Overview

Spectral AI is a medical technology company focused on developing an imaging device called the DeepView System to help doctors assess wounds and guide treatment decisions. The company does not currently generate product revenue and is spending most of its efforts on researching and developing the DeepView System.

In September 2023, Spectral AI signed a $150 million contract with the U.S. Biomedical Advanced Research and Development Authority (BARDA) to support continued development and FDA clearance of the DeepView System. This adds to over $270 million in previous government funding Spectral AI has received.

The company expects to start commercializing the DeepView System in the UK in the second half of 2024 after receiving regulatory clearance there. The DeepView System is still undergoing clinical testing in the US for FDA clearance.

Business Combination

In September 2023, Spectral AI became a public company by merging with a special purpose acquisition company (SPAC) called Rosecliff Acquisition Corp. This “business combination” allowed Spectral AI to start trading its shares on the Nasdaq stock exchange without having to go through an initial public offering (IPO).

As part of the merger, Rosecliff Acquisition Corp changed its name to Spectral AI. This transaction provided Spectral AI with additional cash to fund its operations.

Increased Costs as a Public Company

Becoming a public company has led to higher legal, accounting, insurance, and other costs for Spectral AI. The company expects these costs to continue increasing now that it must meet regulatory requirements for public companies.

Financial Highlights

• Spectral AI’s revenue comes almost entirely from R&D contracts with US government agencies, mainly BARDA. Revenue increased 25% to $6.3 million in Q1 2024 compared to $5.1 million in Q1 2023 due to more activity under the new BARDA contract.

• The company has accumulated losses of about $36 million as of March 31, 2024. Spectral AI expects to continue operating at a net loss while it focuses resources on developing the DeepView System.

• Cash balance was $10.2 million as of March 31, 2024. Recently secured additional financing capacity of $42.5 million through agreements with B. Riley and Yorkville.

Revenue

Currently nearly all of Spectral AI’s revenue comes from reimbursements under R&D contracts with BARDA and other government agencies. Revenue growth depends mainly on the level of R&D activity under these contracts.

Commercial sales of the DeepView System in the future are expected to provide two revenue streams - software licensing/subscriptions and sales of the imaging device itself.

Expenses

Spectral AI’s expenses consist primarily of R&D costs related to developing the DeepView System and general administrative costs such as salaries, consulting fees, rent and insurance.

The company expects costs to increase as a public company, including higher legal, accounting and insurance fees. Managing these additional costs will impact profitability.

Cash Flow

• Cash used in operations decreased by $1.1 million in Q1 2024 compared to Q1 2023, mainly due to lower net losses.

• Cash from financing increased by $8.2 million in Q1 2024, largely due to drawing on financing agreements with B. Riley and Yorkville.

Spectral AI believes it has enough cash to fund at least 12 months of operations between existing cash, government contracts, and financing capacity. But further financing may be needed to support ramping up commercialization or unforeseen costs.

Debt

The company has taken on $5.8 million in debt as of March 31, 2024. This includes:

• $5 million in convertible notes from an agreement with Yorkville
• $0.2 million outstanding on an insurance financing note

The Yorkville notes have zero interest but require repayments starting in May 2024.

Investments in AI Development

In March 2024, Spectral AI created a subsidiary called Spectral IP focused on developing other AI technologies for healthcare. An affiliate of Spectral AI’s largest shareholder invested $1 million into Spectral IP.

This highlights Spectral AI’s long-term strategy to leverage its AI expertise, while staying focused on commercializing the DeepView System in the near-term.

Outlook

Spectral AI is at a pivotal point as it transitions from a R&D-focused company to ramping up commercialization of the DeepView System while continuing clinical testing.

The company appears to be sufficiently funded in the short term thanks to the new BARDA contract and financing agreements. But sustained profitability will depend on execution - keeping costs under control, achieving regulatory clearance, and driving adoption of DeepView.

The $150 million BARDA contract validates the importance of Spectral AI’s technology. But the company faces risks from potential delays in development, regulatory approvals, or market acceptance.

Overall the next 1-2 years seem crucial for demonstrating the commercial viability of the DeepView System. Spectral AI looks well positioned based on government support, but still has much to prove.