Spectral AI(MDAI) - 2023 Q4 - Annual Report

Part I Business Spectral AI develops AI-powered DeepView System for predictive medical diagnostics, focusing on burn and DFU indications, with substantial U.S. government funding and planned UK commercialization Overview and Technology The DeepView System is an AI-powered diagnostic tool using multispectral imaging to predict wound healing, having received UKCA marking for burn indications, with a business model combining SaaS fees and device sales - The DeepView System uses proprietary AI and multispectral imaging (MSI) to provide an immediate prediction on a wound's capacity to heal, assisting physicians in making timely treatment decisions[18] - The company received UKCA marking for its DeepView System for burn indications on February 22, 2024, with registration completed on March 7, 2024, enabling market access in the United Kingdom[19] - The technology captures images across a wide spectrum (near UV to near infrared), processes the data, and uses an AI model to classify tissue as non-healing, partially damaged, or healthy, with the entire process taking approximately 20-25 seconds[20] Government Funding and Commercialization Strategy The company has secured approximately $279.6 million in U.S. government funding, primarily from BARDA, including a new $150 million contract, and plans UK commercial sales for burn indications in H2 2024, with DFU applications targeting UK, EU, and U.S. markets subsequently U.S. Government Funding Summary | Funder | Total Awarded Since 2013 (million USD) | New Contract (Sept 2023) (million USD) | | :--- | :--- | :--- | | BARDA | $272.9 | Up to $150.0 | | Total (All Gov't) | ~$279.6 | N/A | - The new BARDA contract includes an initial award of $54.9 million to support clinical validation and an FDA De Novo application for the DeepView AI-Burn software, with options for an additional $95.1 million for development and procurement[24] - Initial sales for the burn indication are anticipated in the UK in the second half of 2024, with the DFU application targeted for the UK in mid-2024, the EU4 in 2026, and the U.S. in 2025, pending regulatory authorizations[25][26] Clinical Indications and Development Pipeline The company is advancing its DeepView System across burn and DFU indications, demonstrating 92% accuracy in adult burns and 86% in DFUs, while developing a handheld device and 3-D wound measurement technology DeepView System Accuracy in Clinical Trials | Indication | Population | Accuracy (%) | | :--- | :--- | :--- | | Burn | Adults | 92 | | Burn | Pediatrics | 88 | | DFU | Adults | 86 | - A validation study for the burn indication began in early 2024, planning to enroll 240 adult and pediatric subjects across 20 clinical sites[31] - The company is developing a fully handheld, portable version of its technology, the DeepView SnapShot M, with over $6.0 million in funding from the Department of Defense (DHA and MTEC)[40] Intellectual Property The company protects its technology through nine active patent families and a portfolio of 64 trademarks, holding 10 issued U.S. patents and 10 international patents as of year-end 2023, with numerous applications pending Intellectual Property Portfolio (as of Dec 31, 2023) | IP Type | U.S. | International | | :--- | :--- | :--- | | Issued/Allowed Patents | 10 | 10 | | Pending Patent Applications | 5 | 29 | | Trademarks | - | 64 (across 9 jurisdictions) | | Pending Trademark Apps | - | 9 (across 9 jurisdictions) | - The company's technology is protected by nine families of active patents covering areas like Burn/Wound Classification, DFU healing prediction, and MSI snapshot imaging[73][82] Risk Factors The company faces significant risks including financial losses, heavy reliance on government funding, uncertain regulatory approvals, commercialization challenges, and the need to protect its intellectual property and proprietary data Risks Related to Financial Condition and Capital Requirements The company has a history of significant net losses, including $20.9 million in 2023, is highly dependent on BARDA government funding, and may require additional capital for operations and commercialization, with no guarantee of availability - The company has incurred substantial net losses since inception, with a net loss of $20.9 million for the year ended December 31, 2023, and an accumulated deficit of $32.8 million[85] - The business is substantially dependent on funding from BARDA and the DHA; the BARDA contract is the largest single source of revenue and its non-extension would have a material adverse impact[90][91] - The company may need to raise additional capital to fund product development, regulatory submissions, and commercialization, but there are no assurances that additional financing will be available on favorable terms, or at all[100][101] Risks Related to Product Development and Regulatory Review The regulatory review process for medical devices is expensive, time-consuming, and uncertain, with no guarantee of FDA or international approvals, potential clinical trial delays, and risks from evolving legislation - The company may be unable to obtain necessary 510(k) clearance, De Novo classification, or PMA approval from the FDA, or CE mark/UKCA certification in Europe, for its DeepView technology, which is a prerequisite for marketing[105][107][108] - Completion of clinical trials could be delayed, suspended, or terminated due to various reasons, including failure to meet regulatory requirements, slow patient enrollment, or adverse events, increasing development costs and delaying revenue generation[111][113] - Changes in regulations by the FDA, or in the EU and UK (post-Brexit), could impose additional costs, lengthen review times, or make it more difficult to obtain or maintain market authorization for the DeepView System[115][116][120] Risks Related to Commercialization of our DeepView System Commercial success of the DeepView System is uncertain, dependent on market acceptance, the company's ability to build sales infrastructure, secure third-party reimbursement, and effectively compete with existing diagnostic methods and new technologies - The commercial success of DeepView depends on its adoption by clinicians, which is uncertain and may be hindered by factors like lack of experience with new technology, perceived liability risks, and existing relationships with other companies[165][166] - The company currently has no sales, marketing, or distribution infrastructure and will need to build these capabilities, which involves significant expense and risk[172] - Sales will depend on the extent of coverage and reimbursement from third-party payors like private insurers and government programs, which is uncertain and may not be adequate[173] Risks Related to Our Intellectual Property The company's success relies on robust intellectual property protection for its AI algorithms and data, facing risks of insufficient patent coverage, costly litigation, and government rights to inventions developed under contracts with BARDA and DHA - The company's ability to successfully commercialize its products may be harmed if it is unable to obtain and maintain sufficient patent or other IP protection for its technology[228] - The success of the company's AI algorithms is dependent on its significant proprietary repository of approximately 340 billion pixels of DFU and burn data; loss of access to or protection of this data would be a material adverse event[221] - Government contracts with BARDA and DHA grant the U.S. government a nonexclusive, nontransferable, irrevocable, paid-up, worldwide license to practice inventions conceived or reduced to practice under the contract[278] Cybersecurity The company manages cybersecurity risk through an enterprise framework overseen by the Audit Committee, focusing on human, supply chain, and geopolitical threats, employing a multi-layered approach, and has not identified any material incidents as of the filing date - Cybersecurity risk is managed under an enterprise risk management framework overseen by the Audit Committee and the Board[309] - The company focuses on human risk through employee training, supply chain risks via a third-party risk management program, and geopolitical risks[310][313] - The company maintains a cybersecurity incident response plan (CIRP) and performs periodic tabletop exercises to test preparedness[312] Properties The company leases executive offices in Dallas, Texas, at ~$105,000 per month, and an office in the United Kingdom at $14,000 per month, both deemed adequate for current operations Leased Properties | Location | Monthly Cost (USD) | | :--- | :--- | | Dallas, TX (Executive Offices) | ~$105,000 | | United Kingdom | $14,000 | Legal Proceedings The company is not a party to any material legal proceedings but is aware of one material threatened claim it believes lacks merit - The company is not a party to any material legal proceedings but is aware of a material threatened claim it believes lacks merit[319] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Common Stock and warrants began trading on Nasdaq as 'MDAI' and 'MDAIW' post-September 2023 Business Combination, with 17,466,871 shares outstanding as of March 25, 2024, no dividends paid, and recent equity financing agreements with B. Riley and Yorkville - Common Stock and redeemable warrants trade on Nasdaq under symbols 'MDAI' and 'MDAIW' since September 12, 2023[322] - As of March 25, 2024, there were 17,466,871 shares of Common Stock issued and outstanding[323] - The company has not declared or paid dividends and does not plan to in the foreseeable future[324] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue for 2023 decreased to $18.1 million from $25.4 million in 2022, leading to a net loss of $20.9 million due to lower contract activity and $8.3 million in transaction costs, though new BARDA funding and equity facilities are expected to provide sufficient liquidity Results of Operations Research and development revenue decreased 28.8% to $18.1 million in 2023, resulting in a $20.9 million net loss due to lower contract activity, increased G&A expenses, and $8.3 million in Business Combination transaction costs Consolidated Results of Operations | Metric | 2023 (in thousands USD) | 2022 (in thousands USD) | Change ($ in thousands USD) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Research and development revenue | $18,056 | $25,368 | $(7,312) | (28.8)% | | Gross profit | $7,880 | $10,837 | $(2,957) | (27.3)% | | Gross margin | 43.6% | 42.7% | N/A | 0.9 ppt | | Operating loss | $(12,984) | $(2,647) | $(10,337) | (390.5)% | | Net loss | $(20,854) | $(2,912) | $(17,942) | (616.1)% | - The decrease in revenue was primarily due to less activity as the company completed work under the BARDA Burn II contract before initiating work on the new BARDA PBS contract in Q4 2023[366] - The significant increase in net loss was driven by lower revenue, a $7.4 million increase in G&A expenses, and $8.3 million in non-recurring transaction costs for the Business Combination[371][375] Liquidity and Capital Resources The company ended 2023 with $4.8 million in cash and a $32.8 million accumulated deficit, but secured a $10.0 million ELOC with B. Riley and a $30.0 million SEPA with Yorkville, including a $12.5 million advance, to ensure sufficient working capital for the next 12 months - The company ended 2023 with $4.8 million in cash, down from $14.2 million at the end of 2022[381][453] - In December 2023, the company entered into a $10.0 million committed equity facility with B. Riley[381] - In March 2024, the company secured a $30.0 million Standby Equity Purchase Agreement with Yorkville, which includes a $12.5 million pre-paid advance, of which $5.0 million was disbursed immediately[381][454] Non-GAAP Financial Measures The company utilizes Adjusted EBITDA, a non-GAAP metric, to assess performance, reporting a loss of $11.7 million in 2023 compared to a $1.5 million loss in 2022, after excluding specific non-operating and non-cash items Reconciliation of Net Loss to Adjusted EBITDA | | Year Ended Dec 31, 2023 (in thousands USD) | Year Ended Dec 31, 2022 (in thousands USD) | | :--- | :--- | :--- | | Net loss | $(20,854) | $(2,912) | | Depreciation expense | 9 | 11 | | Provision for income taxes | 13 | 106 | | Net interest income | (172) | (21) | | EBITDA | $(20,789) | $(2,816) | | Stock-based compensation | 1,243 | 1,155 | | Change in fair value of warrant liability | (335) | (57) | | Foreign exchange transaction loss | 24 | 237 | | Transaction costs | 8,342 | - | | Adjusted EBITDA | $(11,732) | $(1,481) | Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2023, due to three material weaknesses in internal control over financial reporting, for which a remediation plan is currently being implemented - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023[408] - Three material weaknesses were identified in internal controls related to: 1) communication of complex arrangements, 2) recording of operating expenses, accruals, and unbilled revenue, and 3) the financial statement close process[408] - A remediation plan is underway, involving engaging professional services, strengthening and formalizing accounting processes, and enhancing the ERP system[410] Part III Directors, Compensation, Ownership, and Accountant Fees Information for Items 10 through 14, covering Directors, Executive Officers, Compensation, Security Ownership, Related Transactions, and Principal Accountant Fees, is incorporated by reference from the company's forthcoming 2024 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees and Services is incorporated by reference from the company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[419][421][422][423][424] Part IV Exhibits, Financial Statement Schedules This section presents the company's audited consolidated financial statements for 2023 and 2022, including Balance Sheets, Statements of Operations, Equity, and Cash Flows, with notes detailing accounting policies, the Business Combination, revenue, stock compensation, and subsequent financing events Key Consolidated Balance Sheet Data | | Dec 31, 2023 (in thousands USD) | Dec 31, 2022 (in thousands USD) | | :--- | :--- | :--- | | Cash | $4,790 | $14,174 | | Total Assets | $10,692 | $18,716 | | Total Liabilities | $12,401 | $6,720 | | Total Stockholders' Equity (Deficit) | $(1,709) | $11,996 | Key Consolidated Cash Flow Data | | Year Ended Dec 31, 2023 (in thousands USD) | Year Ended Dec 31, 2022 (in thousands USD) | | :--- | :--- | :--- | | Net cash used in operating activities | $(13,240) | $(1,162) | | Net cash provided by (used in) financing activities | $3,844 | $(785) | | Net decrease in cash | $(9,384) | $(1,947) | - Subsequent to year-end, the company raised $2.7 million through its B. Riley facility, secured a new ~$500,000 DHA contract, formed a new subsidiary (Spectral IP, Inc.) with a $1.0 million investment, and entered a $30.0 million equity facility with Yorkville, receiving an initial $5.0 million advance[560][561][562][563]