Spectral AI, an artificial intelligence (AI) company, has been at the forefront of developing innovative solutions to revolutionize medical diagnostics, particularly in the realm of wound care. With its flagship product, the DeepView® System, Spectral AI is poised to transform the way healthcare providers assess and treat various types of wounds, including burns and diabetic foot ulcers (DFUs).

Company Background

Spectral AI, Inc., formerly known as Rosecliff Acquisition Corp I, was initially formed as a blank check company on November 17, 2020, with the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses. On September 11, 2023, the company consummated a business combination with Spectral MD Holdings, Ltd., a Delaware corporation incorporated on March 9, 2009, and headquartered in Dallas, Texas. This merger led to the company changing its name from Rosecliff Acquisition Corp I to Spectral AI, Inc.

Prior to the business combination, Legacy Spectral's shares of common stock were listed on the AIM market on the London Stock Exchange. In September 2023, just before the closing of the business combination, Legacy Spectral issued 7.68 million shares of its common stock to certain investors in a private placement, in exchange for $34 million. Upon the closing, all of Legacy Spectral's issued and outstanding 145.38 million shares of common stock were exchanged for 14.09 million shares of the company's common stock.

It's important to note that Spectral AI has not generated any product revenue to date. The company currently generates revenue from contract development and research services by providing such services to governmental agencies, primarily to the Biomedical Advanced Research and Development Authority (BARDA) and under a contract with the Medical Technology Enterprise Consortium (MTEC).

Key Partnerships and Funding

One of Spectral AI's key strengths is its strong partnership with the Biomedical Advanced Research and Development Authority (BARDA), a division of the U.S. Department of Health and Human Services. Since 2013, the company has received approximately $281 million in funding awards from BARDA, which has been instrumental in the development and advancement of the DeepView® System. In September 2023, Spectral AI executed its third contract with BARDA, a multi-year Project BioShield (PBS) agreement valued at up to $150 million, further solidifying the government's confidence in the company's technology and its potential to revolutionize wound care.

Spectral AI's Technology and Innovation

DeepView® System

The DeepView® System, Spectral AI's flagship product, leverages proprietary AI algorithms and multi-spectral imaging to provide healthcare providers with a comprehensive assessment of the healing potential of burn wounds and DFUs. By analyzing a vast database of clinical images and data, the system can accurately predict the likelihood of a wound's ability to heal within a specified timeframe, enabling clinicians to make more informed and timely treatment decisions.

For burn wounds, the DeepView® System's non-healing assessment could help clinicians determine appropriate candidates for surgery and identify specific areas of the burn wound that require excision and skin grafting. In the case of DFUs, the system provides a rapid assessment of the non-healing portions of the wound, potentially enabling the physician to use advanced wound care therapies on the first day of treatment rather than waiting up to 30 days.

Regulatory Progress

Spectral AI's commitment to innovation and clinical excellence is evident in its ongoing regulatory efforts. In 2018, the DeepView® System received Breakthrough Device Designation from the U.S. Food and Drug Administration (FDA), recognizing the system's potential to address unmet medical needs and improve patient outcomes. The company is currently in the midst of its U.S. Burn Pivotal Study, one of the largest domestic burn studies ever conducted, designed to validate the AI-driven algorithm used by the DeepView® System for its burn indication. The completion of this study and the subsequent FDA submission, anticipated in the first half of 2025, will be a crucial milestone for the company.

DeepView SnapShot® M Development

In addition to its primary DeepView® System, Spectral AI is advancing the development of its DeepView SnapShot® M, a portable version of the DeepView® System designed to support military battlefield burn evaluation. This development is being conducted in collaboration with the Medical Technology Enterprise Consortium (MTEC) and the Defense Health Agency (DHA). In April 2023, the company received a $4 million grant from MTEC to support this initiative, further expanding the potential applications of its technology.

International Expansion

In addition to its focus on the U.S. market, Spectral AI has made significant strides in the United Kingdom, where several DeepView® System devices have been installed in burn centers. The initial feedback from UK clinicians has been overwhelmingly positive, with physicians expressing enthusiasm for the system's ability to enhance patient care and improve outcomes. The company is also exploring opportunities to expand its reach to other international markets, such as Australia, where it is actively working to deploy the DeepView® System through the country's Special Access Scheme.

Financials

Spectral AI's financial performance has been noteworthy, with the company reporting strong revenue growth in recent quarters. For the third quarter of 2024, the company reported a 138% increase in research and development revenue compared to the same period in the previous year, driven by increased activity under the BARDA PBS contract. Revenue for Q3 2024 reached $8.17 million, up from $3.4 million in Q3 2023.

The company's gross margin improved to 44.9% in Q3 2024, up from 42.8% in Q3 2023, reflecting the higher reimbursement rate under the BARDA contract compared to the previous BARDA Burn II contract. General and administrative expenses declined to $4.6 million or 55% of revenue in Q3 2024, down from $5.6 million or 164% of revenue in Q3 2023, driven by a reduction in non-revenue generating R&D activities.

Spectral AI's net loss narrowed significantly to $1.5 million or $0.08 per share in Q3 2024, compared to a net loss of $10.6 million or $0.77 per share in Q3 2023. The adjusted EBITDA loss for Q3 2024 was approximately $700,000, a substantial improvement from the adjusted EBITDA loss of $3.9 million in Q3 2023.

For the full year 2023, Spectral AI reported annual revenue of $18.06 million, with an annual net loss of $20.85 million. The company's annual operating cash flow and free cash flow for 2023 were both negative $13.24 million.

Looking ahead, Spectral AI has reiterated its revenue guidance for 2024 of approximately $28 million, representing an expected increase of about 55% from the $18.1 million reported in 2023. This growth in revenue guidance reflects the company's work on the BARDA Project BioShield contract as well as additional government funding for the continued development of the DeepView SnapShot® M.

Market Potential and Growth Strategy

Future Priorities

Looking ahead, Spectral AI remains focused on several key priorities. The company is dedicated to completing the U.S. Burn Pivotal Study and submitting the necessary documentation to the FDA for the DeepView® System's regulatory approval. Simultaneously, Spectral AI is advancing the development of its DeepView SnapShot® M, a portable version of the DeepView® System designed to support military battlefield burn evaluation, in collaboration with the Medical Technology Enterprise Consortium (MTEC) and the Defense Health Agency (DHA).

Liquidity and Capital Resources

As of September 30, 2024, Spectral AI had $3.7 million in cash, including $0.9 million in its Spectral IP subsidiary. The company's financial position has been strengthened through various financing initiatives, including a Common Stock Purchase Agreement with B. Riley Principal Capital II, LLC and a Standby Equity Purchase Agreement with Yorkville Advisors. These arrangements provide Spectral AI with additional resources to support its growth and regulatory efforts.

The company has access to a $10 million equity line of credit with B. Riley and a $30 million standby equity purchase agreement with Yorkville. As of September 30, 2024, Spectral AI had drawn $2.7 million from the B. Riley facility and $12.5 million from the Yorkville facility. The company's debt-to-equity ratio stood at -1.858, with a current ratio of 0.726 and a quick ratio of 0.693 as of September 30, 2024.

Despite the challenges faced by the company, such as the need to maintain compliance with Nasdaq's listing requirements, Spectral AI has demonstrated its resilience and unwavering commitment to its mission. Under the leadership of Dr. J. Michael DiMaio, the company's Chairman, Spectral AI has refocused its efforts on the "3Fs" – finance, focus, and finish – to ensure the successful commercialization of the DeepView® System and its continued innovation in the field of wound care diagnostics.

As Spectral AI navigates the regulatory landscape and continues to advance its technological capabilities, the company stands poised to transform the way healthcare providers approach wound management, ultimately improving patient outcomes and enhancing the quality of care. With its strong financial backing, robust partnerships, and pioneering technology, Spectral AI is well-positioned to cement its position as a leader in the AI-driven medical diagnostics market.