REG - Spectral MD Holdings - Final Results
21/03/2022 07:15
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RNS Number : 3648F Spectral MD Holdings, Ltd. 21 March 2022
Spectral MD Holdings, Ltd
("Spectral MD" or the "Company")
Final results
All key operational milestones outlined at admission to AIM achieved in a
transformational year for the Company
LONDON, U.K. AND DALLAS, TX, U.S - Spectral MD Holdings, Ltd. (AIM: SMD), a
predictive analytics company that develops proprietary AI algorithms and
optical technology for faster and more accurate treatment decisions in wound
care, announces its audited final results for the year ended 31 December 2021.
Operational highlights
· Key performance numbers from Expanded Proof-of-Concept ("ePOC")
showing accuracies of 92% and 88% in detection of severe thermal burn injury
in adults and children, respectively
· Awarded new contracts with the US Biomedical Advanced Research and
Development Authority (BARDA) valued at US$40.5 million, with total funding
now awarded from BARDA of over US$100 million
o US$20.6 million Option 1A BARDA contract due to successful ePOC outcome,
in March 2021
o US$18.8 million Option 1B BARDA contract 6 months ahead of schedule, in
September 2021
· Initiated second stage of burn Artificial Intelligence ("AI")
clinical training study, where the research has been expanded from five to a
total of ten clinical sites, and from 100 subjects to a total of 250 subjects
· Successfully completed 150 subject Diabetic Foot Ulcer ("DFU") AI
training study on schedule across six clinical sites
· Appointment of Nils Windler as Chief Financial Officer
Financial highlights
1. Grant revenue of US$15.2 million, primarily from
current BARDA contract
2. Adj. EBITDA US$(3.0) million, including DFU
development costs
3. Cash on hand of US$16.1 million as of 31 December
2021
4. Raised gross proceeds of £11.3 million
(approximately US$15.6 million) through a successful initial public offering,
with the entire share capital admitted to trading on AIM on 22 June 2021
Post-period end highlights
1. Enrolled 80+ subjects across eight clinical sites in
the second stage of the burn AI clinical training study, with the Company on
track to meet the 250 subject enrollment target across 10-12 sites in the US
by Q4 2022
2. Training DFU algorithm performance determined at 81%
accuracy for broad coverage - a robust and reliable result based on results
from a considerably larger study population across multiple locations and
practices
3. DFU AI clinical study initiated with Royal College of
Surgeons in Ireland, clinical agreement in progress and submitted for
regulatory review
4. Full hand-held engineering prototype is being
developed for a miniaturized version of DeepView®
Wensheng Fan, Chief Executive Officer of Spectral MD, said: "In 2021, Spectral
MD achieved all key operational milestones outlined at the time of our IPO. It
has been a transformational year for the Company, from the positive readout
from our clinical trials for both our burn and DFU indications, to the
accelerated US Government funding for our applications and the successful IPO,
raising gross proceeds of £11.3 million (US$15.6 million). I am particularly
proud of the Spectral MD team which we continue to build as we position the
Company for further future success.
"The Company is well positioned to achieve further key milestones that are
foundational to our planned regulatory approvals and commercialization plans.
Over the course of 2022 and 2023, we will accelerate investment in key
management hires and commercialization efforts to enhance the Company's
readiness to obtain significant government support for placement of our
devices in over 5,000 US based hospitals. We will also continue to
opportunistically evaluate additional indications, market opportunities and
other initiatives to further enhance our commercial success and shareholder
value."
2021 Business Update and Outlook
BARDA - Biomedical Advanced Research and Development Authority
At IPO: The Company had been awarded the BARDA contract Option 1A (US$20.6
million), granted in March 2021, and Option 1B (US$18.8 million) was expected
to be granted in 2022 to execute the adult and pediatric multi-center clinical
training study.
Achieved: Spectral MD received the Option 1B US$18.8 million six months ahead
of schedule in 2021 due to a successful ePOC outcome. The accelerated funding,
which takes the total BARDA awarded contract funding into the Company to over
US$100 million, will allow the Company to accelerate initiation of the second
stage of the clinical training study with confidence.
Outlook: The Company expects to successfully complete the Option 1A and 1B 250
subject clinical study in 2022. Upon successful completion of the study, the
Company expects to see high performing algorithm results across demographic
and geographic variability in the study population. The Company is excited for
the continued collaboration with BARDA, as it works together into the next
contract phase.
DFU - Diabetic Foot Ulcers
At IPO: At IPO, the Company expected to meet the 150 subject enrollment goal
for the DFU U.S. training study and complete the study by year end of 2021.
Achieved: The Company successfully completed the 150 subject DFU U.S. training
study on schedule across six clinical sites in December 2021.
Outlook: Following successful completion of the training study, the DFU AI
algorithm is being finalized, and additional newly developed product features
are being incorporated. In 2022, the Company will start and expects to finish
the validation study for the DFU AI algorithm in the U.S.. In Q2 2022, the
Company expects to start the DFU clinical study in the EU, where the data
collected will be combined and compared with U.S. data to expand DeepView®
readiness in both the U.S. and CE marked regions. The Company's focus will be
on the continued development of the DFU AI model as we progress into the
validation study.
DHA - Defense Health Agency
At IPO: The Company intended to develop a miniaturized, fully hand-held
version of DeepView®.
Achieved: The DHA awarded the Company a US$1.1 million contract in June 2021,
two years earlier than expected. The Company has developed an early scientific
protype of the DeepView® technology with key optical and computing
capabilities in a fully handheld, portable form.
Outlook: The Company will continue to develop the early scientific prototype
into a fully engineered, production- ready model to support clinical studies.
Commercialization
At IPO: The Company stated it expected to commence commercial sales in the
U.S. in Q4 of 2022 and UK and Germany in H2 2023.
Achieved: The Company has made substantial advancements on the
commercialization pathway for DeepView® for both DFU and burn indications in
2021. Proceeds raised from its AIM IPO, combined with two successful BARDA
contracts, positions Spectral MD to accelerate commercialization and achieve
key business objectives.
Outlook: The Company's primary focus in 2022 remains to develop its products
towards commercialization for both DFU and burn indications. The Company will
build upon its human resource capabilities and infrastructure readiness to
support key commercial initiatives to distribute DeepView® in the U.S and
Europe.
People/Human Resources
At IPO: At IPO, the Company had 48 full time employees. The focus for the
Company was to hire personnel in all areas to permit the Company to execute
its corporate objectives.
Achieved: Since IPO, the Company added 11 employees and at year end had 55
full-time employees in the US and UK, which includes key hires such as our
newly appointed Chief Financial Officer and Head of UK/EU Clinical Research.
Outlook: The Company will continue to make additional hires over the course of
2022 and beyond. The new hires will be made in all areas, as needed to enable
the Company to realize its technology, IP, clinical, regulatory, and
commercial goals in 2022 and 2023.
Finance
At IPO: At IPO, the Company stated that it will (i) continue to fulfil its
contractual obligations and meet milestones under the BARDA contract; and (ii)
pursue the commercialization of the DFU application in the U.S., UK and EU.
Achieved: The Company was granted US$40.5 million of funding in 2021,
including US$18.8 million post IPO, to accelerate its burn training study. In
addition, through its AIM IPO it raised US$15.6 million in gross proceeds to
finance clinical trials, regulatory approvals, and commercialization for our
DFU indication.
Outlook: The Company has a strong current cash position of US$16.1 million
which is expected to enable the Company to pursue its objectives and to
enhance the prospects of its future success.
Market Abuse Regulation (MAR) Disclosure
The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the Market Abuse Regulations
(EU) No. 596/2014 as it forms part of UK domestic law by virtue of the
European Union (Withdrawal) Act 2018 ('MAR'). Upon the publication of this
announcement via Regulatory Information Service ('RIS'), this inside
information is now considered to be in the public domain.
For further information please contact:
Spectral MD Holdings, Ltd. investors.spectralmd.com
Wensheng Fan, Chief Executive Officer via Walbrook PR
Nils Windler, Chief Financial Officer
SP Angel Corporate Finance LLP (NOMAD and Joint Broker) Tel: +44 (0)20 3470 0470
Stuart Gledhill/Caroline Rowe (Corporate Finance)
Vadim Alexandre/Rob Rees (Sales & Broking)
Stifel Nicolaus Europe Limited (Joint Broker) Tel: +44 (0) 20 7710 7600
Charles Hoare / Ben Maddison / Nick Harland / Will Palmer-Brown
Walbrook PR Ltd (Media & Investor Relations) Tel: +44 (0)20 7933 8780 or spectralMD@walbrookpr.com
Paul McManus / Sam Allen Mob: +44 (0)7980 541 893 / +44 (0)7502 558 258
Alice Woodings +44 (0)7407 804 654
About Spectral MD
Spectral MD is a predictive analytics company that develops proprietary AI
algorithms and optical technology to help clinicians make more accurate and
faster treatment decisions in the wound care sector. Using its DeepView®
Wound Imaging Solution, an internally developed AI technology and
multispectral imaging which has FDA Breakthrough Device Designation status,
the Company is able to distinguish between damaged and healthy human tissue
invisible to the naked eye, providing 'Day One' healing assessments for burn
wounds and diabetic foot ulcers (DFU). Spectral is headquartered in Dallas,
Texas, USA. The Company has received substantial support from the U.S.
government for its application to burn wounds from agencies such as Biomedical
Advanced Research and Development Authority (BARDA), National Science
Foundation (NSF), National Institute of Health (NIH) and Defense Health Agency
(DHA). Spectral currently has signed contracts in respect of the period from
12 November 2009 to 31 December 2022, with a total value of US$100 million
with significant potential future funding that remains to be awarded. On 22
June 2021, the Company completed an AIM IPO, raising gross proceeds of US$15.6
million, to support the further development of the DFU indication.
About DeepView®
DeepView® is a predictive analytics platform that combines AI algorithms and
medical imaging for wound prediction. It is non-invasive, non-radiation,
non-laser and does not require the use of injectable dye. This integration can
be characterized into four distinct components: DeepView® imaging, data
extraction, AI model building and AI wound healing prediction.
The DeepView® imaging technology consists of patented proprietary
multi-spectral optics and sensors that can classify wound tissue physiology
and capture the viability of various biomarkers within the skin. The imaging
technology extracts appropriate clinical data, processes the image and
displays a comparison of the original image next to an image with a color
overlay of the non-healing portions of the wound. The image acquisition takes
0.2 seconds, and the output takes approximately 20 to 25 seconds. DeepView®'s
proprietary optics are able to extract millions of data points or AI model
features from each raw image. This information is then used to build and
continually improve the AI model, which is trained and tested against a
proprietary database of more than 53 billion pixels with ever-growing
clinically validated data points.
DeepView® is designed to enable clinicians to make a more accurate, timely
and informed decision regarding the treatment of the patient's wound.
Chief Executive Officer's Statement
To the Members of Spectral MD
I am pleased to present the audited final results for the twelve months ended
31 December 2021 for Spectral MD, Holdings, Inc.. 2021 was a year focused on
sizable expansion, and development of our DeepView® technology and
operations.
1. In the year ended 31 December 2021 and the immediate
post-period, the Company made substantial progress towards its goal of seeking
FDA approval and commercialization of its DeepView® Wound Imaging Technology.
2. The Company's results, across key performance
metrics, reflect both the committed dedication to our mission and operational
discipline.
3. Strong financial and clinical top line results,
showing excellent AI performance metrics, give the Company great confidence in
the DeepView® technology. We believe it will be instrumental in disrupting
current treatment pathways and improving the standard of care for many
patients across multiple geographical markets, and in multiple applications.
We look forward to building upon our strong momentum, whilst continuing to
collaborate with BARDA and our clinical partners to scale and advance our
transformative technology.
Financial review
The Company met its 2021 milestones for both its Burn and DFU applications and
was able to end the year with a higher-than-expected cash position of US$16.1
million (2020: US$5.1 million). While grant revenue of US$15.2 million (2020:
US$17.3 million) was broadly in line with market expectations, expenses of
US$19.2M (2020: US$15.9 million) were lower, leading to a better-than-expected
negative adjusted EBITDA of US$ (3.0) million (2020: US$ 3.7 million). The
unfortunate circumstances of COVID-19 and resulting limitations of travel and
in-person-meetings forced us and our partners to utilize remote technology to
accomplish our goal, with a corresponding reduction in costs. Furthermore, we
were able to utilize our U.S. resources to drive UK related milestones given
the challenging COVID-19 environment in the UK and EU, which also contributed
to lower expenses.
In June 2021, we successfully raised US$15.6 million as part of our IPO on the
AIM market of the London Stock Exchange. Those funds are designated for
clinical trials, regulatory approvals, and commercialization efforts for our
DFU application through to 2023. Despite the COVID-19 circumstances, we
completed the enrollment of our DFU training study as planned. Grant revenue
from BARDA remains our largest source of revenue. Following the award of the
first option of our BARDA Burns contract (US$20.6 million) in March 2021, we
have been successful in securing additional funding of US$18.8 million through
the second option of this contract in early September 2021, six months ahead
of schedule.
Burn indication
Funding
Spectral MD has received substantial support from the U.S. government with
contracts from institutions such as BARDA, National Science Foundation("NSF"),
National Institute of Health ("NIH") and DHA in support of the burn
application for its DeepView® solution. Total grant funding awarded to date
from these organizations is over US$100 million, including US$40.5 million
awarded during 2021. This grant funding is non-dilutive to our shareholders,
and the Company believes it validates the important nature of its mission and
technology.
Following the successful completion of the ePOC multi-center clinical study in
Q1 of 2021, the Company received two additional grants, US$20.6 million in
March 2021 and US$18.8 million in September 2021, to bolster the Company's
existing clinical database to train the AI algorithm, and to improve the
DeepView® technology in early burn wound healing assessment. The US$20.6
million contract awarded under Option 1A was exercised by BARDA in March 2021
to execute the first stage of the clinical training study to train the
DeepView® AI algorithm at five sites. The contract option funding of US$18.8
million under Option 1B of the Company's current contract with BARDA was
granted six months ahead of schedule, which enables Company to accelerate the
initiation of the second stage of this clinical training study with
confidence.
This Option 1B second stage will expand the study from five to a total of ten
clinical sites, and from 100 to a total of 250 clinical subjects, and is
expected to continue until Q4 2022. In the year ended 31 December 2021 and
immediately post period, enrollment in the expanded clinical training study is
strong and on schedule across eight clinical sites.
The updated U.S. Government Broad Agency Announcement announced in November
2021 effectively closes the door for potential competitors to Spectral MD for
burn healing assessment technologies.
Clinical study results
The results from the ePOC multi-center clinical study were presented at three
scientific presentations at the Southern Region Burn Conference held from 4-7
November 2021, in New Orleans, Louisiana. The top-line results showed an
excellent AI performance metric. The results of the first multi-center study
using Spectral MD's burn imaging technology included 124 adult and pediatric
participants.
In adult participants, the performance showed 92% accuracy, with
cross-validation from the AI model for identification of non-healing burn
regions. This represents an improvement on the previously reported accuracy of
91% for the DeepView® Wound Imaging Solution in early healing assessment of
adults.
In pediatric patients the AI performance showed 88% accuracy, underlining how
the technology is responding with significant reliability to variability in
the study population. Based on these strong results, the Company has bolstered
its infrastructure to facilitate the expansion of the study to additional
sites, and has begun enrollment in a larger study in order to complete the AI
algorithm's development.
FDA communication
In the year ended 31 December 2021, the Company submitted an FDA
pre-submission request. This advises the FDA that the Company will expand the
clinical data set to include burn wound data from emergency departments. The
Company believes that the site-of-service for the DeepView® Wound Imaging
technology will be utilized in both burn care centers and emergency
departments. Expanding our data set to both burn care centers and emergency
departments enables the Company to reach 5,400 potential public sites of
services in the United States, in fulfilment of BARDA's mass casualty
countermeasures mission. The Company is excited to expand its focus to
emergency departments, as it believes that DeepView® is well positioned to
have a substantial impact on burn wound treatment in this setting.
DFU indication
In November 2021, the Company completed enrollment for its Institutional
Review Board (IRB) approved multi-center training study to support the
development of its DFU application for the DeepView® Wound Imaging System.
The study enrolled a total of 150 adult subjects and was executed successfully
and on schedule across six clinical sites in the US.
The DFU images and clinical data collected are currently being incorporated
into the database for the development of DeepView®'s DFU algorithm. The data
will also inform on key datapoints that will be captured in a planned
validation study, and the incorporation of additional newly developed
features. Data collected throughout the study will support the Company's
applications for FDA and CE mark approval for DeepView®'s DFU indication -
one of the necessary milestones required to commercialize DeepView®'s DFU
application. The completion of enrollment for the multi-center study is an
important milestone and illustrates how the Company is delivering on the
expected milestones it outlined at the time of its AIM IPO in June 2021.
The development of the DeepView® system for the DFU application and the user
interface software have seen substantial progress in 2021. Verification and
validation of the user application software for DFU along with the DFU system
specification capabilities were completed by the end of 2021.
Defense Health Agency (DHA)
On 23 June 2021, the Company was awarded a two-year, US$1.1 million,
Sequential Phase II Small Business Technology 5 Transfer (STTR) contract by
the DHA within the U.S. Department of Defense. This funding enables the
Company to research and develop a fully portable, handheld version of the
DeepView® solution. The Company has previously been awarded STTR Phase I and
Phase II contracts from the DHA. In July 2021, the Company held a kick-off
meeting with DHA to review the two-year project timeline. It is anticipated
that Stage One of the study will focus on system development, Stage Two will
develop a fully handheld prototype and Stage Three will be a clinical study
with the Burn Center at University Medical Center New Orleans to validate the
system prototype. The Sequential Phase II contract will fund all three
referenced stages.
In the 12-month period ended 31 December 2021, the Company has made
considerable progress in the development of the miniaturized DeepView®
technology. The Company has developed an early scientific prototype of the
DeepView® technology with key optical and computing capabilities in a fully
handheld, portable form. Upon review in a joint meeting with the DHA, both the
Company and DHA are committed to developing this into a more engineered,
production-ready prototype to support upcoming clinical studies. The Company
is on track to meet the milestones for the study and looks forward to the
continued progression of the miniaturized version of the DeepView®
technology.
Proprietary and clinically validated wound image database for AI development
As of 31 December 2021, approximately 8.1 terabytes and 174 billion pixels
worth of proprietary DFU and burn data have been acquired and utilized for the
deep learning algorithms training. This presents a significant barrier to
entry to would-be competitors in wound care healing assessments.
Intellectual Property (IP) development
The Company places a significant emphasis on obtaining and protecting its
intellectual property. In 2021, the Company filed a total of 15 new
applications, including 12 foreign applications (national phase filings in the
Snapshot and DFU families), two international PCT applications (wound healing
prediction with optical biomarkers, and histology/burns), and one new
provisional application (updated Snapshot disclosure using single aperture and
multiplexed illumination).
Four new patents were allowed or issued in 2021, including a U.S. patent in
the Snapshot family, a China National patent in the Multi-spectral Imaging
(MSI) tissue classification family, and Japan and European patents in the
original MSI+ Photoplethysmography (PPG) tissue classification family. The
granted European patent has been validated in Belgium, Germany, France, and
the UK.
The Company has the following eight active patent application families:
· Burn/Wound classification on MSI and PPG
· Tissue classification on MSI and PPG
· Amputation site analysis on MSI, machine learning and healthcare
matrix
· DFU healing potential prediction and wound assessment on MSI, machine
learning and healthcare matrix
· High-precision, multi-aperture, MSI snapshot imaging
· Wound assessment on MSI, optical biomarkers, and machine learning
· Burn/Histology assessment on MSI and machine learning
· High-precision single-aperture snapshot imaging with multiplexed
illumination
People and Organization
Continuing to build a focused and highly skilled team is critical to our
growth. The Company added 27 employees during the fiscal year 2021 and
currently has 55 full-time employees in the U.S. and UK and has and will
continue to make additional hires over the course of 2022 and beyond. The new
hires will be made in all areas, though in particular in operations, sales,
marketing, and government contracts. This will further enable the Company to
meet its technology, IP, clinical, regulatory, and commercial goals in 2022
and 2023.
In December 2021, the Company was pleased to announce the appointment of Nils
Windler as Chief Financial Officer. Mr. Windler specializes in healthcare and
life sciences and has more than 20 years' finance and operations experience.
In addition, Mr. Windler has a successful track record of leveraging his
financial, operations and sales experience to drive revenue growth and to
enhance profitability and has overseen organizational transformation at the
previous companies at which he has served. He also has built a considerable
reputation and expert knowledge having worked for multiple global
organizations and has been responsible for business transformation at high
growth companies. We are confident that his strong financial acumen, proven
track record, and deep understanding of our industry makes him an ideal fit to
lead Spectral MD's financial team. I look forward to working closely with Nils
to accelerate commercialization, to execute our business initiatives, and to
pursue our routes to markets.
Business outlook
The Company continues to believe that it has developed a unique diagnostic
imaging solution that has no direct competition in the assessment of wound
healing potential. Given the large addressable DFU market and the potential of
the BARDA contract, the Company is optimistic that DeepView® has the
potential to disrupt current treatment pathways, and to improve the standard
of care for many patients across multiple geographical markets and
applications. During 2021, the Company achieved several important milestones,
and it remains highly focused on its goal of commercializing its
transformative DeepView® technology. The Company is confident that it will
continue to build upon the expansion and development it experienced in 2021.
We are well-placed to address challenges and opportunities, based on
underlying financial strength, a resilient organization, a validated
technology, and a diversified business model.
Burn
We look forward to successfully completing the Options 1A and 1B 250 subject
clinical study. Upon successful completion of the study, the Company expects
to see high performing algorithm results across demographic and geographic
variability in the study population. The Company is excited for the continued
collaboration with BARDA, as we work together into the next contract phase.
Spectral MD is in constant communication with BARDA to further develop our
human resource leadership and infrastructure readiness for a federal level
commercial contract. The Company is committed to up-scaling its operations and
infrastructure to support BARDA's procurement needs to distribute the
DeepView® technology into clinics in the United States.
DFU
In 2022, the Company will start, and expects to finish, the validation study
for the DFU AI algorithm in the U.S.. Further, in Q2 of 2022 the Company
expects to start the DFU clinical study in the EU, where the data collected
will be combined and compared with U.S data to expand DeepView® readiness in
both the U.S. and CE marked regions. The Company is optimistic about the
potential to accelerate the development of the DFU application and to expand
into the UK and EU.
DHA
The Company believes that the recently awarded DHA contract has potential for
U.S. Government procurement by the U.S. military and first responders as well
as other militaries in the world, as permitted by law. A fully hand-held
version of DeepView® not only expands the market to the U.S. military, but
also has the potential to enable in-home use for DFU and other consumer
applications, beyond the anticipated DHA applications. In 2022, we will
continue to build upon the great progress achieved in 2021, towards the
realization of a miniaturized device. The Company will continue to develop the
early scientific prototype into a more engineered, production-ready prototype
to support clinical studies. The Company is on track to meet the milestones
for the study and looks forward to the continued progression of the
miniaturized version of the DeepView® technology.
Commercialization
The Company's primary focus for 2022 is the accelerated commercialization for
both DFU and burn indications. We look forward to the planned validation
study, now expected to start around late Q2 in 2022. Data collected will
support the Company's applications for FDA and CE mark approval for
DeepView®'s DFU indication, one of the necessary milestones required to
commercialize DeepView®'s DFU application. The Company is firmly focused on
developing its resource infrastructure in a timely manner to prepare for the
needs of a potential procurement contract with the U.S federal government. The
Company expects that realization of each milestone will create significant
value for the Company in commercializing its technology.
Financial
Throughout 2021, the Company demonstrated its financial stability and the
value which it can generate, even during a pandemic environment. The Company
will continue to build on the Option 1A and 1B funding under the BARDA
contract throughout the rest of 2022 and into 2023 to drive the clinical
training study of the DeepView® Wound Imaging Solution. The Company has a
strong cash position of US$16.1 million at 31 December 2021, which will enable
it to pursue its objectives and to realize its commercial opportunities.
R&D outlook
Based on the existing platform in development for chronic DFU and acute burn
wounds, the Company sees the potential to expand into other wound types such
as Venous Leg Ulcers, Critical Limb Ischemia, and Amputation. Furthermore,
future generations of the Company's algorithm potentially enable its
utilization in the early detection and prevention of wounds, supporting wound
treatment decision making, and in the provision of valuable information in the
follow up evaluation of the therapy efficiency as well as in the insurance
reimbursement process.
Closing statements
The Company has made substantial advances towards commercialization of
DeepView® for both burn and DFU indications. Gross proceeds raised at the
time of IPO of US$15.6 million combined with two successful BARDA contract
awards positions Spectral MD to accelerate commercialization and achieve key
business objectives in 2022.
We believe a critical metric in this phase of our Company's history is ongoing
government grant support, primarily from BARDA, but also from other sources.
This non-dilutive grant funding, over US$100 million which has been awarded
since the Company's inception and US$40.5 million which was awarded in 2021,
enables Spectral MD to conduct important R&D efforts, and to develop and
improve the Company's AI and optical technology performance. We believe that
these R&D efforts also materially enhance the likely success of our future
regulatory and commercial prospects.
Our primary focus is on achieving the core business objectives which we set
out for the Company in its AIM admission document. We continue to
opportunistically evaluate additional indications, market opportunities and
other initiatives that may enhance our potential for commercial success and
shareholder value.
Wensheng Fan
Chief Executive Officer
21 March 2022
Business Risks
The Company continues to assess, monitor, and mitigate the risks in the
business. The principal risks, as reported in the corporate governance section
of the AIM admission document, remain unchanged. The principal risks, and the
current assessment of the risk status and mitigation effectiveness are listed
in the table below.
Risk Description Risk Status Mitigation Mitigation Effectiveness
BARDA Burn development is heavily dependent on BARDA funding Unchanged Maintaining strong relationships and project focus Effective - entered Option 1A commencing March 2021 and Option 1B in September
2021
DHA Development of a handheld device is reliant on funding Unchanged Maintaining strong relationships and project focus Effective - entered Phase II contract in June 2021
Loss of a major customer No commercial sales have been made; almost all revenue from fixed fees Unchanged Maintaining a strong relationship with BARDA and expect diversification of Effective - entered Option 1A commencing March 2021 and Option 1B in September
customers in future years following commercialization 2021
and costs payable by BARDA
Commercial The DeepView(®) system has yet to be launched into the U.S., UK, EU and other Unchanged Maintaining strong relationships and project focus Effective - expanding London office, establishing an EU presence in Dublin,
markets and so adoption and market penetration can only be estimated Ireland, and engaging with potential CRO's in both EU and UK
Research and development Complex scientific research is necessary in the life sciences and medical Unchanged Recruiting and retaining highly skilled employees Effective - hired 27 new employees with world leading capabilities in 2021
device development sector
Product development timelines Unpredictability of the rate of patient recruitment into clinical trials Unchanged Maintaining strong relationships and project focus Effective - on schedule with trials
Regulatory approvals and compliance Obtain various regulatory approvals (including the FDA and EMA approvals) Unchanged Conducting thorough clinical and product market research and maintain strong Effective - engaged in regular discussion to update FDA and established
relationship with regulatory authorities partnerships with world leading expert teams of scientific
and regulatory affairs staff, including recently hired Director of Regulatory
Affairs
Technological change Changing customer requirements and the introduction of products or services or Unchanged Continues to invest in technical developments and apply for patents Effective - issued additional patents in 2021
enhancements embodying new technology
Reimbursement Pending Medicare approval of the Medicare coverage of innovative technologies Unchanged Continue to monitor Medicare's assessment process Effective - provides a guaranteed pathway for coding, coverage and payment for
(MCIT) reimbursement pathway for FDA breakthrough designated devices
DeepView(®)'s burn application, hired a VP of Commercialization and Marketing
to start in April 2022
SUPPLEMENTARY INFORMATION- DEFINITIONS AND RECONCILIATIONS OF NON-GAAP
MEASURES
Non-GAAP measures as defined by the Company
The Company uses adjusted EBITDA as a non-GAAP metric when measuring
performance, including when measuring current period results against prior
periods adjusted EBITDA.
Because of their non-standardized definitions, non-GAAP measures (unlike GAAP
measures) may not be comparable to the calculation of similar measures of
other companies. Supplemental non-GAAP measures are presented solely to permit
investors to more fully understand how Spectral MD management assesses
underlying performance. Supplemental non-GAAP measures are not, and should not
be viewed as, a substitute for GAAP measures.
Adjusted EBITDA
The Company defines adjusted earnings before interest, tax, depreciation and
amortization ("adjusted EBITDA") as net income/(loss) excluding income taxes,
depreciation of property, plant and equipment (including any related
impairment charges), amortization of intangible assets (including any related
impairment charges), interest expense, stock compensation, any non-operating
financial income and expense.
Independent Auditors' Report
The Board of Directors
Spectral MD Holdings, Ltd:
Opinion
We have audited the consolidated financial statements of Spectral MD Holdings,
Ltd and its subsidiaries (the Company), which comprise the consolidated
balance sheets as of December 31, 2021 and 2020, and the related
consolidated statements of operations, comprehensive (loss) income, changes in
temporary equity and stockholders' equity (deficit), and cash flows for the
years then ended, and the related notes to the consolidated financial
statements.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2021 and 2020, and the results of its operations and its cash
flows for the years then ended in accordance with U.S. generally accepted
accounting principles.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America (GAAS). Our responsibilities under
those standards are further described in the Auditors' Responsibilities for
the Audit of the Consolidated Financial Statements section of our report. We
are required to be independent of the Company and to meet our other ethical
responsibilities, in accordance with the relevant ethical requirements
relating to our audits. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the
consolidated financial statements in accordance with U.S. generally accepted
accounting principles, and for the design, implementation, and maintenance of
internal control relevant to the preparation and fair presentation of
consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the consolidated financial statements, management is required to
evaluate whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about the Company's ability to continue as a
going concern for one year after the date that the consolidated financial
statements are issued.
Auditors' Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the
consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors' report
that includes our opinion. Reasonable assurance is a high level of assurance
but is not absolute assurance and therefore is not a guarantee that an audit
conducted in accordance with GAAS will always detect a material misstatement
when it exists. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override
of internal control. Misstatements are considered material if there is a
substantial likelihood that, individually or in the aggregate, they would
influence the judgment made by a reasonable user based on the consolidated
financial statements.
In performing an audit in accordance with GAAS, we:
· Exercise professional judgment and maintain professional skepticism
throughout the audit.
· Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error, and design
and perform audit procedures responsive to those risks. Such procedures
include examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements.
· Obtain an understanding of internal control relevant to the audit in
order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control. Accordingly, no such opinion is expressed.
· Evaluate the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well
as evaluate the overall presentation of the consolidated financial statements.
· Conclude whether, in our judgment, there are conditions or events,
considered in the aggregate, that raise substantial doubt about the Company's
ability to continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit, significant
audit findings, and certain internal control related matters that we
identified during the audit.
/s/ KPMG LLP
Dallas, Texas
March 18, 2022
Spectral MD Holdings, Ltd.
Consolidated Balance Sheets as of December 31, 2021
2021 2020
US$ US$
Assets
Current assets:
Cash and cash equivalents 16,120,779 5,124,639
Accounts receivable, net 1,434,954 2,690,911
Prepaid expenses and other current assets 857,666 92,868
Total current assets 18,413,399 7,908,418
Non-current assets:
Property and equipment, net 31,593 -
Other noncurrent assets 39,695 31,046
Total Assets 18,484,687 7,939,464
Liabilities, temporary equity and stockholders' equity
Current liabilities:
Accounts payable 1,740,217 3,799,208
Accrued expenses 2,390,687 1,122,129
Notes payable 582,698 -
Warrant liability 185,724 -
Total current liabilities 4,899,326 4,921,337
Non-current liabilities:
Notes payable - 768,575
Total non-current liabilities - 768,575
Total Liabilities 4,899,326 5,689,912
Series A preferred stock ($0.001 par value); no shares authorized, issued or - 1,113,987
outstanding as of December 31, 2021; 10,000,000 shares authorized and
4,324,330 shares issued and outstanding as of December 31, 2020
Stockholders' Equity
Common stock ($0.001 par value); 400,000,000 shares authorized; 135,034,564 135,035 61,347
shares and 61,347,000 shares issued and outstanding as of December 31, 2021
and 2020, respectively
Additional paid-in capital 22,639,625 6,096,178
Accumulated deficit (9,189,292) (5,021,960)
Accumulated other comprehensive loss (7) -
Total Stockholders' equity 13,585,361 1,135,565
Total Liabilities, Temporary Equity and Stockholders' Equity 18,484,687 7,939,464
See accompanying notes to the consolidated financial statements
Spectral MD Holdings, Ltd.
Consolidated Statements of Operations and Comprehensive (Loss) Income
For the Years Ended December 31, 2021
2021 2020
US$ US$
Research and development revenue 15,167,827 17,300,884
Cost of revenue (8,186,698) (9,314,427)
Gross profit 6,981,129 7,986,457
Operating costs and expenses:
General and administrative 11,326,513 6,537,687
Total operating costs and expenses 11,326,513 6,537,687
Operating income (loss) (4,345,384) 1,448,770
Other income (expense):
Interest expense (17,342) (39,839)
Change in fair value of warrant liability 297,779 -
Foreign exchange transaction loss (187,582) -
Other income - 426
Total other income (expense) 92,855 (39,413)
(Loss) income before income taxes (4,252,529) 1,409,357
Benefit (provision) for income taxes 97,525 (174,626)
Net (loss) income (4,155,004) 1,234,731
Dividend on Series A preferred stock (1,258,959) -
Net (loss) income applicable to common stockholders (5,413,963) 1,234,731
Other comprehensive loss
Foreign currency translation adjustment (7) -
Total comprehensive (loss) income applicable to common stockholders (5,413,970) 1,234,731
Net (loss) income per share of common stock
Basic (0.05) 0.02
Diluted (0.05) 0.00
Weighted average common shares outstanding
Basic 100,291,815 57,897,520
Diluted 100,291,815 132,856,898
See accompanying notes to the consolidated financial statements
Spectral MD Holdings, Ltd.
Consolidated Statements of Changes in Temporary Equity and Stockholders'
Equity (Deficit)
For the Years Ended December 31, 2021
Accumulated Total
Additional Other Stockholders'
Paid-in Accumulated Comprehensive Equity
Preferred Stock Common Stock Capital Deficit Loss (Deficit)
Shares Amount Shares Amount
US$ US$ US$ US$ US$ US$
Balance at December 31, 2019 4,324,330 1,113,987 53,809,092 53,809 3,481,825 (6,256,691) - (2,721,057)
Issuance of common stock to convert notes payable and accrued interest to - - 1,754,790 1,755 357,977 - - 359,732
related parties
Stock option exercised for cash - - 1,980,000 1,980 44,220 - - 46,200
Stock compensation - - 3,803,118 3,803 2,212,156 - - 2,215,959
Net income - - - - - 1,234,731 - 1,234,731
Balance at December 31, 2020 4,324,330 1,113,987 61,347,000 61,347 6,096,178 (5,021,960) - 1,135,565
Issuance of common stock for cash - - 19,067,797 19,068 15,594,808 - - 15,613,876
Issuance cost, net of $0.5 million warrant liability - - - - (1,479,218) - - (1,479,218)
Cumulative dividend on Series A preferred stock - 1,258,959 - - (1,258,959) - - (1,258,959)
Conversion of preferred stock to common stock (4,324,330) (2,372,946) 53,889,765 53,890 2,319,056 - - 2,372,946
Stock option exercised for cash - - 42,500 43 4,383 - - 4,426
Stock compensation - - 687,502 687 1,363,377 - - 1,364,064
Foreign currency translation adjustment - - - - - - (7) (7)
Prior period adjustment - - - - - (12,328) - (12,328)
Net loss - - - - - (4,155,004) - (4,155,004)
Balance at December 31, 2021 - - 135,034,564 135,035 22,639,625 (9,189,292) (7) 13,585,361
Spectral MD Holdings, Ltd.
Statements of Cash Flows
For the Years Ended December 31, 2021
2021 2020
US$ US$
Cash flows from operating activities:
Net (loss) income (4,155,004) 1,234,731
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation expense 723 -
Stock based compensation 1,364,064 2,215,959
Change in fair value of warrant liability (297,779) -
Changes in operating assets and liabilities:
Accounts receivable 1,255,957 (1,913,451)
Prepaid expenses and other current assets (275,228) 8,580
Other assets (8,649) -
Accounts payable (2,071,319) 2,574,387
Accrued expenses 1,268,558 (300,634)
Net cash (used in) provided by operating activities (2,918,677) 3,819,572
Cash flows from investing activity:
Purchases of property and equipment (7,216) -
Net cash used in investing activity (7,216) -
Cash flows from financing activities:
Proceeds from issuance of common stock and warrant, net of issuance costs 14,618,161 -
Proceeds from PPP loan - 768,575
Proceeds from stock option exercise 4,426 46,200
Payments for notes payable (700,547) -
Payments for notes payable to related parties - (280,000)
Net cash provided by financing activities 13,922,040 534,775
Effect of foreign exchange rates on cash (7) -
Net increase in cash and cash equivalents 10,996,140 4,354,347
Cash and cash equivalents, beginning of period 5,124,639 770,292
Cash and cash equivalents, end of period 16,120,779 5,124,639
Supplemental cash flow information:
Cash paid for interest 12,220 18,500
Cash paid for income taxes 254,963 12,989
Noncash financing activities disclosure:
Cumulative dividend on Series A preferred stock 1,258,959 -
Conversion of preferred stock to common stock 2,372,946 -
Prepaid asset acquired for debt 473,913 -
Software and prepaid software maintenance acquired for debt 40,757 -
Issuance of common stock to convert notes payable and accrued interest to - 359,732
related parties
See accompanying notes to the consolidated financial statements
1. Organization, Nature of Business and Liquidity
Spectral MD, Inc., headquartered in Dallas, Texas, was incorporated in
Delaware on March 9, 2009.
On December 23, 2020, the Company formed its wholly-owned subsidiary in
Delaware, Spectral MD Holdings, Ltd. (the "Company"). The subsidiary had no
activity through December 31, 2020.
On June 21, 2021, Spectral MD Merger Sub, Inc. ("Merger Sub"), a Delaware
corporation and wholly owned subsidiary of Spectral MD Holdings, Ltd., merged
with and into Spectral MD, Inc. Following the merger, the separate corporate
existence of Merger Sub ceased and Spectral MD, Inc. continued as the
surviving corporation and through the merger became a wholly owned subsidiary
of the Company. In connection with the merger, each share of the Spectral MD,
Inc.'s common stock and the Spectral MD, Inc.'s preferred stock issued and
outstanding immediately prior to the effective date were converted into one
share of Common Stock. All of the stockholders of the Spectral MD, Inc. prior
to the merger became stockholders of the Company immediately following the
merger. All existing Common Stock of the Company held by the Spectral MD, Inc.
were cancelled at the effective date of the merger.
On June 22, 2021, the Company was listed and started trading on the AIM market
of the London Stock Exchange (the "AIM").
Effective June 21, 2021, all shares of the Company's common stock issued and
outstanding were combined and reclassified on a six for one basis. The effect
of this stock split has been retroactively applied to all periods presented
On July 22, 2021, the Company formed its wholly-owned subsidiary in the UK,
Spectral MD UK Ltd., ("Spectral MD UK") in order to prepare for and initiate
the regulatory approval process in the E.U. and U.K.
The Company is devoting substantially all of its efforts towards research and
development of its DeepView® Wound Imaging System. The Company has not
generated any product revenue to date. The Company currently generates revenue
from contract development and research services by providing such services to
governmental agencies, primarily to the Biomedical Advanced Research and
Development Authority ("BARDA"). The Company operates in one segment.
Liquidity
As of December 31, 2021 and 2020, the Company had approximately US$16.1
million and US$5.1 million, respectively in cash, and an accumulated deficit
of US$8.9 million and US$5.0 million, respectively. The Company has
historically funded its operations through the issuance of notes and the sale
of preferred stock and common stock. In July 2021, the Company received net
proceeds of approximately US$14.6 million from its initial public offering
("IPO") on the AIM on June 22, 2021 (see Note 3). Additionally, during 2021,
the Company finalized its execution of Options 1A and 1B of the contract with
BARDA, which may provide the Company with an additional US$39.4 million to
execute the clinical training study of DeepView® Wound Imaging System for
burn wound healing assessment. This contract option funding of US$39.4 million
follows the US$27.3 million contract received from BARDA in July 2019 in the
original award. In total, the contract has a potential funding of up to
US$88.7 million if all future options are executed.
The Company evaluated whether there are any conditions and events, considered
in the aggregate, that raise substantial doubt about its ability to continue
as a going concern within one year beyond the release date of the consolidated
financial statements. Based on such evaluation and the Company's current plans
as described above, management believes that the Company's existing working
capital as of December 31, 2021, will be sufficient to satisfy its operating
cash needs within one year beyond the release date of the consolidated
financial statements.
During the early months of 2020, COVID-19 emerged and has subsequently spread
world-wide. The World Health Organization has declared COVID-19 a pandemic
resulting in federal, state, and local governments and private entities
mandating various restrictions, including travel restrictions, restrictions on
public gatherings, stay at home orders and advisories, and quarantining people
who may have been exposed to the virus. Management has determined that there
has been no significant impact to the Company's operations, however management
continues to monitor the situation.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company's consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
of America ("GAAP") as determined by the Financial Accounting Standards Board
("FASB") Accounting Standards Codification ("ASC").
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Spectral MD, Inc. and Spectral MD UK.
Significant inter-company transactions and balances have been eliminated
in consolidation.
Use of Estimates
The preparation of these consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. The Company bases its estimates and judgments on historical experience
and on various other assumptions that it believes are reasonable under the
circumstances. The amounts of assets and liabilities reported in the Company's
balance sheets and the amounts of expenses reported for each of the periods
presented are affected by estimates and assumptions, which are used for, but
not limited to, revenue recognition, warrant liability, stock-based
compensation expense, and income tax valuation allowances. Actual results
could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with an original maturity
of three months or less when purchased to be cash equivalents. All cash and
cash equivalents are held in United States financial institutions.
Accounts Receivable
Accounts receivable represent amounts due from U.S. government agencies
pursuant to research and development contracts associated with the Company's
DeepView® Wound Imaging System. Accounts receivable amounted to approximately
US$1.4 million and US$2.7 million as of December 31, 2021 and 2020,
respectively.
The Company evaluates the collectability of its receivables based on a variety
of factors, including the length of time the receivables are past due, the
financial health of its customers and historical experience. Based upon the
review of these factors, the Company recorded no allowance for doubtful
accounts as of December 31, 2021 and 2020.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist principally of cash and cash equivalents and accounts receivable. All
cash and cash equivalents are held in United States financial institutions
which, at times, exceed federally insured limits. The Company has not
recognized any losses from credit risks on such accounts. The Company believes
it is not exposed to significant credit risk on cash and cash equivalents.
Additional credit risk is related to the Company's concentration of
receivables. As of December 31, 2021 and 2020, receivables were concentrated
from one customer (which is a U.S. government agency) representing 94% and 99%
of total net receivables, respectively. No allowance for doubtful accounts
were recorded as of December 31, 2021 and 2020.
One customer (which is a U.S. government agency) accounted for 98% of the
recognized research and development revenue for each of the years ended
December 31, 2021 and 2020.
Fair Value
Fair value is defined as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction
between market participants at the measurement date. Assets and liabilities
that are measured at fair value are reported using a three-level fair value
hierarchy that prioritizes the inputs used to measure fair value. This
hierarchy maximizes the use of observable inputs and minimizes the use of
unobservable inputs. The three levels of inputs used to measure fair value are
as follows:
Level 1 - Unadjusted quoted prices in active markets that are assessable at
the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly, for substantially the full term of
the asset or liability; and
Level 3 - Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (supported by
little or no market activity).
Fair Value of Financial Instruments
Financial instruments, which include cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities are carried at cost,
which management believes approximates fair value due to the short-term nature
of these instruments.
Foreign Currency
The reporting currency for the consolidated financial statements of the
Company is the U.S. dollar. The functional currency of Spectral MD Holdings,
Ltd. is the U.S. dollar. The functional currency of the Company's subsidiaries
is the local currency of the subsidiaries. The assets and liabilities of this
subsidiary is translated into U.S. dollars at exchange rates in effect at the
end of each reporting period. Revenues and expenses for these subsidiaries are
translated at average exchange rates in effect during the applicable period.
Translation adjustments are included in accumulated other comprehensive income
as a component of stockholders' equity.
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated at exchange rates in effect at the balance
sheet date. Resulting unrealized gains and losses are included in other
income, net in the consolidated statements of operations. For the year ended
December 31, 2021, the Company recorded a $160,782 foreign exchange
transaction loss, primarily related to the Company's bank account denominated
in British Pounds, included in foreign exchange transaction loss on the
consolidated statement of operations and comprehensive (loss) income. The
Company did not have any foreign exchange transaction gains or losses for the
year ended December 31, 2020.
Derivative Liabilities
The Company does not generally use derivative instruments to hedge exposures
to cash flow, market, or foreign currency risks. During the year ended
December 31, 2021, the Company entered into one derivative instrument, to set
a foreign currency exchange rate, that settled during the year. The accounting
for changes in fair value of derivatives depends on the intended use of the
derivative and resulting designation. The Company did not designate its
derivative instrument as a hedge for accounting purposes and, as a result,
marked its derivative instrument to fair value and recognized a change in fair
value of $26,800 included in foreign exchange transaction loss in the
consolidated statement of operations and comprehensive (loss) income.
The Company evaluates all of its financial instruments, including issued stock
purchase warrants, to determine if such instruments are derivatives or contain
features that qualify as embedded derivatives, pursuant to ASC 480 and FASB
ASC Topic 815, "Derivatives and Hedging" ("ASC 815"). The classification of
derivative instruments, including whether such instruments should be recorded
as liabilities or as equity, is re-assessed at the end of each reporting
period. The Company accounts for its warrants issued to SP Angel, who acts as
nominated adviser and broker to the Company for the purposes of the AIM Rules
as derivative liabilities in accordance with ASC 815. Accordingly, the Company
recognizes the instruments as liabilities at fair value, determined using the
Black-Scholes option-pricing model, and adjusts the instruments to fair value
at the end of each reporting period. The liabilities are subject to
re-measurement at each consolidated balance sheet date until exercised, and
any change in fair value is recognized in the Company's consolidated
statements of operations.
Research and Development Revenue
The Company recognizes revenue when the Company's customers obtain control of
promised goods or services, in an amount that reflects the consideration which
the Company expects to receive in exchange for those goods or services by
analyzing the following five steps: (1) identify the contract with a
customer(s); (2) identify the performance obligations in the contract; (3)
determine the transaction price; (4) allocate the transaction price to the
performance obligations in the contract; and (5) recognize revenue when (or
as) the Company satisfies a performance obligation. In order to transfer
control to the customer for contract development and manufacturing services,
the Company must have a present right to payment, legal title must have passed
to the customer, and the customer must have the significant risks and rewards
of ownership. Research and development revenue contracts are generally
recognized based upon the cost-to-cost measure of progress, provided that the
Company meets the criteria associated with transferring control of the good or
service over time.
The Company generates research and development revenue primarily from
cost-plus-fee contracts associated with development of certain product
candidates. Revenues from reimbursable contracts are recognized as costs are
incurred, generally based on allowable costs incurred during the period, plus
any recognizable earned fee. The Company uses this input method to measure
progress as the customer has the benefit of access to the development research
under these projects and therefore benefits from the Company's performance
incrementally as research and development activities occur under each project.
We consider fixed fees under cost-plus-fee contracts to be earned in
proportion to the allowable costs incurred in performance of the contract.
Revenue for long-term development contracts is considered variable
consideration because the deliverable is dependent on the successful
completion of development and is generally recognized based upon the
cost-to-cost measure of progress, provided that the Company meets the criteria
associated with satisfying the performance obligation over time. The Company
was awarded multiyear contracts in 2019 and 2021 by BARDA for the development
of the Company's DeepView® Wound Imaging Solution. BARDA may award contracts
that are less than 12 months depending on the scope of work and deliverables.
Payments from customers are generally received within 30 days of when the
invoice is sent.
Because the Company's contracts have an expected duration of one year or less,
the Company has elected the practical expedient in ASC 606-10-50-14(a) to not
disclose information about its remaining performance obligations.
Research and Development
The Company expenses research and development costs as operating expenses as
incurred. These expenses include salaries for research and development
personnel, consulting fees, product development, pre-clinical studies,
clinical trial costs, and other fees and costs related to the development of
the technology.
Stock-Based Compensation
The Company accounts for all stock-based payments to employees
and non-employees, including grants of stock options, restricted stock
awards ("RSAs") and stock options with non-market performance conditions
("PSOs") to be recognized in the consolidated financial statements, based on
their respective grant date fair values. The Company estimates the fair value
of stock option grants and PSOs using the Black-Scholes option pricing model.
The RSAs are valued based on the fair value of the Company's common stock on
the date of grant. The assumptions used in calculating the fair value of the
Company's stock and stock-based awards represent management's best estimates
and involve inherent uncertainties and the application of management's
judgment. The Company expenses stock-based compensation related to stock
options and RSAs over the requisite service period. As the PSOs have
performance conditions, compensation expense is recognized for each award if
and when the Company's management deems it probable that the performance
conditions will be satisfied. Forfeitures are recorded as they occur.
Compensation previously recorded for unvested equity awards that are forfeited
is reversed upon forfeiture. The Company expenses stock-based compensation to
employees over the requisite service period, on a straight-line basis, based
on the estimated grant-date fair value of the awards.
Income Taxes
Income taxes are recorded in accordance with ASC 740, Income Taxes ("ASC
740"), which provides for deferred taxes using an asset and liability
approach. The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Deferred tax assets and
liabilities are determined based on the difference between the consolidated
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are provided, if based upon the weight of available
evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized.
The Company accounts for uncertain tax positions in accordance with the
provisions of ASC 740. When uncertain tax positions exist, the Company
recognizes the tax benefit of tax positions to the extent that the benefit
would more likely than not be realized assuming examination by the taxing
authority. The determination as to whether the tax benefit will more likely
than not be realized is based upon the technical merits of the tax position as
well as consideration of the available facts and circumstances. The Company
has no uncertain tax positions as of December 31, 2021 and 2020 that qualify
for either recognition or disclosure in the consolidated financial statements
under this guidance.
The Company's policy is to classify assessments, if any, for tax related
interest as interest expense and penalties as general and administrative
expenses in the consolidated statements of operations. There were no amounts
accrued for interest or penalties for the years ended December 31, 2021 and
2020.
Net (Loss) Income per Share of Common Stock
Basic net (loss) income per share of common stock is computed by dividing the
net (loss) income attributable to common stockholders by the weighted-average
number of shares of common stock outstanding during the period. Diluted (loss)
income per share of common stock adjusts basic earnings per share for the
potentially dilutive impact of unvested restricted stock, stock options,
warrants and preferred stock. Dilutive securities having an anti-dilutive
effect on diluted net earnings per share are excluded from the
calculation. The dilutive effect of the unvested restricted stock and stock
options, are calculated using the treasury stock method. For warrants that are
liability-classified, during periods when the impact is dilutive, the Company
assumes share settlement of the instruments as of the beginning of the
reporting period and adjusts the numerator to remove the change in fair value
of the warrant liability and adjusts the denominator to include the dilutive
shares calculated using the treasury stock method. The Company applies the
if-converted method to compute the potentially dilutive effect of the Series
A preferred stock.
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended
to simplify various aspects related to accounting for income taxes. ASU
2019-12 removes certain exceptions to the general principles in Topic 740 and
also clarifies and amends existing guidance to improve consistent application.
The Company adoption of this standard on January 1, 2021 did not have an
effect on its consolidated financial statements as it did not change the way
collaborative development services and the related costs of these services are
reflected in the Company's consolidated financial statements.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU
2016-02"). ASU 2016-02 requires an entity to recognize assets and liabilities
arising from a lease for both financing and operating leases. ASU 2016-02 will
also require new qualitative and quantitative disclosures to help investors
and other financial statement users better understand the amount, timing, and
uncertainty of cash flows arising from leases. The Company will adopt ASU
2016-02 on January 1, 2022. The Company does not expect ASU 2016-02 to have a
material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit
Losses, which was subsequently amended by ASU 2018-19 and ASU 2019-10. This
standard requires the measurement of expected credit losses for financial
instruments carried at amortized cost held at the reporting date based on
historical experience, current conditions and reasonable forecasts. The
updated guidance also amends the current other-than-temporary impairment model
for available-for-sale debt securities by requiring the recognition of
impairments relating to credit losses through an allowance account and limits
the amount of credit loss to the difference between a security's amortized
cost basis and its fair value. In addition, the length of time a security has
been in an unrealized loss position will no longer impact the determination of
whether a credit loss exists. The main objective of this ASU is to provide
financial statement users with more decision-useful information about the
expected credit losses on financial instruments and other commitments to
extend credit held by a reporting entity at each reporting date. With the
issuance of ASU 2019-10 in November 2019, the standard is effective for fiscal
years and interim periods within those fiscal years beginning after December
15, 2022. The Company will continue to assess the possible impact of this
standard, but currently does not expect the adoption of this standard will
have a significant impact on its consolidated financial statements, given its
limited history of bad debt expense relating to trade accounts receivable.
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in
Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity's Own Equity, which simplifies accounting for
convertible instruments by removing major separation models required under
current GAAP. The ASU removes certain settlement conditions that are required
for equity contracts to qualify for the derivative scope exception, and it
also simplifies the diluted earnings per share calculation in certain areas.
The ASU is effective for the Company on January 1, 2024. Early adoption is
permitted, but no earlier than January 1, 2021. The Company is currently
evaluating the impact of this standard on its consolidated financial
statements and related disclosures.
3. Initial Public Offering
The Company completed its initial public offering on AIM on June 22, 2021. The
Company issued 19,067,797 shares of common stock for net proceeds of
approximately US$14.6 million after deducting offering expenses of
approximately US$1.0 million incurred by the Company (the "Offering"). The
Company also issued 762,712 warrants to SP Angel, who acts as nominated
adviser and broker to the Company for the purposes of the AIM Rules at the
Placing Price. The initial fair value of warrants was approximately US$0.5
million (see Note 4). The proceeds of the Offering will be primarily used for
Diabetic Foot Ulcer ("DFU") clinical trials in the United States (U.S.) and
Europe, and FDA clearance in the U.S. and CE Mark application and approval in
Europe to use DeepView for DFU application.
4. Fair Value Measurements
The following table presents information about the Company's financial
liabilities that are measured at fair value on a recurring basis as of
December 31, 2021, by level within the fair value hierarchy:
Fair value measured at December 31, 2021
Quoted prices in Significant other Significant
Fair value at active markets observable inputs unobservable inputs
December 31, 2021 (Level 1) (Level 2) (Level 3)
US$ US$ US$ US$
Warrant Liability $ 185,724 $ - $ - $ 185,724
There were no transfers between Level 1, 2 or 3 during the year ended December
31, 2021. There was no warrant liability in 2020.
The following table presents changes in Level 3 liabilities measured at fair
value for the year ended December 31, 2021 (in US$).
Balance - January 1, 2021 $ -
Issuance of warrants 483,503
Change in fair value (297,779)
Balance - December 31, 2021 $ 185,724
Both observable and unobservable inputs were used to determine the fair value
of positions that the Company has classified within the Level 3 category.
Unrealized gains and losses associated with liabilities within the Level 3
category include changes in fair value that were attributable to both
observable (e.g., changes in market interest rates) and unobservable (e.g.,
changes in unobservable long- dated volatilities) inputs.
The following table provides quantitative information regarding Level 3 fair
value measurements inputs at their measurement:
December 31, June 16,
2021 2021
Strike price (per share in US$) $ 0.80 $ 0.89
Contractual term (years) 5.5 6.0
Volatility (annual) 67.6% 85.0%
Risk-free rate 1.3% 0.9%
Dividend yield (per share) 0.0% 0.0%
5. Research and Development Revenue
For the years ended December 31, 2021 and 2020, the Company's revenues
disaggregated by the major sources was as follows:
2021 2020
US$ US$
BARDA 14,897,161 17,037,784
Other U.S governmental authorities 270,666 263,100
Total revenue 15,167,827 17,300,884
6. Accrued Expenses
Accrued expenses consist of the following as of December 31, 2021 and 2020:
2021 2020
US$ US$
Salary and wages 896,200 619,510
Provision operating expenses 700,224 -
Benefits 469,518 302,540
Franchise tax 291,425 -
Deferred rent 22,623 32,867
Accrued interest 10,697 5,575
Income tax - 161,637
Total accrued expenses 2,390,687 1,122,129
7. Notes Payable and Notes Payable to Related Parties
Notes Payable
PPP Loan
On April 13, 2020, the Company entered into a promissory note with JPMorgan
Chase Bank, N.A., as lender, pursuant to the Paycheck Protection Program
("PPP") of the Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act") for US$768,575 (the "PPP Loan"). The PPP Loan, which matures on April
13, 2022 and bears interest at 1% per annum, can be prepaid at any time prior
to maturity with no prepayment penalties. The Company could defer interest and
principal payments until September 13, 2021. Beginning on September 13, 2021,
the Company was required to make equal monthly payments of principal and
interest until the loan maturity on April 13, 2022. The PPP Loan is subject to
customary terms for payment defaults and breaches of representations and
warranties. The Company did not request the PPP Loan to be forgiven. During
2021, the Company repaid US$355,270 of principal and interest for the PPP
Loan. As of December 31, 2021 and 2020, the remaining principal is US$415,500
and US$768,575, respectively, and accrued interest is US$10,586 and US$5,554,
respectively, for the PPP Loan.
Insurance Note
On June 21, 2021, the Company entered into a financing agreement for a portion
of its insurance premium for US$473,913 ("Insurance Note"). The Insurance Note
bears interest at 5.7% per annum and is payable in nine equal monthly payments
of principal and interest beginning on July 21, 2021. As of December 31, 2021,
the remaining principal is US$160,405.
Software Note
On February 28, 2021, the Company entered into a note for the purchase of
software of US$40,757 ("Software Note") which is due in six equal payments
beginning September 1, 2021. The imputed interest for the Software Note is
immaterial. As of December 31, 2021, the remaining principal is US$6,793.
Notes Payable to Related Parties
2019 Notes Payable to Related Parties
On August 7, 2019, the Company entered into two promissory notes (the "Notes")
with Granicus IP, LLC, an entity owned by the Company's then Chairman of the
Board, and John H and Marcia Kirk Stevens Family Trust, an entity owned by the
Company's then board member, each for US$100,000. The Notes bore interest at
10% per annum and were due on demand. During 2020, the Company repaid the
Notes for US$218,500, including principal and accrued interest.
2013 Notes Payable to Related Parties
During 2013, the Company entered into two demand notes (the "2013 Notes") with
Erich Spangenberg, a shareholder of the Company, and LSC Holding, LLC, an
entity affiliated with a shareholder of the Company, for US$136,220 and
US$150,000, respectively, that bore interest at 7% per annum and 8% per annum,
respectively.
During 2020, the Company issued 1,754,790 shares of its common stock to
related parties to extinguish outstanding principal and accrued interest of
US$359,732 and paid cash of US$80,000 for the remaining balance of the 2013
Notes.
The following table summarizes interest expense included in the consolidated
statements of operations and comprehensive (loss) income for the years ended
December 31, 2021 and 2020:
2021 2020
US$ US$
PPP loan 7,317 5,575
Insurance premium financing 10,025 -
2019 Notes payable to related parties - 11,833
2013 Notes payable to related parties - 19,461
Interest charge on credit card - 2,970
Total interest expense 17,342 39,839
8. Commitments
Legal Matters
The Company is not currently subject to any material legal proceedings;
however, the Company may from time to time become a party to various legal
proceedings arising in the ordinary course of the Company's business.
Leases
In August 2017, the Company assumed a lease for its principal office in
Dallas, Texas, which expires on March 1, 2023. Base rent in connection with
the lease is US$47,645 per month, as of December 31, 2021. During 2021, the
Company also entered into a short-term lease agreement for office space and
property in the United Kingdom.
The Company recorded rent expense of US$779,812 and US$663,746 for the years
ended December 31, 2021 and 2020, respectively.
Future minimum payments under the Company's lease agreement, as of December
31, 2021 is as follows:
2021
US$
2022 579,189
2023 96,780
Total 675,969
9. Preferred Stock
Effective June 21, 2021, the Company increased its authorized shares for
preferred stock to 10,000,000 shares.
The preferred stock had the following key terms:
Liquidation: In the event of certain voluntary or involuntary acquisition or
sale transactions or upon the liquidation, dissolution or winding up of the
Company (each, a "Distribution Event"), the holders of Series A preferred
stock were entitled to receive out of the proceeds or assets of the Company
legally available for distribution to its shareholders (the "Proceeds"), prior
and in preference to any distribution of the Proceeds of such Distribution
Event to the holders of common shares by reason of their ownership thereof, an
amount per share equal to the Liquidation Value per share, plus a cumulative
preference of 8% per annum, compounded annually from the date of issuance of
the Series A preferred stock (collectively, the "Distribution Preference
Amount"). In the event that the Proceeds shall be insufficient to enable the
distribution in full of the Distribution Preference Amount to the holders of
the Series A preferred stock for all of the preferred shares held by them, all
of the Proceeds shall be distributed among the holders of Series A preferred
stock on a pro rata, as-converted basis. Upon completion of the distribution
required to the holders of Series A preferred stock, all of the remaining
Proceeds available for distribution to shareholders shall be distributed among
the holders of common shares pro rata based on the number of common shares
held by each such holder.
The aggregate liquidative value of the Series A preferred stock was $2,283,845
as of December 31, 2020.
Conversion: At any time after issuance, the Series A preferred stock was
convertible, in whole or in part, into shares of the Company's common stock at
the option of the Holder. Each Series A preferred share was automatically
converted into common stock of the Company upon the closing a firmly
underwritten public offering netting proceeds of at least $25 million at an
offering price calculated based on a Company valuation of at least $150
million, and approved by holders of the Series A preferred stock. The number
of shares of common stock issuable upon a conversion was determined by (i)
multiplying the number of shares of preferred stock to be converted by the
Liquidation Value, (ii) adding to the result a cumulative preference of 8% per
annum, compounded annually from the date of issuance of the Series A preferred
stock, and then (iii) dividing the result by the conversion price in effect
immediately prior to such conversion. The conversion price of the Series A
preferred stock is $0.2642 per share, subject to adjustment for stock
dividends, reclassifications, recapitalizations and combinations.
Immediately prior to the Offering, all outstanding shares of Series A
preferred stock and unpaid cumulative dividend were converted into 53,889,765
shares of common stock.
Voting: Holders of Series A preferred stock voted on as-converted basis and
have full voting rights and powers equal to the voting rights and powers of
the holders of common shares, voting as a single class. Holders representing a
Series A preferred majority, exclusively and as a separate class, were
entitled to elect two (2) directors of the Company.
As of December 31, 2021, there were no outstanding preferred stock.
10. Stockholders' Equity
The Company was authorized to issue 400,000,000 and 25,000,000 shares of
common stock, par value US$0.001 per share, as of December 31, 2021 and 2020,
respectively. The Company had 135,034,564 and 61,347,000 shares of common
stock issued and outstanding as of December 31, 2021, and 2020, respectively.
During the year ended December 31, 2021, the Company issued 19,067,797 shares
of common stock for net proceeds of approximately US$14.6 million after
deducting offering expenses of approximately US$1.0 million incurred by the
Company. During the year ended December 31, 2021, the Company issued 42,500
shares of common stock for aggregate proceeds of US$4,426 from stock option
exercises. During the year ended December 31, 2020, the Company issued
1,980,000 shares of common stock for aggregate proceeds of US$46,200 from
stock option exercises.
During the year ended December 31, 2020, the Company issued 1,754,790 shares
of its common stock to related parties to extinguish outstanding principal and
accrued interest of US$359,732 of loans to related parties.
11. Stock-based Compensation
2018 Long Term Incentive Plan
On July 24, 2018, the Company's' Board adopted the 2018 Long Term Incentive
Plan (the "2018 Plan") which permits granting of incentive stock options (they
must meet all statutory requirements), non-qualified stock options, stock
appreciation rights, restricted stock, stock units, performance shares,
performance units, incentive bonus awards, and other cash-based or stock-based
awards. Pursuant to the 2018 Plan, stock options must expire within 10 years
and must be granted with exercise prices of no less than the fair value of the
common stock on the grant date, as determined by the Board of Directors.
Restricted Stock
The RSAs generally vest over four years. A summary of RSA activities for the
year ended December 31, 2021 and 2020 are presented below.
Number of Shares Weighted Average Grant Date Fair Value per Share
US$
Nonvested at January 1, 2020 27,925,002 $ 0.10
Restricted stock forfeited (22,371,876)
Vested (3,803,124) $ 0.10
Nonvested at December 31, 2020 1,750,002 $ 0.10
Vested (687,500) $ 0.10
Nonvested at December 31, 2021 1,062,502 $ 0.10
Stock Options
The fair value of each employee and non-employee stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model.
The Company's common stock became publicly traded on July 22, 2021 and lacks
company-specific historical and implied volatility information. Therefore, it
estimates its expected stock volatility based on the historical volatility of
a publicly traded set of peer companies. Due to the lack of historical
exercise history, the expected term of the Company's stock options for
employees has been determined utilizing the "simplified" method for awards.
The expected term of stock options granted to non-employees is equal to the
contractual term of the option award. The risk-free interest rate is
determined by reference to the U.S. Treasury yield curve in effect at the
time of grant of the award for time periods approximately equal to the
expected term of the award. Expected dividend yield is zero based on the fact
that the Company has never paid cash dividends and does not expect to pay any
cash dividends in the foreseeable future.
In applying the Black Scholes option pricing model, the Company used the
following assumptions for stock options granted in 2021 and 2020:
2021 2020
Exercise price (per share in US$) $ 0.26 $ 0.16
Expected term (years) 5.3 5.0
Volatility (annual) 82% 85%
Risk-free rate 0.4% 0.2%
Dividend yield (per share) 0% 0%
A summary of stock options activity for the years ended December 31, 2021 and
2020 is presented below:
Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value
US$
US$
Outstanding at January 1, 2020 24,894,000 $ 0.10 8.8 $ -
Options granted 11,940,000 $ 0.21 10.0
Options exercised for cash (1,980,000) $ 0.02
Options forfeited/expired (7,249,500) $ 0.11
Outstanding at December 31, 2020 27,604,500 $ 0.15 8.8 $ 1,604,758
Options granted 7,208,000 $ 0.26 8.9
Options exercised for cash (42,500) $ 0.15
Options forfeited/expired (801,000) $ 0.20
Outstanding at December 31, 2021 33,969,000 $ 0.17 8.1 $ 10,963,319
Options vested and exercisable at December 31, 2021 25,746,426 $ 0.14 7.7 $ 5,558,828
During 2021 and 2020, the Company granted 180,000 and 1,320,000 stock options,
respectively, to certain employees with certain performance conditions,
including achieving a qualified financing or clinical milestones. For the year
ended December 31, 2021, all of the performance conditions were achieved and
the Company recorded US$200,948 of stock-based compensation expense for these
awards based on the grant date fair value of each award in the consolidated
statement of operations and comprehensive (loss) income. For the year ended
December 31, 2020, management did not deem that it was probable that the
performance conditions would be satisfied so expense was not recorded for
these awards.
In November 2020, the Company modified the stock option awards to change the
awards from vesting over four years to vesting over three years. Subsequent to
November 2020, stock option awards generally vest over three years.
For the years ended December 31, 2021 and 2020, the Company recorded
stock-based compensation of US$1,364,064 and US$2,215,959, respectively, in
general and administrative expenses in the consolidated statements of
operations and comprehensive (loss) income.
As of December 31, 2021, there was US$1,706,590 of unrecognized stock-based
compensation related to stock option grants that will be amortized over a
weighted average period of 0.9 years.
As of December 31, 2021, there was US$103,334 of unrecognized stock-based
compensation related to restricted stock option grants that will be amortized
over a weighted average period of 0.9 years.
During the year ended December 31, 2018, the Company issued 983,022 shares of
common stock and 1,673,321 stock options (the "Investor Options") for an
aggregate proceeds of US$973,192. The Investor Options have a two-year term
and are exercisable at a price of US$1.20 per share. The Investor Options
expired on December 31, 2020.
Warrants
On June 22, 2021, in conjunction with the closing of the Company's IPO, the
Company issued 762,712 warrants, with strike price of $0.89 and a ten-year
life, to SP Angel, who acts as nominated adviser and broker to the Company for
the purposes of the AIM Rules. As of December 31, 2021, there are 762,712
warrants outstanding with an exercise price of US$0.80.
12. Income Taxes
As of December 31, 2021 and 2020, the Company had available federal net
operating loss carryforwards ("NOLs") of US$3,042,616 and US$0, respectively,
which are available to offset future federal taxable income. Under the Tax
Cuts and Jobs Act, all NOLs incurred after December 31, 2017 are carried
forward indefinitely for federal tax purposes. The Coronavirus Aid, Relief,
and Economic Security Act ("CARES Act") signed in to law on March 27, 2020,
provided that NOLs generated in a taxable year beginning in 2020, 2019, or
2018, may now be carried back five years and forward indefinitely. In
addition, the limitation of NOL utilization up to 80% of taxable income
limitation is temporarily (for 2020, 2019 and 2018) removed, allowing NOLs to
fully offset taxable income. Federal tax returns for the years 2018, 2019 and
2020 remain subject to audit.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset is presented below:
2021 2020
US$ US$
Deferred income tax assets:
Net operating loss carryforwards 638,949 -
Stock-based compensation 250,431 370,822
Other 195,975 165,552
Total deferred income tax assets 1,085,355 536,374
Deferred income tax liabilities:
Fixed assets 759 -
Total deferred income tax liabilities 759 -
Net deferred income tax assets 1,084,596 536,374
Valuation allowance (1,084,596) (536,374)
Deferred income tax assets, net of valuation allowance - -
ASC 740, "Income Taxes" requires that a valuation allowance be established
when it is "more likely than not" that all, or a portion of, deferred tax
assets will not be realized. A review of all available positive and negative
evidence needs to be considered, including the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies.
After consideration of all the information available, management believes that
uncertainty exists with respect to future realization of its deferred tax
assets and has, therefore, established a full valuation allowance as of
December 31, 2021, and 2020. The net change in valuation allowance for the
years ended December 31, 2021 and 2020 was an increase of US$548,222 and a
decrease of US$279,423, respectively.
The income tax provision consists of the following as of December 31:
2021 2020
US$ US$
Current:
US Federal (159,341) 161,637
US State 61,816 12,989
Total current provision (97,525) 174,626
Deferred:
US Federal - -
US State - -
Total deferred provision - -
Total provision for income taxes (97,525) 174,626
A reconciliation of the U.S. Statutory income tax rate to the Company's
effective tax rate is as follows:
2021 2020
US$ US$
Statutory federal income tax rate 21.0% 21.0%
State taxes, net of federal (1.1%) 0.7%
Stock-based compensation (6.1%) 10.2%
Other 1.4% 0.3%
Change in valuation allowance (12.9%) (19.8%)
Provision for income taxes 2.3% 12.4%
13. Related Party Transactions
There are no related party transactions or balances, other than as disclosed
in Note 7, above. Salaries payable to related parties will be included in the
Annual Report.
14. Net (Loss) Income Per Common Share
The reconciliations between basic and diluted net (loss) income per
common share for the years ended December 31, 2021 and 2020 are as follows:
2021 2020
US$ US$
Numerator
Net (loss) income $ (4,155,004) $ 1,234,731
Dividend on Series A preferred stock (1,258,959) -
Net (loss) income applicable to common stockholders (numerator for net (loss) $ (5,413,963) $ 1,234,731
income per common share - basic)
Less: preferred dividends upon conversion of Series A preferred stock - (1,145,859)
Numerator for net (loss) income per common share - diluted $ (5,413,963) $ 88,872
Denominator
Weighted-average common shares outstanding - basic 100,291,815 57,897,520
Weighted-average dilutive shares issuable - unvested restricted stock - 10,369,593
Weighted-average dilutive shares issuable - stock options - 12,621,203
Weighted-average dilutive shares issuable - Series A preferred stock - 51,968,582
Weighted-average common shares outstanding - diluted 100,291,815 132,856,898
Net (loss) income per common share
Basic $ (0.05) $ 0.02
Diluted $ (0.05) $ 0.00
The table below summarizes potentially dilutive securities that were not
considered in the computation of diluted net (loss) income per common share
because the effect would be anti-dilutive.
2021 2020
Shares issuable upon vesting of restricted stock 1,062,502 -
Shares issuable upon exercise of stock options 33,969,000 11,820,000
Shares issuable upon exercise of warrants 762,712 -
Total anti-dilutive shares 35,794,214 11,820,000
15. Subsequent Events
In February 2022, the Company granted approximately 2,175,000 stock options to
various employees of the Company, including Wensheng Fan, CEO of the Company.
All options are granted under the 2018 Long Term Incentive Plan.
In February 2022, the Company paid aggregate bonuses of US$265,000 to Mr. Fan,
CEO of the Company, including a bonus of US$225,000 that was included in
accrued expenses on the consolidated balance sheet as of December 31, 2021,
and a discretionary bonus of US$40,000.
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