Good afternoon, and welcome to the Spectral AI Third Quarter 2024 Financial Results Conference Call. All participants will be in listen only mode. [Operator Instructions]. 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 DiMaio, Chairman of the Board; and Vince Capone, 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, 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 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 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 DiMaio, Spectral AI's Chairman of the Board of Directors. Dr. DiMaio, 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 with calling a Spectral AI. Some of you may know, some of you may not. I'm actually the founder of this company. We founded a 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 office of the Chair. We have an outstanding leadership team, one of them being Vince Capone, who's here, who is General Counsel and CFO. So I want to remind everyone why I founded the company and why we're so 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 progressed and we have an outstanding partner in BARDA, the Biomedical Advanced Research Development Authority, which is a brand to 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…

Dr. DiMaio, and 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 10-Q 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 DeepView 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 44.9% from 42.8% 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 and 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…

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 a couple of weeks I become Chairman of the Board has gone up 30% from about $0.93 a share to about $1.5 per 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.

[Operator Instructions] Our first question is from Ryan Zimmerman with BTIG. Please go ahead.

Good afternoon. Thanks for taking my questions. So 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. DiMaio, you could just talk about kind of the next 6 to 9 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 truthing actually as we speak. There has never been more time or devotion to a single BARDA 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 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 heals and which parts did not. That information is then fed back to train the algorithm, which is being developed as we speak, to be able to produce a result or a product that they can be used by the doctors. So once we complete all that, I just said there, the truthing, the algorithm development and we kick in information, then we'll send the process submission to the FDA. I will share with you, Ryan, and everybody else that we're totally in talks with the FDA not quite daily, but pretty frequently. We have several meetings set up in 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 when 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. And then maybe turning to the U.K. for a bit. I think last quarter, you had about five systems in U.K. hospitals that you're 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 U.K.

Good question. Thanks, Ryan. So again, for the audience, there are several devices in the U.K. 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 happiness that the doctors have seen in the U.K. with the device. 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 N-I-C-E for those of you who know who that is. And the U.K. is a one health care 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 a significant value to the U.K. population. So our goal here is to get and achieve that NICE designation for the U.K. 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 U.K. and now they want it. So we're going to be rolling out devices in the U.K. And finally, this information and this clinical use situation will be very useful to the U.S. FDA application, so they understand the workflow, and it will be a smooth transition to be able to integrate that in the U.S. burn flow in the U.S. burn community.

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

I have some early feedback. I don't want to get ahead of my skis as Vince likes to say to say the exact time lines now. We're working on those right now. I'd say in the next few months or so, we will be having devices prepared and rolled out to the Australia. I think in the next conference, the next quarterly call, we'll have more information, but that is imminent, 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.

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

Thanks for the question. And congratulations on your progress. My questions regarding regulatory and U.K. commercialization were answered. But 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? So 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 proposition of the device to be able to save certain metrics in the patient's care. In other words, it may be quicker time to the operating room, it may be length of stay, it may be decreased costs. 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 in hospitals.

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

The next question is from RK Ramakanth with H.C. Wainwright. Please go ahead.

Thank you. Thanks for taking the questions. So with the 5 units or 6 units that you have in the U.K., 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 that you also have to do to NICE before you get that designation so that you can commercialize in U.K. Is these 5 units are enough or you need to put in more in the hands of the U.K. docs? Any commentary there?

So thanks, RK. I appreciate the question. So I don't -- I'm not going to answer that and get -- I don't know how many units or images we need to get to get the NICE approval. So let me be very clear. I don't know the answer to that question. But however, going back to what I said with Ryan and other analysts, the initial results from those units in the U.K. from the doctors has been overwhelmingly positive. And 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 on this call knows that there really isn't a device that has anything close to what the DeepView 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 a clinician a very useful device. And that is what's proving to be the case in the U.K. 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 that 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?

RK, thank you. You're singing my song. As you know, you don't know, I mean, I've written many hundreds of articles and manuscripts and we literally have a manuscript, a 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, it may be stock prices, but in the medical community, it's publications and presentations. So yes, we have data that we're collating now. We've also have information from -- in the U.S., 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 lots 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 and 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 -- for that indication?

Yes. Thanks, RK. And so my 3Fs, 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 2Bs because that is a major funding source. We've got a commitment. We have received or going to receive almost $0.25 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 a holding pattern once I'm convinced and the leadership team is convinced that we are -- we have our organization streamlined and focused on delivering the BARDA product to the FDA. So in summary, the answer is yes. We will look at other indications. But how we do that and whether we do DFUs or we may have a more widely applicable indication to be able to look at burn, wound viability or something more general may be a more reasonable manner to be able to get this product to a wider market.

Thank you. Thank you for taking all the questions.

[Operator Instructions] The next question is from John Vandermosten with Zacks. Please go ahead.

Thank you. And hello Dr. DiMaio and Vince. How are you guys doing?

Great.

Since the last quarterly update, you've announced another award for -- from MTEC for the portable version of DeepView. What -- I guess, first of all, was that -- 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 on revenue you want to go?

So John, we've focused our efforts on the BARDA PBS contract. And as such, we've dedicated more resources to that contract, as Dr. DiMaio has indicated, right? 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 MTEC, I heard about the miniaturization, there's very soon in the next few weeks, the -- which is called BAMC, the Brooke Army Medical Center is going to be doing a little bit of feedback back and forth in the underlying preliminary design of the miniaturization device, the MTEC 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 iterate that and then come back with some more improvements. So the answer is we're still in the throes of developing that to a device that will be amenable and acceptable to the military war fighter, and then we're in the middle of that contract now.

Great. And then on the revenue guidance for the year, I seem to 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?

Yes, I think so. I mean we're in -- we're through 10 months so far. I think $28 million 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 question.

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

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 burn study, and I don't know if you mentioned this, Dr. DiMaio, 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 some 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 are looking at, we want to make sure the same metrics that they're interested in. And those metrics include a Dice coefficient sensitivity and 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 burn 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 are 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 information, but 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.

Yes. Again, to kind of follow on, we got all the data. We have a great Jihong who 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. And he's looking at four different algorithms in what's called 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.

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

Again, thanks to 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 going to continue to do the 3Fs, which is finance, focus and finish all this. I thank you all for your attendance and interest in our company, and I wish you all a good evening.

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