Spectral AI, Inc.

Good day and welcome to the Spectral AI third quarter 2023 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that today's event is being recorded. I would now like to turn the conference over to Devin Sullivan of the Equity Group. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone, and thank you for joining us for Spectral AI's 2023 Third Quarter Financial Results Conference Call. Our speakers for today will be Wen-Hsien Fan, Chief Executive Officer of Spectral AI, and Niels Windler, the company's Chief Financial Officer. Before we begin, I'd like to remind everyone that during this call, certain statements may be made that constitute forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995, including statements regarding the company's strategy, plans, objectives, initiatives, and financial outlook. When used during these discussions, 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 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 the company's control that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. As such, investors are cautioned not to place undue reliance on any forward-looking statements. Investors should carefully consider the foregoing factors and other risks and uncertainties described in the risk factors sections of the company's filings with the SEC, including the registration statement and 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 forward-looking statements. Management will also be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in the company's press release. With that said, I'd now like to turn the call over to Wencheng Fan, Spectral AI's Chief Executive Officer. Wencheng, please go ahead.

Thank you, Devin, and good morning to all. Thank you all for joining us today for our third quarter financial results conference call. This is our very first conference call as a NASDAQ listed company. I want to thank our executive team, board members, advisors, and investors for their support in allowing us to achieve our objective as a U.S. public listed company. and for their continuous belief in Special AI and our mission. I will turn things over to Niels shortly to discuss our financial results. For now, given that many of you guys may be new to our company, and I'd like to spend a few minutes discussing Special AI, our technology, our accomplishments, and most importantly, the significant opportunities we're addressing to change the standard of care in wound assessment and treatments. Special AI is a Dallas, Texas-based company. We specialize in predictive analytics with a platform that uses proprietary artificial intelligence, AI, to predict if a wound will heal. The name of our technology and our product is DeepView, D-E-E-P, V-I-E-W, with a current focus in predictive medical diagnostics. Our DeepView system is a platform technology that uses proprietary AI algorithms combined with multispectral imaging technology to determine if a wound will heal under routine care or will require advanced wound care products and treatments to do so. The imaging takes less than 200 milliseconds, and the AI-powered assessment is delivered in seconds. DFU sees what the naked human eyes cannot. We think of it as a rapid response test that provides an immediate, objective, and statistically reproducible wound healing assessment that allows the physician to make an informed decision regarding next steps treatment decisions. Right now, DFU has two main areas of clinical indications, burn wound and diabetic foot ulcer, DFU. Along with these two clinical indications, we're also working on productization of our 3D wound size measurement tool for standardized digital documentation and compliance. In the case of a burn wound, DeepView would help determine the burn wound area that will not heal. the area that the regeneration capacity is lost. And for those burn wounds, such a non-healing area will likely require excision and skin grafting. If you answer the most relevant question from a surgeon's perspective, where do I cut? And it will also help the emergency department to make the informed decision on which patients to be transferred to the burn centers for advanced care or keeping them in their routine care. According to the American Burn Association, 1.1 million Americans suffer from burn injuries each year, with over 500,000 presenting to emergency departments and 40,000 requiring surgeries and hospitalization. In contrast to this demand, only 2% of the U.S. hospitals have burn centers. and there are only about 250 burn surgeons in all of the United States. The use of DeepView helps bridge this gap. We have conducted three large multi-site clinical studies across the United States that have validated DeepView's current accuracy for burn wounds like 92% for adults and 88% for children. compared with the current physician accuracy of 50 to 70% at the best of human performance. In addition, there are head-to-head clinical trials evaluations that have been demonstrating that DeepView provides higher accuracy on the same burn wound than the accuracy of both burn specialists and the non-burn specialists at burn centers as well as emergency medical professionals. Our initial studies also show that DFEW reduced the length of stay, LOS, by more than three plus days from the current average of eight days. Because DFEW can offer the high accuracy assessment much earlier in the treatment flow, all of this lead to significantly lower cost, reduce the treatment time, reduce chances for infections and complications, and reduce patients' pain and suffering. And in the mass casualty situations, such as the unfortunate Maui fire earlier this year, DFU can help save healthcare resources and greatly improve the utilization of both emergency departments as well as the burn centers in the hospitals. That is for the burn wound indication. Now, for diabetic foot ulcers, where the DFU accuracy now sits at 86%, based on our multiple clinical studies in the U.S. and EU. A non-healing assessment would justify the immediate use of advanced wound care products and therapies, including not limited to hyperbaric oxygen chamber, synthetic dressing, skin substitutes, and vascular interventions. If you can provide the objective assessment and statistically sound justifications early on, as opposed to the current wait and see approach that both physicians and patients have to wait as long as 30 days and sometimes 45 days to justify if a DFU will heal or not so that the payers for this patient can approve the advanced wound care products and therapies. I don't think I needed to really fight anybody to say that the challenges around the diabetes is just on the rise. This is a global epidemic. In fact, I just returned from Saudi Arabia and the UAE, the GCC region. More than 20% of their population are diabetic and it's growing. The local hospital systems get the benefits of DFU healing assessment as a diagnostic assistant right away. They also asked how DeepView can help on the prevention side. Well, to use DeepView, it's like taking a snapshot of pictures. Literally, under 200 milliseconds, it's done imaging, and the AI results in seconds. It's non-invasive, non-irradiation, and non-touch. DeepView can be used as a continuous monitoring tool for the wound and provide both physicians and patients the feedback information to therapies and compliance efforts and help prevent the recurrence of the ulcers. Well, Byrne has an estimated TAM of 3.7 billion through 2028. That bad foot ulcer affects more than 5.2 million patients per year. That is in the US, UK, and the EU. While the global market of more than $11 billion. DFU patients report an average of 15.5 doctor visits per year with a cost of up to $63,000 per patient per year. At present, there is no medical device that can determine if a DFU will heal. It is ironic that you and I can walk into many hospitals and clinics around the country and see an array of advanced treatment options to DFUs. However, new patients who present with a DFU have to wait up to 30 days to gain access to those advanced wound care products and therapies. Why? Because this is what the insurance companies require before authorizing treatment and means 30 days, sometimes up to 45 days of patient uncertainty, 30 days of unnecessary patient discomfort, 30 days of exposure to possible infection, and 30 days closer to potential amputation. That is an acceptable and quite honestly, in our view, unnecessary. Our goal following the receipt of the necessary regulation approvals is for the DVU platform to become part of the clinical treatment flows at ERs, hospitals, birth centers, interclinics, podiatrist offices. We believe that the use of DVU by clinicians can result in appropriate treatment commencing the day on day one. And the complementary aspect of DeepView's wound assessment ability with a multitude of available and effective healing therapies suggests significant potential partnership opportunities between Special MD, between Special AI, and all those therapeutical companies for DeepView upon regulatory clearance. With respect to our regulatory pathway, we will first focus on DFEW for diabetic foot ulcer assessment, given the size of the market opportunity. We intend to submit applications for FDA, UKCA, and CE mark approval for DFEW DFE indication, as well as for 3D wound measurement capabilities in 2024, subject to the completion of ongoing studies. Potential product commercialization and revenues from DeepView for DFU are also targeted for 2024. We anticipate FDA and CE mark approval for the burn indication in 2025. Of note, our DeepView platform received breakthrough device designation for burn indication from the FDA since 2017, allowing us to prioritize reviews and a dedicated line of communication with the FDA. Both BFU Gen 1 and Gen 2 platform were cleared by FDA in 2013 and 2017, respectively. For our upcoming Gen 3 with all the AI indications, actually in this quarter of Q3, specifically on September 8th, we held our ninth Q7 meeting with FDA, and this one was our validation study design and data analysis needed for clearance. We actually believe in the classic open book approach with FDA and our plans towards clearance is part of our practices to de-risk one of the most important milestones of our roadmap towards commercialization. We have a robust and scalable strategic partnership platform in place consisting of clinical alliances in the U.S. and European Union. as well as key external development and manufacturing relationships for the production and delivery of our debut systems when appropriate. We're continuing to expand and strengthen these relationships in advance of anticipated FDA clearance. You will see in our press release, we have highlighted a variety of recent accomplishments, all of which we're very proud of. Before turning things over to news, I want to highlight one in particular. In late September of this year, September 28th, 7.40 a.m. Eastern Time, actually, we were awarded our largest contract to date from the U.S. federal agency called BARDA, B-A-R-D-A, valued at up to 149 million U.S. dollars. Together with the previous contracts, This brings a total U.S. government awards to the company since 2019 to more than $246 million. This latest multi-year contract includes an initial award of near $55 million to support the clinical validation and FDA clearance of DeepView for commercial marketing and distribution purposes. This is a major milestone that enables our technology to become a key component of the U.S. government's preparedness efforts for burn meth casualty events. The initial award of this $55 million placed DFU devices at various burn centers and emergency rooms to support the ongoing clinical validation study and to facilitate the transition of DFU as a device for routine care upon FDA clearance. The contract also includes with an additional total value of approximately $95 million, and can be exercised for additional product development, procurement, and deployment initiatives. This contract is under the project file shield, and this includes clinical studies necessary for FDA clearance, that's the $55 million for, in up to $95 million for now for procurement and deployment of DeepView technology. We're very excited about our prospects for continued growth. We're confident that we're on the verge of delivering a disruptive, talking-edge, AI-driven wound healing assessment platform with the potential to significantly improve the current standard of care across multiple indications. We also believe DIVIU offers a wonderful diagnostic opportunities to build the strategic partnerships with other wound care product companies. We believe the benefits of DIVIU to physicians, hospitals, patients, payers, advanced wound care products, and all these relationships. With that, I now will turn things over to our CFO, Nils Wendler. Nils, please go ahead for the financial results, please.

Thank you, Wencheng, and thank you, everyone, for joining us today. I would also like to remind everyone that our press release issued yesterday evening and our Form 10-Q that will be filed with the SEC today both contain a good amount of detail on our operating results. With that in mind, I'll focus my remarks on selected highlights and key items. Research and development revenue was 3.4 million compared to 7 million in last year's third quarter. This was primarily driven by the wind down of the BARDA burn two contract, which was expected as clinical trials were nearing its completion. Importantly, we have transitioned to work under the new BARDA BioShield contract, the largest in our history, with a value of up to 149 million. The initial $55 million of this contract has been executed and will spread over a 30-month period ending in March 2026, with options valued up to $95 million beyond that. We will see a full quarter of contribution from this new contract in the fourth quarter. As a reminder, especially for those who are new to Spectral AI, R&D revenue is driven by our research and development activities. We invoice the government monthly for R&D expenditures with an added margin to cover expenses such as labor and third-party contractors and consultants. We generally receive payments against these invoices from the government within two weeks after the invoice submission, which produces a positive and predictable effect on our P&L and cash flow. Our gross margin declined to 42.8% from 45.9%. This quarter decline in gross margin was due to commencing the $4 million MTECH contract that was awarded to Spectral AI in the second quarter of 2023 and is scheduled to continue through the first quarter of 2025. This contract has a lower margin than our BARDA contract. However, given its modest size compared to the BARDA BioShield contract, we do not expect work performed under the MTECH contract to materially degrade overall gross margin in Q4 2023 as well as in 2024. The EmTech Award supports the ongoing development of DeepView Snapshot M, a handheld, fully portable version of our DeepView wound assessment system that would be used to triage burn victims in combat situations. This represents the first of what we expect. Over time, we will be adding several Horizon applications of our DeepView AI platform. General and administrative expenses in the third quarter were 5.6 million compared to 3.5 million related to increased headcount to support our growth, overall R&D initiatives, and product commercialization efforts, specifically ongoing clinical trials in support of planned regulatory submissions related to our DFU indication. As previously announced, we completed our business combination in September 2023, which resulted in our NASDAQ listing. Non-recurrent transaction costs associated with a combination with 7.6 million in the third quarter of 2023 as compared to no such cost in last year's third quarter. Net loss for the quarter was 10.6 million or 77 cents per share and included 7.6 million in non-recurrent costs. This compared to a net loss of approximately 400,000 or 3 cents per share in last year's third quarter. Adjusted EBITDA loss was 3.9 million compared to adjusted EBITDA of about zero in last year's third quarter. As of September 30th, 2023, cash and cash equivalents totaled 7.3 million, and the company had no long-term debt. We are reiterating our revenue guidance of approximately 17.4 million for the year 2023. This suggests an approximately 36% increase in revenue for the fourth quarter of 2023, from the $3.4 million in revenue we generated in the third quarter. For 2024, we are reiterating revenue guidance of approximately $28 million, an expected increase of roughly 60% from the estimated $17.4 million in 2023. The majority of this growth will be derived from the Bauder BioShield contract. With respect to gross margin, for Q4, we expect an improvement driven by the new BARDA contract, which carries higher margins. For 2024, gross margin is expected to further improve as we ramp up the BARDA BioShield contract. Finally, on October 30th, we filed an S-1 registration statement with the SEC to register 8.4 million shares of our common stock, underlying the same number of warrants that we were issued in connection with our September 2023 business combination, as well to register approximately 10 million shares of common stock issued to certain shareholders in connection with the business combination. This filing was required as part of the business combination, and the shares have been accounted for in our fully diluted share counts. Thank you for your attention, and I'll turn things back to Wencheng.

All right. Thank you, Niels. And Rocco, if it's okay, can we open the calls for questions from the analysts, please?

Absolutely. If you would like to ask a question, please press star then 1 on your telephone keypad. If your question has already been addressed and you'd like to withdraw your question, please press star then 2. Today's first question comes from Ryan Zimmerman with BTIG.

Please go ahead. Good morning. Can you hear me okay?

Yeah, we can hear you, Ryan.

Oh, good. Thanks for taking the questions and congrats on the first quarter here as the NASDAQ listed company. I appreciate you guys giving all the color. It's very helpful as we think about kind of the progression of the business. In terms of the guidance for 2024, Neil, I appreciated all those comments. I'm just curious kind of what kind of revenue composition you are contemplating for next year. It sounds like Most of that is BARDA-related, but I think it does assume some commercial sales, and I'm just curious if you could comment specifically on kind of the thinking there as it relates to DeepView.

Yeah, thank you, Ryan, for the question. No, I mean, like I said, the majority of our 2024 revenue will come from the BARDA BioShield contract. A further revenue source will be the continued M-TECH contract, and we're also planning on starting commercial sales But, again, to reiterate, the majority of our 2024 revenue will come from Barnum.

Okay. Very helpful. And it sounds like that's pretty predictable, so that's nice to hear. And then my other question is just around the technology itself, and this is probably more directed toward Wang Sheng. But, you know, when you think about the accuracy rates of DeepView, they're very impressive right now. But you're going to add another component, which is the 3D wound feature, I think, in the years ahead. How do you think about what that can do for the technology, Wang Sheng, from an accuracy standpoint, if you can get that accuracy level higher, or what that could do either from an adoption perspective as you think about some of those features?

Thank you, Ryan. Wonderful question. The 3D wound size measurement is actually a very complimentary, almost a required feature, in my humble opinion, to DPU for its clinical adaptations. Why would I say that? For the past years, I always ask the question, how many imaging technology you would see in the future of hospitals, ERs, and wound care clinics, podiatry office for wound assessment? My answer always came back with just one. So the wound size measurement is a fundamental compliance issue. They need to better document the wound progression regardless of all these other perspectives because it's required. And the nurses, operators are very used, familiar with the wound size measurement. Sadly, today, there are not many useful tools for this. Many, many of the clinics are still using the rulers and other fundamental technologies to measure it. Thank God there are already some imaging tools on the market to offer the wound size measurement. There are the trailblazers help us educate the markets already. I really appreciate their efforts. And I believe our 3D wound size measurement, based upon our deep view imaging technology, offers one of the most accurate, easy to use, and really reliable measurements. And it measures the dimension, the areas, and the 3D effects in volume, for example, for DFU wounds. And in that perspective, it provides the current clinical users a very familiar tool. With analogy to the Internet, this almost adds the stickiness of the user's friendliness to our AI prediction side. In my humble opinion, I think DFU will provide the AI predictions as the true differentiating factor while complementing that with the center of care using the 3D wound sensor measurement for standardized digital documentation and compliance efforts. To me, that's very, very much complementary for each other to ensure the deep view clinical adaptations. I hope that answers your question, Ryan.

Yeah, no, very comprehensive. Thank you, Wang Cheng. And then I'll just sneak one more in and I'll hop back in queue, but You get $55 million up front on the $149 million contract. Can you just remind us kind of what unlocks the remainder of that $149 million contract from a milestone or development perspective as we think about some of the revenue that could come in from BARDA in the years ahead? Thanks for taking the questions, and congrats again on the first quarter here out the gate.

Thank you, Ryan. For the $149 million contract received, $55 million is already released, and we're doing the monthly drawdown from that $55 million right now. The clearance-centered focus of that is FDA clearance of DFU's burn indication. Upon the FDA clearance of DFU AI burn, the rest of the $95 million will be triggered in a structured way so that we can start a federal procurement process and deployment of our deep views into the ERs and the burn centers. That's how the contract is structured. Got it. I hope that clarified. Thank you so much. Have a good day.

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for the closing remarks.

Thank you, Rocco. And thank you again for your participation and continued interest in special AI. We are very pleased with our progress and look forward to keeping you updated. We hope to speak with some of you at our upcoming conference presentations, including the Benchmark Conference in December in New York City. We'll also be in San Francisco in January in connection with the JPMorgan Conference. Thank you all. Thank you for your support, and have a great day. Thank you.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.