Spectral AI - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered a top-line and EPS beat versus S&P Global consensus, with Research & Development revenue at $6.71M vs. $5.25M estimated and EPS at -$0.04 vs. -$0.13 estimated; gross margin expanded to 47.2% while net income swung to $2.9M, largely driven by a $4.25M favorable warrant liability fair value change.
• Management reiterated FY 2025 revenue guidance of ~$21.5M (BARDA-driven, excludes burn commercialization), and remains on track to submit the FDA De Novo by end of Q2 2025; BARDA partnership and 10+ FDA pre-sub meetings underpin derisking efforts.
• Capital structure strengthened in March with $8.5M initial debt draw from Avenue Capital and ~$2.7M equity, lifting cash to $14.1M and extending runway; a second $6.5M debt tranche and ~$7M equity are contingent on FDA clearance.
• Burn Validation Study confirmed DeepView outperforms clinicians on sensitivity and Dice; positive UK/Australia real-world feedback supports eventual commercialization and value proposition build-out.
• Near-term stock narrative centers on regulatory submission, BARDA procurement ramp (post-clearance), and disciplined OpEx, with potential estimate revisions following Q1 beats and confirmation of guidance trajectory.

What Went Well and What Went Wrong

What Went Well

• Delivered revenue and EPS beats: $6.71M R&D revenue and EPS of -$0.04 versus consensus of $5.25M and -$0.13, respectively; gross margin up 60 bps YoY to 47.2%.
• Net income inflected to $2.9M, driven by $4.25M decrease in warrant liability fair value and lower borrowing/transaction costs, highlighting effective financial management and capital structure optimization.
• Strategic progress toward FDA De Novo: completion of Burn Validation Study with statistically significant outperformance on sensitivity (image-wise 86.6% vs. 40.8% CJA) and Dice (68.5% vs. 39.2% CJA); management emphasized confidence and extensive FDA/BARDA engagement (“on track” by end of Q2).

What Went Wrong

• Sequential revenue decline vs. Q4 2024 ($6.71M vs. $7.60M) as BARDA activity mix moderated; management signaled lighter second-half BARDA revenue while resources pivot to regulatory submission.
• Operating loss persisted (-$0.90M) despite G&A discipline, underscoring continued need for scale and commercialization to achieve sustainable operating profitability.
• Commercial revenue remains immaterial in UK/Australia near term; NICE pathway and implementation science work elongate external monetization timelines, limiting contribution in FY 2025 guidance.

Transcript

Operator (participant)

Please note that this event is being recorded. I would now like to turn the conference over to Sara Prendergast. Please go ahead.

Sara Prendergast (Assistant General Counsel)

Thank you, Nick. Good afternoon, everyone, and thank you for joining us for Spectral AI's 2025 First Quarter Financial Results Conference Call. Our speaker for today will be Vince Capone, the company's Chief Financial Officer. Before we begin, I'd like to remind everyone that during this call, certain statements made are forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including statements regarding the company's strategy, plans, objectives, initiatives, and financial outlook. When used on this call, 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 the negative versions of such words or expressions, are intended to identify forward-looking statements.

These forward-looking statements are not guarantees of future performance, conditions, or results, and involve a number of known and unknown risks, uncertainties, assumptions, and other important factors, many of which are outside of 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 sections of the company's filings with the SEC, including our 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.

With that said, I would now like to turn the call over to Vince Capone, Spectral AI's Chief Financial Officer.

Vince Capone (CFO)

Thank you, Sarah, and good afternoon, everyone. We appreciate you joining us today for our First Quarter Financial Results Conference Call. We are pleased to report we had a strong start to the year with significant accomplishments in the areas of product advancement and continued operating efficiencies. We also strengthened our financial profile and created a well-defined cash runway to support our growth initiatives throughout the foreseeable future. We have continued to evolve from a research company to a commercial organization and have a well-defined business focus for 2025 and beyond. We have had some significant developments as we move forward into 2025, which I'd like to address now. First and foremost, our FDA submission. Our team is continuing to work hard as we move towards our FDA de novo classification submission by the end of the second quarter of 2025.

We are primarily focused as an organization on this goal, and we are on track to meet this timeline. Second, I'd like to talk a little bit about our burn validation study results. In March 2025, we also released the results of our burn validation study. Utilizing over 340 billion clinically validated data points, our study, which began in January 2024 and concluded in March 2025, represented one of the largest burn trials ever conducted in the U.S. across burn centers and emergency departments. The goal of the burn validation study was to further demonstrate the innovative and versatile nature of Spectral AI's DeepView technology, as well as its ability to predict burn wound healing potential on the first day of injury, with greater performance and speed than the methods currently used today.

As our results have shown, together with a rigorous statistical analysis, the DeepView System continues to outperform the clinical judgment of burn physicians by a large margin. We are very pleased with the results from the study, which we will be utilizing as part of our FDA submission for our de novo classification. Next, I'd like to talk for a few minutes about financing. As we also announced in March, the company successfully completed a debt financing agreement with Avenue Capital of up to $15 million in funding, with an initial drawdown of $8.5 million. In connection with this debt financing, the company also raised approximately $2.7 million of equity financing from institutional and existing investors.

With total cash on hand now of over $14 million and potential access to an additional $6.5 million of debt and a reduced operating burn rate, which I will discuss later, our company has significant financing in hand for the foreseeable future to enable us to accelerate our product commercialization efforts and our operations in the foreseeable future. Next, let me talk a little bit about our MTEC development. We continue to drive the development of our DeepView System handheld device, the DeepView Snapshot M, as part of our MTEC development contract. We've successfully assembled two development prototypes, each with fully functional hardware. This marks a key milestone in our development timeline.

Looking ahead, the next major activities include advancing our industrial design, conducting environmental testing to evaluate the performance of the device under rugged and military operational conditions, and continuing our AI software development and integration to enable a total body surface area measurement and AI non-healing prediction functionality. We're on track for development of this technology, and we will continue to build momentum through the next phases of this contract. Lastly, I want to talk a little bit about Spectral IP. This is our healthcare intellectual property focused subsidiary. We are fortunate to have a well-known expert in intellectual property, Erich Spangenberg, as our largest shareholder. As we previously stated, we named Erich as CEO of this subsidiary, and its primary focus with respect to this entity has been to identify assets.

This entity continues through its SEC registration process, and it has recently filed an amended registration statement for its initial public offering. It is important to note once again that the activities of this IP-focused subsidiary require limited management resources and no additional capital from the company. Additionally, no core operating assets or intellectual property of the company will be involved in the subsidiary. With that, let me turn my comments over to our quarterly earnings. We have issued our earnings release this afternoon, which contains additional details of our operating results, and we will be filing our Form 10-Q with the SEC later this week. With that in mind, I will focus my remarks on select highlights and key items.

First off, we are pleased to report that research and development revenue for the first quarter rose 6% to $6.7 million from $6.3 million in the first quarter of last year. This growth reflects an increased level of activity under the BARDA Project BioShield contract, which was awarded to the company in September 2023 as we work towards our FDA de novo submission. Gross margin rose to 47.2% from 46.6% in the first quarter of last year due to the higher concentration of direct labor as a component of our revenue under the BARDA Project BioShield contract. General and administrative expenses for the first quarter of 2025 were significantly reduced from $5.1 million in the first quarter of 2024 to $4.1 million in this quarter.

The reduction in general and administrative expenses primarily relates to our focus on the BARDA Project BioShield contract as we move to complete our de novo submission by the end of the second quarter of 2025, with less work being done on other potential indications and continued cost-cutting and efficiency measures of the company. The reduction in general and administrative expenses resulted in an operating loss for the first quarter of 2025 of only $896,000 as compared to a net loss of $2.1 million in the first quarter of 2024. We continue to drive operational efficiencies throughout the organization. Other income for the first quarter of 2025 was up $4.9 million from other expenses, which accounted for an expense of $1 million in the first quarter of 2024, as the company recorded a decrease in the fair value of its publicly traded warrant liability of $4.4 million.

This resulted in the company reporting net income of $2.9 million as compared to a net loss of $3.2 million in the first quarter of last year. At March 31, 2025, we had 25,588,121 shares outstanding. Now, moving over to the balance sheet, as of March 31, 2025, cash and cash equivalents totaled $14.1 million, up from $5.2 million on December 31, 2024. This is primarily due to the company completing its financing as noted above. As stated earlier, this financing also includes a second tranche, which would provide the company with an additional $6.5 million of debt and an intended equity raise of another $7 million upon FDA approval of our de novo submission. With our reduced spending levels, we believe this level of funding is sufficient to provide the company with the necessary capital throughout the foreseeable future.

For 2025, we are reiterating our revenue guidance of approximately $21.5 million. This guidance does not include contributions from the sales of the DeepView System for the burn indication in the U.K. or in Australia, which, if any, are not expected to be material for this year. I want to thank you for your time and attention today. Nick, let's open up the call for questions from our analysts.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause for a brief moment to assemble our roster. Your first question today will come from Ryan Zimmerman with BTIG. Please go ahead.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Good afternoon. Thanks for taking the questions, Vince. On the guidance, I guess I'll start there. You're calling, I think, for $21.5 million just from BARDA revenue. You're tracking ahead of that. So any pull forward there in terms of what you saw in the first quarter? Because if I hold everything steady, arguably you'll do maybe a little bit better than what your guidance is calling for.

Vince Capone (CFO)

Yeah, Ryan, I appreciate the question. I think for us, we had a strong start to the year, and it's reflective of our efforts to focus on an FDA submission by the end of the second quarter. I think the second half of the year is looking probably less revenue with respect to the BARDA contract as we continue to work on further developments of the DeepView System. As of now, I think when we're not that far through 2025, I think we're confident in the revenue guidance. If we continue to outperform, we may restate guidance. For now, we think the revenue guidance of $21.5 million seems like a reasonable mark.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Yeah. No, I can appreciate that early in the year. That's fair. And then dovetailing into the next question, just you're going to submit end of the second quarter. So any color in terms of how you're preparing for that submission, what you're doing to de-risk the submission, any kind of flavor for your interactions with FDA at this point, I think, would be appreciated by investors.

Vince Capone (CFO)

Sure. No, Ryan, that's a great question. We have the benefit of a 12-year relationship with BARDA. BARDA has been very helpful with us. They've been a fantastic partner for us as we work through this process. We're working with them as part of our submission. The FDA, we've had over 10 pre-sub meetings with the FDA. We're working, as an organization, frankly, very hard to get the submission in a form. We think the burn validation study results were also supportive, and we've identified the three metrics that we are confident that the FDA is going to look at in our submission. To give some color there, I think we've done the things we can do to de-risk our submission as best we can. I think we feel confident on the outcome, but obviously, we don't control that. BARDA has been helpful.

The FDA has been very helpful in our pre-sub meetings, and we're just really working aggressively as an entire organization to get that submission completed and in.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Okay. I'll leave it there and hop back in queue. Thanks for taking the questions, Vince.

Vince Capone (CFO)

Thanks, Ryan.

Operator (participant)

Your next question today will come from Carl Byrnes with Northland Capital Markets. Please go ahead.

Carl Byrnes (Managing Director and Senior Equity Research Analyst)

Thanks for the question. Congratulations on your progress. Just to kind of follow up a little bit, with respect to the 10 pre-sub meetings that you've had with FDA, have you incurred or been hit with any additional requests or deliverables that are in process? If so, can you elaborate on that? Thanks.

Vince Capone (CFO)

Carl, thanks for the question, and thanks for attending the call. No, I mean, we've kind of been walking through this process with the FDA as we've walked through the submission process. I don't really want to get into specifics on the deliverables as part of our FDA submission, but suffice to say, when we released the press release in March, identifying how we've performed with our rigorous analysis and how the burn validation study performed with respect to Dice score, sensitivity, specificity, we're confident that those are benchmarks that the FDA is going to look at as we work through these pre-subs with them. I think that we've tried to de-risk our submission as best we can. We feel, frankly, excited as an organization to get the submission in.

Carl Byrnes (Managing Director and Senior Equity Research Analyst)

Great. Thanks. Just a follow-up unrelated, but on general administrative, it seemed to be a little bit lower than expected in the first quarter. How do you see that for the balance of the year? Thanks.

Vince Capone (CFO)

No, great. I appreciate you picking that up. Obviously, that has driven our results for the quarter. The idea that we are, no pun intended, burning less than $1 million per quarter, we've focused somewhat on operational efficiencies. We see that as helping us with a long runway of the cash we have on hand. I think this is going to provide us with what we need as we move forward. I would anticipate general and administrative expenses to stay consistent with our first quarter results, but that's what keeps me up at night, and we'll continue to drive towards those numbers.

Carl Byrnes (Managing Director and Senior Equity Research Analyst)

Excellent. Congrats again. Thanks.

Vince Capone (CFO)

Thanks, Carl.

Operator (participant)

Your next question today will come from John Vandermosten with Zacks. Please go ahead.

John Vandermosten (Senior Biotechnology Research Analyst)

Great. Good afternoon, Vince. I thought I'd start out with just another question on Snapshot M. I heard you say you had a couple of prototypes made already, and I think we were expecting it to be available for military use in 2027. It sounds like maybe you might be able to beat that. What do you think about the timing at this point for Snapshot M?

Vince Capone (CFO)

Hi, John. Thanks for participating on the call. No, look, I do not necessarily know if we are going to be able to beat the timeline. I think the message that should be taken away from here is that as we are focused on the FDA submission for the DeepView System, we also continue to work very hard on the MTEC contract. We see DeepView Snapshot M as a very good second indication of our technology, and we are working hard through those contracts to get into the position that we want to be with the device and our ability to assist the U.S. military really in the battlefield. It is an absolute fantastic use of our technology and one that we are quite pleased to support the U.S. government and our military brothers and sisters.

John Vandermosten (Senior Biotechnology Research Analyst)

Okay. When you, assuming you get approval, you kind of have a market that's there ready for you, which really limits the amount of effort you're going to have to put in on that. Will you have some kind of awareness campaign or something to perhaps sell a few extra devices outside of maybe the core area where BARDA is focusing, or are you just going to focus mainly on just what BARDA will sell for you initially?

Vince Capone (CFO)

Look, it's a great question. As I said earlier, BARDA has been a fantastic partner for us, not just with the non-dilutive financing that we've taken in to date, but they've been a great sounding board. They've been a great partner. Obviously, we need to focus on that relationship and the parameters around that contract. Our commercialization team is working hard towards expanding our commercialization efforts once we get FDA approval of the device and moving into the commercial phase, even outside of the BARDA environment. I do want to say BARDA is a strong partner and our primary focus.

John Vandermosten (Senior Biotechnology Research Analyst)

Got it. And finally, after you submit, I assume that'll be in probably late June, you'll have the second half to kind of reorder your focus. What will that focus be on? I mean, Snapshot M is one of the big things. What else will you be spending your time doing with Spectral AI?

Vince Capone (CFO)

John, we have continuing advancements of the DeepView System as part of not just the first phase of the PVS contract, but also as part of the second phase. We're going to be working hard on advancing it through the different stages of the BARDA contract so that once we get FDA clearance, if not before, we'll be able to access that second tranche of the BARDA contract, not just with respect to the delivering of devices, but the further advancement of the device. That is first and foremost. You know what I've already talked about. We'll continue to develop the MTEC handheld device for the military. There may be other indications there. Our team is continuing to drill down on potential other indications as we focus in as we move through 2025 into 2026.

I would tell you that I would expect a large portion of the work we do in the second half of this year will be to continue to refine and develop and expand the DeepView System as part of that BARDA contract.

John Vandermosten (Senior Biotechnology Research Analyst)

Great. Thanks, Vince.

Vince Capone (CFO)

Thanks a lot, John.

Operator (participant)

Your next question today will come from Vinny Montgomery with SP Angel. Please go ahead.

Vadim Montgomery (Analyst)

Sorry, Vince. I think I got my name wrong, but it's Vinny here. Thanks for all that. I think a lot of the questions have been answered on BARDA, but I'm interested in just kind of this is a little bit further in the future, but can you give us a little bit more color on how discussions go with the DOD? Because obviously, if you could develop that into a similar relationship as you had with BARDA, it'd be great diversification of revenues from an agency that's much larger. I mean, how does that develop? The contracts to date have been getting ever bigger. Obviously, they're not the size of the BARDA contracts, but they're obviously a bit earlier stage. How is that going? I mean, can you just give us a bit of an example of how those contracts develop?

Vince Capone (CFO)

Vadim, I appreciate you getting on this call, especially knowing your time zone in the U.K., so thank you. I mean, we've had the luxury of a long-standing relationship with BARDA. We've had a luxury of working hard with MTEC and DHA throughout the DOD. We're continuing to work on those relationships. You're right. It takes time to develop those relationships. We're quite pleased with the development of the Snapshot M product so far, and we just need to continue to work hard through research and development to improve that device and further build on that DOD relationship. It's not something that I could point to and say, "Oh, well, it's something that would render itself very easily," but we continue to drive that. I think the continued development of our device will drive further development and relationships and contracts with the DOD.

Vadim Montgomery (Analyst)

Okay. Is it fair to say that it has BARDA equivalent potential in the future, or is that too early to tell?

Vince Capone (CFO)

Yeah. I don't want to, I can't make a statement like that.

Vadim Montgomery (Analyst)

Yeah. Yeah.

Vince Capone (CFO)

I can't make a statement like that. You do remember, you do know I'm still the General Counsel of the company as well, so.

Vadim Montgomery (Analyst)

Excellent. Excellent. Look, thanks, Vince. That's all the questions for tonight.

Vince Capone (CFO)

Thanks, Vadim.

Operator (participant)

That concludes our question-and-answer session. I would like to turn the conference back over to Vince Capone for any closing remarks.

Vince Capone (CFO)

Nick, thank you. Thank you all again for your participation and continued interest in Spectral AI. We are very pleased with the progress we continue to make, and we remain optimistic about the prospects for the growth and the development of our company. We continue to work hard on our FDA submission, and we look forward to having future announcements on the progress of these goals in the near term. Again, thank you all, and have a nice night.

Operator (participant)

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