Spectral AI Inc

Previous wording

We are an AI company focused on predictive medical diagnostics. We operate in one segment. Currently, we are devoting substantially all of our efforts towards research and development of our DeepView System, an internally developed multi-spectral imaging device that has FDA breakthrough device designation status. Given our recent receipt of the UKCA mark for burn indication on our DeepView System, we expect to begin commercialization activities in the United Kingdom in the second half of 2024. Our DeepView System uses proprietary algorithms to distinguish between damaged and healthy human tissue invisible to the naked eye, providing “Day One” healing assessments. DeepView’s output is specifically engineered to allow the physician to make a more accurate, timely and informed decision regarding the treatment of the patient’s wound. Our focus from 2013 through 2021 was on the burn indication, which we expanded to also include the diabetic foot ulcer (“DFU”) indication in 2022.

Current wording

We are an artificial intelligence (“AI”) company focused on predictive medical diagnostics. We operate in one segment. Currently, we are devoting substantially all of our efforts towards research and development of our DeepView® System, an internally developed multi-spectral imaging device that has previously received FDA breakthrough device designation status for an earlier version. Given our recent receipt of the UKCA mark for burn indication on our DeepView® System, we expect to begin commercialization activities in the United Kingdom in the second half of 2024. Our DeepView® System uses proprietary algorithms to distinguish between damaged and healthy human tissue invisible to the naked eye, providing “Day One” healing assessments. DeepView’s output is specifically engineered to allow the physician to make a more accurate, timely and informed decision regarding the treatment of the patient’s wound. Our focus from 2013 through 2021 was on the burn indication, which we expanded to also include the diabetic foot ulcer (“DFU”) indication in 2022.

Previous wording

For burn wounds, a non-healing assessment could aid the clinician in making an immediate and objective determination for appropriate candidates for surgery, as well as determining what specific areas of the burn wound will require excision and skin grafting. We have conducted three large clinical studies with multiple sites across the United States, enrolling 413 burn patients, including 329 adult and 84 pediatric patients. Through these studies, we were able to quantify the burn assessment accuracy in patients undergoing both surgical and non-surgical treatment. In December 2023 we initiated a pivotal clinical study seeking enrollment of 240 patients, including 180 adult and 60 pediatric patients through multiple sites across the United States.

Current wording

For burn wounds, a non-healing assessment could aid the clinician in making an immediate and objective determination for appropriate candidates for surgery, as well as determining what specific areas of the burn wound will require excision and skin grafting. We have conducted three large clinical studies with multiple sites across the United States, enrolling 413 burn patients, including 329 adult and 84 pediatric patients. Through these studies, we were able to quantify the burn assessment accuracy in patients undergoing both surgical and non-surgical treatment. In December 2023 we initiated a pivotal clinical study seeking enrollment of 240 patients, including 180 adult and 60 pediatric patients through multiple sites across the United States in both burn center and emergency departments. By the end of the third quarter of 2024, the Company had completed the enrollment of 169 patients at burn centers, finishing that portion of the overall study.

Previous wording

We have not generated any product revenue to date. We have received substantial support from the U.S. government for our DeepView System’s application for burn wounds, particularly fromthe Biomedical Advanced Research and Development Authority (“BARDA”), which is part of the HHS Office of the Assistant Secretary for Preparedness and Response in the United States, established to aid in securing the United States from chemical, biological, radiological, and nuclear threats, as well as from pandemic influenza and emerging infectious diseases. We have also received funding from the National Science Foundation (the “NSF”), the National Institute of Health (the “NIH”) and the Defense Health Agency (the “DHA”). Since 2013, we have received approximately $280.2 million in funding awards from government contracts, primarily from BARDA, which accounts for $272.9 million. This has allowed us to develop our technology and further our clinical trials.

Current wording

We have not generated any product revenue to date. We have received substantial support from the U.S. government for our DeepView® System ’s application for burn wounds, particularly fromthe Biomedical Advanced Research and Development Authority (“BARDA”), which is part of the HHS Office of the Assistant Secretary for Preparedness and Response in the United States, established to aid in securing the United States from chemical, biological, radiological, and nuclear threats, as well as from pandemic influenza and emerging infectious diseases. We have also received funding from the National Science Foundation (the “NSF”), the National Institute of Health (the “NIH”) and the Defense Health Agency (the “DHA”). Since 2013, we have received approximately $281.0 million in funding awards from government contracts, primarily from BARDA, which accounts for $272.9 million. This has allowed us to develop our technology and further our clinical trials.

Previous wording

In addition to our PBS BARDA Contract, we received a $4.0 million grant award from the Medical Technology Enterprise Consortium (“MTEC”) in April 2023, which, building on prior awards from DHA, is to be used to support military battlefield burn evaluation via a handheld version of the DeepView System (the “MTEC Agreement”). The MTEC Agreement is currently intended to run through April 2025 with funding dependent on various milestones. In March 2024, we received an additional $0.5 million award from the Defense Health Agency to further this development.

Current wording

In addition to our PBS BARDA Contract, we received a $4.0 million grant award from the Medical Technology Enterprise Consortium (“MTEC”) in April 2023, which, building on prior awards from DHA, is to be used to support military battlefield burn evaluation via a handheld version of the DeepView® System (the “MTEC Agreement”). In August 2024, the MTEC award was increased to $4.9 million and is currently intended to run through December 2025 with funding dependent on various milestones. In September 2024, we received an additional $0.9 million from MTEC for further development of the handheld device. In March 2024, we received an additional $0.5 million award from the Defense Health Agency to further this development.

Previous wording

Comparison of Three and Six Months Ended June 30, 2024 and 2023

Current wording

Comparison of Three and Nine months ended September 30, 2024 and 2023

Previous wording

The following table summarizes these metrics for the three and six months ended June 30, 2024 and 2023 (in thousands):

Current wording

The following table summarizes these metrics for the three and nine months ended September 30, 2024 and 2023 (in thousands):

Previous wording

We define gross profit as research and development revenue, less cost of revenue, and define gross margin, expressed as a percentage, as the ratio of gross profit to revenue. Gross profit and gross margin can be used to understand our financial performance and efficiency and as we begin commercialization, it will allow investors to evaluate our pricing strategy and compare against our competitors. Our management uses these metrics to make strategic decisions, pricing decisions, identifying areas for improvement, set targets for future performance and make informed decisions about how to allocate resources going forward.

Current wording

We define gross profit as research and development revenue, less cost of revenue, and define gross margin, expressed as a percentage, as the ratio of gross profit to revenue. Gross profit and gross margin can be used to understand our financial performance and efficiency and as we begin commercialization, it will allow investors to evaluate our pricing strategy and compare against our competitors. Our management uses these metrics to make strategic decisions, pricing decisions, identify areas for improvement, set targets for future performance and make informed decisions about how to allocate resources going forward.

Previous wording

The following table summarizes of our results of operations for the three and six months ended June 30, 2024 and 2023 (in thousands):

Current wording

The following table summarizes of our results of operations for the three and nine months ended September 30, 2024 and 2023 (in thousands):

Previous wording

Research and development revenue was $7.5 million and $13.8 million for the three and six months ended June 30, 2024, respectively, an increase of 75.9% and 48.0%, respectively, compared to the comparable periods in 2023, reflecting more activity as we completed work under the PBS BARDA Contract and in the awards and work performed under the Company’s other U.S. governmental contracts.

Current wording

Research and development revenue was $8.2 million and $22.0 million for the three and nine months ended September 30, 2024, respectively, an increase of 137.6% and 72.1%, respectively, compared to the comparable periods in 2023, reflecting more activity as we completed work under the PBS BARDA Contract and in the awards and work performed under the Company’s other U.S. governmental contracts.

Previous wording

For the three and six months ended June 30, 2024 and 2023, the Company’s revenues disaggregated by the major sources was as follows:

Current wording

For the three and nine months ended September 30, 2024 and 2023, the Company’s revenues disaggregated by the major sources was as follows:

Previous wording

Cost of revenue for the three and six months ended June 30, 2024 was $4.2 million and $7.5 million, respectively, an increase of 69.3% and 40.8%, respectively, compared to the comparable periods in 2023, due to increased activity to fulfill our U.S. governmental contracts, consistent with increased research and development revenue.

Current wording

Cost of revenue for the three and nine months ended September 30, 2024 was $4.5 million and $12.1 million, respectively, an increase of 129.0% and 64.5%, respectively, compared to the comparable periods in 2023, due to increased development activity to fulfill our U.S. governmental contracts, consistent with increased research and development revenue.

Previous wording

Gross margin for the three and six months ended June 30, 2024 was 44.3% and 45.3%, respectively, an increase of 2.2% and 2.7%, respectively, as compared to the comparable periods in 2023, due to a higher reimbursement rate under the PBS BARDA Contract, executed in September 2023, than the rate in the BARDA Burn II contact.

Current wording

Gross margin for the three and nine months ended September 30, 2024 was 46.3% and 45.7%, respectively, representing an increase of 3.5% and 3.1%, respectively, as compared to the comparable periods in 2023, due to a higher reimbursement rate under the PBS BARDA Contract, executed in September 2023, than the rate in the BARDA Burn II contact.

Previous wording

General and administrative expense was $5.8 million and $10.8 million for the three and six months ended June 30, 2024, respectively, an increase of 20.4% and 10.0%, respectively as compared to the comparable periods in 2023. Non-revenue generating research and development activities have decreased by approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2024 compared to the comparable periods in 2023 offset by an increase of approximately $1.1 million and $1.2 million related other administrative expenses for the three and six months ended June 30, 2024, respectively, compared to the comparable periods in 2023.

Current wording

General and administrative expense was $4.6 million and $15.4 million for the three and nine months ended September 30, 2024, respectively, representing a decrease of 19.2% and 0.7%, respectively as compared to the comparable periods in 2023. Non-revenue generating research and development activities have decreased by approximately $1.0 million and $1.1 million for the three and nine months ended September 30, 2024 compared to the comparable periods in 2023 offset by an increase of approximately $1.1 million related to other administrative expenses for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. Other administrative expenses for the three months ended September 30, 2024 decreased by less than $0.1 million, compared to the three months ended September 30, 2023.

Previous wording

Net interest (expense) income for the three and six months ended June 30, 2024 primarily relates to cash interest received or (paid) by us from our deposit accounts.

Current wording

Net interest (expense) income for the three and nine months ended September 30, 2024 primarily relates to cash interest received or (paid) by us from our deposit accounts.

Previous wording

Borrowing related costs increased $0.7 million and $1.0 million for the three and six months ended June 30, 2024, respectively, due to debt issuance costs and payments of the discount and premium related to the Yorkville Convertible Notes that were expensed during the period.

Current wording

Borrowing related costs increased $1.1 million and $2.1 million for the three and nine months ended September 30, 2024, respectively, compared to the comparable periods in 2023 due to debt issuance costs and payments of the discount and premium related to the Yorkville Convertible Notes that were expensed during the period.

Previous wording

Change in fair value of warrant liability increased by $0.4 million for the three and six months ended June 30, 2024 as compared to the comparable periods in 2023. The increase reflects changes in the fair value of the Public Warrants, which were issued in September 2023.

Current wording

Change in fair value of warrant liability decreased by $0.7 million and $0.3 million for the three and nine months ended September 30, 2024, respectively, as compared to the comparable periods in 2023. The decrease reflects changes in the fair value of the Public Warrants, which were issued in September 2023.

Previous wording

Change in fair value of notes payable decreased by approximately $0.2 million and $0.1 million for the three and six months ended June 30, 2024, respectively, which reflects the total change in the fair value of the Yorkville notes issued 2024.

Current wording

Change in fair value of notes payable increased by approximately $0.1 million and decreased less than $0.1 million for the three and nine months ended September 30, 2024, respectively, which reflects the total change in the fair value of the Yorkville notes issued 2024.

Previous wording

Other income (expenses), including transaction costs for the three and six months ended June 30, 2024 primarily relate to legal, professional, and service fees incurred in connection with the Yorkville transaction and B. Riley purchase agreement. Other income (expenses), including transaction costs for the three and six months ended June 30, 2023 primarily relate to non-recurring legal, accounting, and consulting costs expended for the Business Combination.

Current wording

Other income (expenses), including transaction costs for the three and nine months ended September 30, 2024 primarily relate to legal, professional, and service fees incurred in connection with the Yorkville transaction and B. Riley purchase agreement. Other income (expenses), including transaction costs for the three and nine months ended September 30, 2023 primarily relate to non-recurring legal, accounting, and consulting costs expended for the Business Combination.

Previous wording

The following table presents our Adjusted EBITDA for the three and six months ended June 30, 2024 and 2023 (in thousands):

Current wording

The following table presents our Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023 (in thousands):

Previous wording

As of June 30, 2024, we had approximately $6.9 million in cash, notes payable of $8.0 million, and no long-term debt. We had an accumulated deficit of approximately $38.9 million. Included in our cash balance is $0.9 million in cash in the Company’s newly-formed wholly-owned subsidiary Spectral IP, Inc., a Delaware corporation (“Spectral IP”) which was formed on March 7, 2024.

Current wording

As of September 30, 2024, we had approximately $3.7 million in cash, short-term notes payable of $5.0 million, and $1.0 million of long-term debt. We had an accumulated deficit of approximately $40.3 million. Included in our cash balance is $0.9 million in cash in the Company’s newly-formed wholly-owned subsidiary Spectral IP, Inc., a Delaware corporation (“Spectral IP”) which was formed on March 7, 2024. See Notes 7 and 15 for further information.

Previous wording

In April 2023, the Company received a $4.0 million grant under the MTEC Agreement for a project that is expected to be completed by April 2025. The MTEC Agreement is for the development of a handheld version of the DeepView System which is to be used to support military battlefield burn evaluation. The project has three phases, beginning with planning, design and testing; followed by development, design modification and buildout of the handheld device; and then the manufacturing of the handheld device.

Current wording

In April 2023, the Company received a $4.0 million grant under the MTEC Agreement, which wasincreased to $4.9 million in August 2024 and is currently intended to run through December 2025. The MTEC Agreement is for the development of a handheld version of the DeepView® System which is to be used to support military battlefield burn evaluation. The project has three phases, beginning with planning, design and testing; followed by development, design modification and buildout of the handheld device; and then the manufacturing of the handheld device.

Previous wording

The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023 (in thousands):

Current wording

The following table summarizes our cash flows for the nine months ended September 30, 2024 and 2023 (in thousands):

Previous wording

Net cash used in operating activities increased by approximately $2.5 million for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023 primarily driven by changes in operating liabilities including accrued expenses and deferred revenue, partially offset by a decrease in net loss. The lower net loss is a result of higher research and development revenue due to increased BARDA activity, partially offset by higher non-operating transaction costs in the six months ended June 30, 2024 compared to the same period in 2023.

Current wording

Net cash used in operating activities increased by approximately $1.2 million for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023 primarily driven by changes in operating liabilities including accrued expenses and deferred revenue, partially offset by a decrease in net loss. The lower net loss is a result of higher research and development revenue due to increased BARDA activity and lower non-operating transaction costs in the nine months ended September 30, 2024 compared to the same period in 2023.

Previous wording

Cash Flows Provided by (Used in) Financing Activities

Current wording

Cash Flows Provided by Financing Activities

Previous wording

Net cash provided by financing activities increased approximately $10.6 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This was primarily attributable to the proceeds of $2.8 million from the ELOC, proceeds received from notes payable of $9.2 million principally from the Pre-Paid Advances under the SEPA and $0.3 million of payments for deferred offering costs in 2023, partially offset by $2.7 million of repayments of notes payable.

Current wording

Net cash provided by financing activities increased approximately $4.5 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This was primarily attributable to the proceeds of $2.7 million from the ELOC, proceeds of $12.5 received from notes payable principally from the Pre-Paid Advances under the SEPA, partially offset by $6.6 million of repayments of notes payable as compared to proceeds of $3.4 million from the issuance of Common Stock and operating cash received upon closing of the Business Combination of $0.7 million during the nine months ended September 30, 2023.

Previous wording

Beginning on the forty-fifth (45th) day following the issuance date of the Convertible Note issued in connection with the first Pre-Paid Advance, and continuing on the same day of each successive month thereafter, (each, an “Installment Date”), the Company shall repay a portion of the outstanding balance of the Pre-Paid Advance in an amount equal to (i) $1,750,000, plus (ii) the a payment premium of 7% of such Installment Principal Amount, and (iii) accrued and unpaid interest hereunder as of each Installment Date. The maturity date of the Convertible Notes issue in connection with each Pre-Paid Advance will be 12 months after the issuance date of such Convertible Notes. As of June 30, 2024, the Company has made aggregate installment payments on the first and second Pre-Paid Advances in the amount of $2.7 million, of which $2.3 million relates to the repayment of the principal, $0.2 million relates to the 8% original issue discount and $0.2 million relates to the 7% payment premium.

Current wording

Beginning on the forty-fifth (45th) day following the issuance date of the Convertible Note issued in connection with the first Pre-Paid Advance, and continuing on the same day of each successive month thereafter, (each, an “Installment Date”), the Company shall repay a portion of the outstanding balance of the Pre-Paid Advance in an amount equal to (i) $1,750,000, plus (ii) the a payment premium of 7% of such Installment Principal Amount, and (iii) accrued and unpaid interest hereunder as of each Installment Date. The maturity date of the Convertible Notes issue in connection with each Pre-Paid Advance will be 12 months after the issuance date of such Convertible Notes. In October 2024, the Company and Yorkville agreed to amend the dates and the allocation of installment amounts to be paid pursuant to the Pre-Paid Advances, such that the outstanding balance of the Pre-Paid Advances is to be paid by February 2025. As of September 30, 2024, the Company has made aggregate installment payments on the Pre-Paid Advances in the amount of $8.3 million, of which $7.2 million was settled in cash and $2.1 million was settled in shares. Of the aggregate installment payments, $7.1 million relates to the repayment of the principal, $0.6 million relates to the 8% original issue discount and $0.6 million relates to the 7% payment premium.

Previous wording

On March 7, 2024, the Company formed a new wholly-owned subsidiary, Spectral IP, to be utilized to acquire artificial intelligent intellectual property with a specific emphasis on healthcare. On March 19, 2024, the Company announced that Spectral IP received a $1.0 million investment from an affiliate of its largest shareholder for the development of its artificial intelligence intellectual property portfolio. The investment is structured as a note payable with a one-year maturity, an interest rate of 8%, and requiring earlier prepayment if the Company spins off Spectral IP to the Company’s shareholders or if Spectral IP is sold to a third party.

Current wording

On March 7, 2024, the Company formed a new wholly-owned subsidiary, Spectral IP, to be utilized to acquire artificial intelligent intellectual property with a specific emphasis on healthcare. On March 19, 2024, the Company announced that Spectral IP received a $1.0 million investment from an affiliate of its largest shareholder for the development of its artificial intelligence intellectual property portfolio. The investment is structured as a note payable with a one-year maturity, an interest rate of 8%, and requiring earlier prepayment if the Company spins off Spectral IP to the Company’s shareholders or if Spectral IP is sold to a third party. See Note 15 for further information.