Spectral AI, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparative period is Q1 2023. Unaudited. Financial amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Spectral AI is developing the DeepView AI wound-imaging system for burn wounds and diabetic foot ulcers. It has not generated product revenue; current revenue is from government-funded research and development contracts, primarily BARDA. The company reported one operating segment. Its September 2023 business combination was accounted for as a reverse recapitalization, with Legacy Spectral treated as the accounting predecessor.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Research and development revenue | $6.326 | $5.078 | +$1.248, or 24.6% |
| Gross profit / margin | $2.945 / 46.6% | $2.181 / 42.9% | +$0.764 / +3.6 percentage points |
| General and administrative expense | $5.088 | $5.079 | +$0.009 |
| Operating loss | $(2.143) | $(2.898) | Loss narrowed $0.755 |
| Net loss | $(3.205) | $(3.609) | Loss narrowed $0.404 |
| Net loss per share, basic and diluted | $(0.19) | $(0.27) | |
| Adjusted EBITDA (non-GAAP) | $(2.133) | $(2.596) | Loss narrowed $0.463 |
| Operating cash flow | $(2.680) | $(3.755) | Cash use fell $1.075 |
Revenue growth reflected increased work under the PBS BARDA contract. Gross margin improved principally because the new PBS BARDA contract has a higher reimbursement rate than the completed BARDA Burn II contract. BARDA represented $6.101 million of Q1 2024 revenue; one U.S. government customer accounted for 96% of revenue and 98% of receivables at quarter-end.
Cash was $10.157 million at March 31, 2024, versus $4.790 million at year-end 2023. Current assets were $14.884 million and current liabilities $17.511 million. Notes payable totaled $5.752 million, all presented as current; the company reported no long-term debt. Accumulated deficit was $35.993 million. Financing cash flow was $8.049 million, including common-stock proceeds and new borrowings.
Material changes, outlook, risks and unusual items
- Funding and dilution: The company sold 1,187,398 shares through its B. Riley equity facility for $2.667 million gross proceeds during the quarter. It also received $4.6 million net proceeds on a $5.0 million Yorkville convertible note, issued at an 8% original issue discount. The note has a fixed $3.16 conversion price, monthly repayment provisions and a 7% payment premium. Further Yorkville advances, subject to conditions, could total $7.5 million principal; the SEPA permits share sales of up to $30 million. The company also has a B. Riley facility with up to $10 million in aggregate gross proceeds available, subject to its terms.
- Liquidity outlook: Management believes the PBS BARDA contract, MTEC agreement and available B. Riley and Yorkville financing provide sufficient working capital for at least one year beyond the financial statement release date. This assessment depends on contract funding and financing availability; management cautions that additional capital may be needed and may not be available on acceptable terms.
- Development and commercialization: A 240-patient pivotal burn study began in December 2023. The company expects the PBS BARDA contract’s initial $54.9 million award to support clinical validation and FDA clearance through Q1 2026. Following receipt of UKCA marking for the burn indication, management expects UK commercialization activities to begin in the second half of 2024. These are forward-looking plans, not reported results. The overall BARDA contract is valued at up to approximately $150 million.
- Other funding and related-party transaction: MTEC awarded $4 million for a handheld system project expected to run through April 2025; the company received an additional $0.5 million Defense Health Agency award in March. A newly formed subsidiary, Spectral IP, received a $1 million note investment from an affiliate of the largest shareholder. The note matures in one year, bears 8% interest and may require earlier repayment upon a spin-off or sale.
- Controls and legal matters: Management concluded disclosure controls were not effective at March 31, 2024, citing material weaknesses involving communication of complex transactions, expense/accrual and unbilled-revenue cut-off, and the financial close and reconciliation process. Remediation is underway but not yet demonstrated effective. The company disclosed a material threatened claim it believes is without merit; it reported no material pending legal proceedings.
- Other items: Q1 other expense included $0.276 million of borrowing-related costs and $0.848 million of other expenses, primarily transaction-related fees. In April 2024, the company extended its Dallas office lease through February 2028, with minimum rent of approximately $0.1 million monthly plus operating expenses.
No formal product-revenue or earnings guidance is provided in the filing. Key risks include dependence on government awards, customer concentration, clinical and regulatory uncertainty, financing needs and dilution, supplier reliance, and the possibility that commercialization or funding timelines differ from expectations.
Important facts for investors to verify
- Progress, funding milestones and remaining available value under the PBS BARDA contract and MTEC/DHA awards.
- Pivotal-trial enrollment and results, FDA clearance timing, and whether UK commercialization begins as expected.
- Cash burn, repayment obligations and conditions for the remaining Yorkville advances and equity facilities, including potential share dilution.
- Remediation and testing of the disclosed material weaknesses, and whether disclosure controls become effective.
- Continued dependence on a single government customer and the status or resolution of the threatened claim.