Spectral AI, Inc.

Good afternoon and welcome to the Spectral AI Third Quarter 2024 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, this event is being recorded. I would now like to turn the conference over to Devin Sullivan, Managing Director of the Equity Group. Please go ahead.

Thank you, Gary. Good afternoon, everyone, and thank you for joining us for Spectral AI's 2024 Third Quarter Financial Results Conference Call. Our speakers for today will be Dr. Michael DeMaio, Chairman of the Board, and Vince Capone, and I'm 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, forecast, plans, intends, will, should, future, propose, and variations of these words or similar expressions or the 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 the other risks and uncertainties described in the risk factor 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 important risks and uncertainties that could cause actual events and results to differ materially from those contained in the forward-looking statements. With that said, I'd now like to turn the call over to Dr. Michael DiMio, Spectral AI's Chairman of the Board of Directors. Dr. DiMio, please go ahead.

Good afternoon to you and everyone. I cannot tell you how happy and excited I am to be here. I am here kind of chuckling when calling a Spectral AI. Some of you may know, some may not, I'm actually the founder of this company. We founded as Spectral MD in 2009 and I represent the second largest shareholder in the company to this date. We're getting back to basics. Just like our election that recently happened, we're kind of getting back. We've had a renewal and refresh of what's going on in the country and there's a renewal and refresher going on in this company as well. It's come full circle. I founded the company. I was the CEO for over a decade and I'm back now as the Chairman of the Board and helping chair the Office of the Chair. We have an outstanding leadership team, one of them being Vince Compone who's here who is General Counsel and CFO. So I want to remind everyone why I founded the company and why we're still here to this day with a focus on what we're trying to do. We are and continue to develop a revolutionary device based upon basic science research that was founded on animal studies that were done to show the best wavelengths of light that could be used to capture the most information from damaged skin. We have an outstanding partner in BARDA, the Biomedical Advanced Research Development Authority, which is a branch of the federal government, the United States federal government, which is quite a worthy sponsor for our company. We continue to embark arm in arm on developing a device and a product that will be able to revolutionize and treat burn and all kinds of wounds based on AI technology. We have nine wavelengths of light that's being trained by algorithms that are using truthing by burns in real clinical studies with hundreds of patients and literally thousands of images that will be able to show or tell the doctors the ability of a wound to heal or not heal. With that information, clinicians like myself can utilize that information and thus be able to triage and treat patients in a thoughtful manner. Now that I'm back, I've been regrouping the team, which is outstanding. We have a leadership team with Vince Capone, Louis Bercouco, Jeremiah Sparks, and Stan Misek that are going to lead us to take this device to commercialization. It's quite a challenge and as a heart and lung surgeon, I certainly welcome any challenges. I don't have any problem taking those challenges on head on and face on. What I've done in zooming the command module here is to try to focus things in a very clear way. Just like going into an operation to surgery, I like to imagine verbalized and focused on what we're going to do. To that end, I've focused on the three F's. Here are the three F's. Number one is finance, number two is focus, and number three is finish. By finance, I mean we have the best reliable source of revenue and support, which is BARDA, the branch of the US federal government, and another source is called M-Tech, which is the Defense Health Agency, which is focusing on our miniaturization device. The second F is focus. We're regrouping and focusing to be laser focused on completing these projects. We're focused on delivering those items that we promised to BARDA and to the population at large. We're focusing on getting the clearance from the FDA for this technology and this device. And we're doing that in a very clear way. The company has embraced this change and embraced this focus. The team is intact. Nobody is left. Everybody remains excited on the mission. The third F is finish. Complete the project that BARDA has asked us to do. Complete the miniaturization device of the M-Tech device, which is for the military or the war fighters. Finish the FDA submission, get the clearance, and go forward with that to the US market. And finish what we started in the UK. We're in the UK now with several devices. It's received a tremendous response in the UK. The burn doctors there are excited. There was a recent meeting at the ISBI where preliminary data was presented showing that this change improved the care of the patients with the devices that they have in the UK. We will continue that excitement, continue that push in the UK. I might add at this point that it's become so exciting in the UK that the partners in Australia, in addition, are looking to get the devices there. So very, very soon we have a workflow that we're going to be sending devices to Australia under special access program to be able to get the doctors and the burn doctors in Australia to use the devices as well. With that introduction, again, I say I'm excited to be back. I'm excited to focus on the three Fs and get this company and this device and this dream that I had in 2009 with the eventual goal of commercialization and completion of this project. With that, I'd like to turn things over to Vince Capone, who again is our Chief Financial Officer and General Counsel, for review of our third quarter performance.

Vince? Dr. DeMaio, thank you all for joining us today. We recently issued our press release this afternoon which contains additional details of our operating results and we have filed our 10Q with the SEC this evening as well. With that in mind, I will focus my remarks on select highlights and key financial metrics. For the third quarter of 2024, we are quite pleased to report that we have outstanding operating results reflecting our focus on advancing the development of our deep view system for burn centers and the reduction of non-supported operational expenses. With that in mind, let me turn to our financial results. Research and development revenue for the third quarter rose by 138% to 8.2 million from 3.4 million in the third quarter of last year. This growth reflects an increased level of activity under the BARDA Project BioShield contract, which was awarded to us in September 2023. Gross margin also improved and improved to .9% from .8% in last year's third quarter, reflecting both increased product development activity as well as the higher reimbursement rate under the BARDA PBS contract as compared to the reimbursement rate in our BARDA Burn II contract, which accounted for most of our operating revenue in 2023. General administration administrative expenses during the third quarter of 2024 declined to 4.6 million or 55% of revenue. That's down from 5.6 million or 164% of revenue in last year's third quarter. This was driven primarily by an approximate $1 million reduction in non-revenue generating research and development activities associated with the company's strategic focus on the BARDA PBS contract for the near term. We anticipate continued operational focus on the BARDA PBS contract as we work towards our FDA submission in the first half of 2025. Other expenses for the third quarter of 2024 declined as well to just under $800,000 as compared to 6.5 million in the same period last year. The primary driver of this decline was $7.6 million of non-recurring transaction costs that we recorded in the third quarter of 2023, which was associated with the September 2023 consummation of our business combination and our listing on NASDAQ. There were no such expenses in this year's third quarter. Our net loss narrowed to $1.5 million or 8 cents per share from a net loss of $10.6 million or 77 cents per share in the third quarter of last year, again reflecting our focus on operational efficiencies. Adjusted EBITDA loss for the quarter was approximately $700,000 as compared to an adjusted EBITDA loss of $3.9 million in last year's third quarter. As of September 30, 2024, we had approximately 18.5 million shares outstanding. Moving over to the balance sheet, as of September 30, 2024, cash and cash equivalents totaled $3.7 million as compared to $4.8 million at year-end last year. Cash at September 30, 2024 included $900,000 in the company's wholly-owned subsidiary, Spectral IP. As of September 30, 2024, the company had approximately $6 million in notes payable as well. With respect to our cash position, we believe we are positioned to support ongoing operations through an improved operating efficiencies as well as our ability to raise additional opportunistic funding. As you may know, we recently filed our S3 shelf registration, which was affected by the SEC on October 31 to support these efforts. For 2024, we are reiterating our revenue guidance of approximately $28 million, an expected increase of about 55% from the $18.1 million we reported in 2023. This growth reflects our work on the BARDA Project BioShield contract as well as additional government funding in the continued development of our handheld device, EPU Snapshot M. With that, I also again want to thank you, and I turn the conversation back over to Dr. DeMaio. Thank you, Vince.

Well

done.

I want to tell everyone on the call, again, I'm happy to be here and have full confidence we're going to complete these tasks before us. I'm also happy to report that although it's not the most important metric at this point, the share price in the couple of weeks of becoming chairman of the board has gone up 30% from about $0.93 a share to about $1.50 a share, a good sign that we have stability and confidence in our company and that the leadership is working very well together. With that, I'll ask the operator to open the call up for questions from our analysts.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily

to assemble our roster. Our first question is from Ryan Zimmerman with

BTIG. Please go ahead.

Good afternoon. Thanks for taking our questions. So, you know, congrats on the progress on the burn study. I guess I want to ask kind of how you're preparing for FDA submission. It sounds like you still need to collect a little more data, if I'm not mistaken, on some of those burn patients as they finish up. I could be incorrect on that, but maybe Dr. Dermatt, you can just talk about kind of the next six to nine months or so before you get that submission into FDA and what we should be looking for.

Thanks, Ryan Zimmerman. So, as you know, you may not know, I was talking to the doctors that are doing the truth thing, actually, as we speak. There has never been more time or devotion to a single bar to study to be able to truth and process a product, and they have spent hundreds of millions of dollars in other companies. So, all the enrollment for the burn center portion of the study has been completed. The images are being truth, and for those of you who may not understand, that means using burn biopsies and the condition of the burns at 21 days to determine what parts of the burn wound healed and which parts did not. That information is then fed back to train the algorithm, which is what should be developed as we speak, to be able to produce a result or a product that can be used by the doctors. So, once we complete all that, I just said there, the truth thing, the algorithm development, and we kick in information, then we will send the process of submission to the FDA. I will share with you, Ryan, and everybody else that we're literally in talks with the FDA, not quite daily, but pretty frequently. We have several meetings set up the next few weeks, so we will get an interactive feedback from the FDA on exactly what else they need or want us to do, so we send our submission. So, in summary, we're collating the images, collating the data, perfecting the algorithm, and getting the submission organized in a manner that's conducive to the FDA for the submission, as Vince said, in the first half of next year.

Okay, very helpful. Then, maybe turning to the UK for a bit. I think last quarter you had about five systems in UK hospitals that you were gathering feedback on. Any incremental update on either more systems in the field or feedback you've gotten, when you potentially see some commercial revenue from those initial placements, and really anything on your efforts in the UK?

Good question. Thanks, Ryan. So, again, for the audience, there are several devices in the UK. We're expanding it slowly. We're continuing to iterate the device and get the necessary improvements from the feedback we're getting in a real-time manner from the docs in the field. This is by far the most valuable feedback to me as a doctor and to them as doctors is how is the machine working? Is it working as intended? And how can it be used in the workflow of my practice? And the answer to that is a resounding yes. And, in fact, the abstract has been created and presented demonstrating the improvement and the value proposition. Now, having said that, as we continue to iterate, we don't necessarily expect at this point the revenue to come immediately because the value proposition is still being formed. The ultimate goal here is to get the device that will be amenable to the NICE, that's -C-E, for those of you who know who that is. And the UK is the one healthcare system called the National Health Service, NHS, and they have a metric called the NICE, which is a consortium and a body that determines that a device or a drug is of significant value to the UK population. So our goal here is to get and achieve that NICE designation for the UK and thus we would anticipate revenue to flow after all this. So to repeat, the primary goal we have is to get the device perfected in the workflow, get good feedback, and use that in further studies. I mentioned earlier that the docs in the Australia have heard about this in the UK and now they want it, so we're going to be rolling out devices in the UK. And finally, this information and this clinical use situation will be very useful to the US FDA application so they understand the workflow and it will be a smooth transition to be able to integrate that in the US burn flow and the US burn community.

And just to follow up Dr. DiBiou, the Australian doctors that are asking for it, is there any regulatory hurdles that we have to consider? Any timelines you can put on kind of when you could be in Australia with DeepView?

I've got some early feedback. I don't want to get ahead of my skis. It's just like to say the exact timelines now, but we're working on those right now. I say in the next few months or so we will be having devices prepared and rolled out to Australia. I think in the next conference, the next quarterly call, we'll have more information, but that is eminent and we are literally in memorandums of understanding. It's called the Special Access Pathway is what it's called in Australia and we're working through that. So to your question about the hurdles, yes they are, but we're going through those hurdles right now and we anticipate success.

Okay, thank you for taking my questions.

Thank

you. The next question is from Carl Burns with Northland Capital Markets. Please go ahead.

Thanks for the question and congratulations on your progress. My question is regarding regulatory UK commercialization or Hansard, but you know looking out a little bit, what do you expect with respect to commercial readiness in the United States in terms of training and dedicated sales force? I know that's out a little bit, but just curious on how you view that this time. Thanks.

Thank you for the question. So if I understood the question, what are we looking, so you may not know, but the BARDA contract actually has some clauses in there to help us begin to kick start the sales force for the device. It's also in the BARDA contract to get approximately 200 devices via the government pathways into the burn centers across the United States. At the same time or in a parallel fashion, we're also going to be doing clinically, some people call them RCTs, but there's clinical applicability or workflow studies to understand and show the value, the value proposition of the device to be able to save certain metrics in the patient's care. In other words, it may be quicker time in the operating room, it may be length of stay, it may be decreased cost, it may be better efficiency on the transplants of the skin transplants that are done. So once the devices get out there and the use case is shown and the value proposition is shown, that is when we expect the docs and the hospitals and the different agencies to be able to see the value and then the sales will kick up. Obviously we want to get those in the hands of the doctors first and then begin the clinical trials that will demonstrate the usefulness to the patients initially and the doctors and hospitals.

Got it, great. Thanks so much and congratulations again.

Thank you.

The next question is from RK Ramekantz with HC Wainwright. Please go ahead.

Thank you. Thanks for taking the questions. So with the five units or six units that you have in the UK, are you able to collect enough data just as you were talking what needs to be done in terms of improving the workflow and the projected value which you also have, I believe you also have to do to needs before you get that designation so that you can commercialize in the UK. If these five units are enough or you need to put in more in the hands of the UK docs, any commentary there?

So thanks RK, appreciate the question. So I'm not going to answer that and I don't know how many units or images we need to get to get the needs approval. So let me be very clear, I don't know the answer to that question. However, going back to what I said with Ryan and other analysts, the initial results from those units in the UK from the doctors has been overwhelmingly positive. I'm not saying that to exaggerate, they truly have found it to be terribly useful into the process of their care. And I'm sure everybody in this room knows that there really isn't a device that has anything close to what the VQ device does to be able to show the predictive value of healing. So the reason we developed this device over the last 10 or so years is to be able to give the clinician a very useful device and that is what's proving to be the case in the UK with the burn surgeons. But to your question, exactly how many images we need or the patients, no I don't know that, I will get the answer and we will have that for you.

Okay, thank you for that. And then based on what you're seeing, sorry, the other question is would any of the data be publicly presented at some conference or something so that we also can see how excited these physicians are with what they're getting in terms of the patient care improvement?

Okay, thank you. You're singing my song. You know, as you know, you don't know, I mean, I've written many hundreds of articles and manuscripts and we literally have a manuscript and publication plan in place that we're going to implement and fast track a number of articles, including those that you're talking about in terms of presentations and publications. As you know, in the medical community, that is a currency that we talk about. On Wall Street, maybe stock prices, but in the medical community is publications and the presentation. So yes, we have data that we're collating now. We've also have information from in the US, not to answer your question kind of indirectly, we've interviewed emergency room doctors and burn doctors and trauma doctors to see how accurate they are in determining wounds. And it's very, very interesting information. I can't reveal it now because we're going to publish it. But we're going to have a lot of papers coming out in the next several months that are going to be showing its usefulness, its applicability, and the continued need for a device and a technology to solve the problems that remain in the burn community. There are thousands of patients that come into the emergency rooms in the hospitals. It's very difficult. There's not much expertise in burns. It's spread out a lot. And so to have a device that can help triage this and send the patients to the right place in the right time is going to be very fantastic.

And then the last question for me is, I understand your focus is squarely on the burn indication at this point. But I believe the company is also looking to get into the DFU wounds. Any commentary there in terms of the study or when we should start thinking about studies and data from that indication?

Yeah, thanks, RK. And my three F's, the second one is focus. And at this point, based upon everything that I've seen now that I'm back, is we're going to focus for the moment, for the next near term, on burns and on BARDA, the two B's, because that is a major funding source. We've got a commitment. We have received or are going to receive almost a quarter of a billion from that funding source, and we need to deliver that product. So the DFU is temporarily in a holding pattern, my words. We will pull them out of the holding pattern once I'm convinced and the leadership team is convinced that we have our organization streamline and focus on delivering the BARDA product to the FDA. So in summary, the answer is yes. We will look at under indications, but how we do that and whether we do DFUs, we may have a more widely applicable indication to be able to look at burn, wound viability, or something more general, maybe a more reasonable manner to be able to get this product to a wider market.

Thank you. Thank you for taking all my questions.

Again, if you have a question, please press star then one. The next question is from John Vandermoessen with Zax. Please go ahead.

Thank you. And hello, Dr. DeMaio, Vince. How are you guys doing? Great. Great. Since the last quarterly update, you've announced another award from M-TEC for the portable version of DeepView. I guess first of all, was some of that award the reason why third quarter revenues were maybe a bit higher than kind of the trend line for the year? And then secondly, what are the major milestones you expect for the snapshot device as we move towards getting to go in front of the FDA? The question is revenue on the...

So, John, we've focused our efforts on the barter PBS contract and as such, we've dedicated more resources to that contract. As Dr. DeMaio has indicated, we've kind of pivoted some resources to the burn contract. We're focused on delivering that product to the FDA submission in the first half of 2025 and that's contributed to a number of things for us, right? Higher margin and higher revenue, frankly.

Okay. In addition to your question on the M-TEC, I've heard about the miniaturization. Very soon, the next few weeks, which is called BAMC, the Brook Army Medical Center, is going to be doing a little bit of feedback back and forth in the preliminary, underlying preliminary design of the miniaturization device, the M-TEC device. And so with that, we'll get feedback from the military, see what they think about the size and shape and et cetera, that we met the specs that they asked us for, and then we'll reiterate that and then come back with some more improvements. So the answer is we're still on the throes of developing that to a device that will be amenable and acceptable to the military, a warfighter, and then we're in the middle of that contract now.

Great. And then on the revenue guidance for the I still remember, I think it was somewhere around 28 million in government contracts. Is that still the number that we should be thinking about for this year?

Yeah, I think so. I mean, we're through 10 months so far. I think 28 is a reasonable and conservative number to see us drive the market to for 2028. Hopefully we'll be above that, but I think that's good revenue guidance for the rest of 2024.

Okay, great. Thanks for taking my questions.

Thank you. The next question is a follow-up from Ryan Zimmerman with BTIG. Please go ahead.

Hey guys, just one quick question I'll wrap up. I think we're going to see, or at least we were slated to see, top line data from the Byrne study, and I don't know if you mentioned this Dr. Germau, around December of this year. I just want to see if that's still the case, number one. And then two, remind us kind of what we're looking for in terms of top line data, what those outcomes are, and what you consider maybe successful, and so forth as we look for that.

Great question. Thanks, Ryan. You are on target. So the answer is yes to your question. We expect top line data to come out in December. I'm going to be cautious, not because I'm cautious, but because the FDA, we're working, as I said earlier, with iterative feedback with the FDA literally in the upcoming weeks. And so that the metrics that we're looking at, we want to make sure it's the same metrics that they're interested in. And those metrics include a DICE coefficient, sensitivity, specificity, accuracy, and some combination thereof. It's also comparing our, of those statistics, Ryan, to what's called CJA, which is a clinical judgment annotation. That's a fancy word for what the doctors are going to think is going to be the part of the Byrne area that's going to heal or not heal. And historically, we compare them to historical controls and literature. And I think right now that's evolving in discussions with the FDA. So in summary, what we're going to have is data showing our, repeat what I said, sensitivity, specificity, DICE coefficient, which is a measure of the true positive and the false positives within a binary presentation of non-healing pixels or healing pixels. And all that information, we have the we want to collate it in a way that is what the FDA wishes to see for our submission and for our clearance. Does that make sense, Ryan?

Very helpful. Thank you.

Yeah. Again, to kind of follow on, we got the data. We have a great Ji Hong, leads our data science team. And I got to tell you, he is a very, very exciting, deliverable, brilliant young man that is all over this information. He's looking at four different algorithms in what's called a, in a symphony matter to be able to collate these different algorithms to see which ones of these in combination are going to provide the best answers to these questions. Thanks, Ryan.

This concludes our question and answer session. I would like to turn the conference back over to Dr. DeMaio for any closing remarks.

Again, thanks, everyone, on the call. I want to thank everyone on our team as well as our business partners and investors. Their ongoing support is paramount for us to deliver on our commitment to develop and commercialize our DeepView system, which we believe and know will significantly improve patient outcomes. As I said before, I'm glad to be back. I'm happy to be back. And we're I thank you all for your attendance and interest in our company, and I wish you all a good evening.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.