hyperbaric Oxygen Chamber, synthetic dressing, skin substitutes and vascular conventions. 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 players for these patients can approve the advanced wound care products and therapies.:

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 the DeepView in DFU healing assessment as a diagnostic assistance right away. They also asked if DeepView can help on the prevention side. Well, to use the DeepView is like taking a snapshot of pictures, literally under 200 milliseconds is down imaging and AI result in seconds. It’s non-visits non-radiation and touch if you 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. :

Well, burn has an estimated TAM of $3.7 billion through 2028 that bad foot also affects more than 5.2 million patients per year that is in the U.S., U.K. and EU 4, while the global market of more than $11 billion. DFU patients reported 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 the DFU have to wait after 30 days to gain access to those advanced wound care products and therapies. Why? Because this is what the insurance companies require before authorizing treatments and in 30 days, sometimes after 45 days of patient uncertainty, 30 days of unnecessary patient discomfort, 30 days of exposure to possible infection and days closer to potential amputation. That is an acceptable and quite honestly, in our view, unnecessary. :

Our goal following the receipt of the necessary regulation approvals is for the DeepView platform to become part of the clinical treatment flows in ERs, hospitals, burn centers, inter clinics, podiatric offices. We believe that the use of DeepView by clinicians can result in appropriate treatment commencing on day 1, and the complementary aspect of DeepView’s wound assessment ability with a multitude of available and effective healing therapies suggests significant potential partnership opportunities between Spectral AI and all those therapeutical companies put DeepView upon regulatory clearance. With respect to our regulatory pathway, we will first focus on DeepView for diabetic foot ulcer assessment given the size of the market opportunity. We intend to submit applications for FDA, UKCA and CE mark approval for DeepView for DFU indication as well as for 3D wound measurement capabilities in 2024, subject to the completion of ongoing studies. :

Potential product commercialization revenues from DeepView for DFU are also targeted for 2024. We anticipate FDA and CE mark approval for the burn indication in 2025. Of note, our DeepView platform received brief device designation for burn indication from the FDA since 2017, allowing us to prioritize reviews and the dedicated line of communication with the FDA. Both DeepView Gen-1 and Gen 2 platform were cleared by FDA in 2030 and 2017, respectively, for our upcoming G3 with all the AI indications, actually in this quarter of Q3, specifically on September 8, we held our nice Q7 meeting with FDA, and this one was our validation study design, data analysis needed for clearance. We actually believe in the classic open book approach with FDA and our plans towards clearance as part of our practices to de-risk one of the most important milestones of our road map towards commercialization. :

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 DeepView 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. Before turning things over to Nils, 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. federal agency called BARDA B-A-R-D-A valued at up to USD 149 million. Together with the previous contract, this brings a total U.S. government awards to the company since 2019 to more than USD 246 million.

This latest multiyear contract includes an initial award of nearly $55 million to support the clinical validation and FDA clearance of DeepView for commercial marketing and distribution purposes. This is a major milestone that enables our technology to become a key component of the U.S. government's preparedness efforts for firm mass casualty events. The initial award of this $55 million placed DeepView devices at various burn centers and emergency rooms to support the ongoing clinical validation study and facilitate the transition of DeepView as a device for routine care upon FDA clearance. The contract also includes with an additional total value of approximately $95 million and can be exercised for additional product development, procurement and DeepView deployment initiatives. :

This contract is under the Project BioShield and this includes clinical studies necessary for FDA clearance. That's the $55 million for and up to $95 million for now for procurement and deployment of DeepView technology. We're very excited about our prospects for continuing growth. We're confident that we're on the verge of delivering a disruptive tucking edge, AI-driven bond hearing assessment platform with the potential to significantly improve the current standard of care across multiple indications. We also believe DeepView offers a wonderful diagnostic opportunities to build strategic partnerships with other wound care product companies. We believe the benefits of DeepView 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. :

Nils Windler: Thank you, Wensheng. 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 $3.4 million compared to $7 million in last year's third quarter. This was primarily driven by the wind down of the BARDABurn I contract, which was expected as clinical trials were nearing its completion. Importantly, we have transitioned to work under the new BARDA BioShield contract, the largest in our history with a value of up to $149 million. The initial $55 million of this contract has been executed and will spread over a 30-month period ending in March 2026 with options valued up to $ 95 million beyond that. We will see a full quarter of contribution from this new contract in the fourth quarter.

As a reminder, especially for those who are new to Spectral AI, R&D revenue is driven by our research and development activities. We invoice the government monthly for our R&D expenditures with an added margin to cover expenses such as labor and third-party contractors and consultants. We generally receive payments against these inverses from the government within 2 weeks after the inverse submissions, which produces a positive and predictable effect on our P&L and cash flow. Our gross margin declined to 42.8% from $45.9 million. This quarter decline in gross margin was due to commencing the $4 million MTEC contract that was awarded to Spectra AI in the second quarter of 2023 and is scheduled to continue through the first quarter 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 MTEC contract to materially degrade overall gross margin in Q4 2023 as well as in 2024. The MTEC award supports the ongoing development of DeepView’s Snapshop M, a handheld fully portable version of our DeepView wound assessment system that would be used to triage burn victims and combat situations. This represents the first of what we expect over time, we will be adding several horizon applications of our DeepView AI platform. General and administrative expenses in the third quarter were $5.6 million compared to $3.5 million related to increased headcount to support our growth, overall R&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 with $7.6 million in the third quarter of 2023 as compared to no such costs in last year's third quarter. Net loss for the quarter was $10.6 million or $0.77 per share and included $7.6 million in nonrecurring costs. This compared to a net loss of approximately $400,000 or $0.03 per share in last year's third quarter. Adjusted EBITDA loss was $3.9 million compared to adjusted EBITDA of about 0 in last year's third quarter. As of September 30, 2023, cash and cash equivalents totaled $7.3 million and the company had no long-term debt. We are reiterating our revenue guidance of approximately $17.4 million for the year 2023. This suggests an approximately 36% increase in revenue for the fourth quarter of 2023 from the $3.4 million in revenue we generated in the third quarter. :

For 2024, we are reiterating revenue guidance of approximately $28 million, an expected increase of roughly 60% from the estimated $17.4 million 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-1 registration statement with the SEC to register 8.4 million 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 million shares of common stock issued to certain shareholders in connection with the business combination. 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 Wensheng. :

Wensheng Fan: All right. Thank you, Nils. And Rocco, if it's okay, can we open the call for questions from analysts, please.

Operator: [Operator Instructions]. Today's first question comes from Ryan Zimmerman with BTIG.

Ryan Zimmerman: Congrats on the first quarter here as the NASDAQ-listed company. I'm just curious what revenue composition you are contemplating for next year? It sounds like most of that is BARDA related, but I think it does assume some commercial sales. And I'm just curious if you could comment specifically on the thinking there as it relates to DeepView.

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

Ryan Zimmerman: And then my other question is just around the technology itself, and this is probably more directed toward Wensheng. But when you think about the accuracy rate of DeepView, they're very impressive right now. But you're going to add another component, which is a 3D Wound feature, I think, in the years ahead. And so how do you think about what that can do for the technology Wensheng, 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.

Wensheng Fan: The 3D 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 clinic supply chain office for wound assessment. 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 the wound size measurement. Sadly today, there are not many useful tools for this. Many, many of the clinics are still using the rulers and other fundamental technologies to measure it.

Thank God, there are already some imaging tools on the market to offer the wound size measurement. There are the true blazers help us educate the market already. I really appreciate their efforts, and I believe our 3D wound size measurement based upon our DeepView imaging technology offers one of the most accurate, easy to use and really reliable measurements and it measures the dimension, the areas in the 3D effects in volume, for example, for the DeepView wound. And in that perspective, it provides the current clinical users a very familiar to -- with the analogy to the Internet, this almost adds the stickiness of the users friendliness to our AI prediction side. in my humble opinion, I think if you will provide the AI predictions as the true differentiating factor while complementing that with the center of care using the 3D wound as management for deep standardized and digital documentation and compliance efforts. To me, that's very, very much complementary for each other to ensure the DeepView clinical adaptations. :

Ryan Zimmerman: And then I'll just sneak one more in, and then I'll hop back in queue. But you get $55 million upfront on the $149 million contract. Can you just remind us what unlocks the remainder of that $149 million 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? Congrats again on the first quarter here out of the gate.

Wensheng Fan: For up to $149 million contract received $55 million is already released and we're doing the monthly draw down from that $35 million right now. The clear and center focus of that is FDA clearance of DeepView’s burn indication. Upon the FDA clearance of DeepView’s AI burn, the rest of the $95 million will be triggered in a structured way so that we can start the federal procurement and deployment of our DeepViews into the ERs and the burn centers. That's how the contract is structured.

Operator: And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for the closing remarks.

Wensheng Fan: Thank you, Rocco, and thank you again for your participation and continued interest in Spectral 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 generally in connection with the JPMorgan conference. Thank you all. 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.