REG - Spectral MD Holdings - Final Results
27/02/2023 07:00
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RNS Number : 0624R Spectral MD Holdings, Ltd. 27 February 2023
Spectral MD Holdings, Ltd
("Spectral MD" or the "Company")
Final Results
Strong foundations laid ahead of planned regulatory submissions in 2023
LONDON, U.K. AND DALLAS, TX, U.S. - Spectral MD Holdings, Ltd. (AIM: SMD), a
predictive analytics company with proprietary AI algorithms and optical
technology for faster and more accurate treatment decisions in wound care,
announces its audited results for the year ended 31 December 2022.
Operational Highlights:
US Burn Indication supported by BARDA (Biomedical Advanced Research and
Development Authority)
· Awarded US$ 8.2 million contract expansion to accelerate the
commercialization pathway for DeepView™
· Burn Image Assessment Study ("BIAS") findings reinforce DeepView™'s
value proposition and clinical need:
o In 31% of healing wounds Emergency Department ("ED") physicians
incorrectly selected immediate referral to a burn center or surgery
o In 74% of non-healing wounds ED physicians failed to select immediate
referral or surgery
· Adult enrollment in Burn AI training study completed
Diabetic Foot Ulcer ("DFU") Indication
· Clinical Study is on track to complete enrollment by end of Q2 2023
to support DeepView™ AI-DFU FDA regulatory submission in 2023
Commercial readiness
· Strengthened senior leadership team with four key appointments: Niko
Pagoulatos, Chief Operating Officer; Christine Marks, VP Marketing &
Commercialization; Vince Capone, General Counsel & Company Secretary; and
Mary Regan, VP of Clinical Affairs
· Won Best Technology Award at the European Mediscience Awards in June
2022
Financial Highlights:
· R&D revenue up 67% to US$ 25.4 million (2021: US$ 15.2 million)
funding Burn indication development as well as the development of handheld
prototype DeepView SnapShot® M
· Strong cash position with cash on hand of US$ 14.2 million (2021: US$
16.1 million)
Post-Period Highlights:
US Burn Indication
· Pediatric enrollment in Burn AI training study has been completed in
February 2023.
· Federal contract opportunity initiated for Health and Human Services
Burn Wound Imaging technology. Company responded with proposal and will be
evaluated for contract fulfillment.
· DeepView™ AI-3D developed to capture millimetric level wound size
measurement accuracy with single image acquisition without requiring external
reference markers for seamless integration into the clinical workflow.
DFU Indication
· Successful interim results reported showing AI diagnostic accuracy
improvement from 81% to 86%.
· US clinical study is on track with additional sites being
incorporated in Q1 2023, providing data to support FDA and UKCA regulatory
submissions.
· Initiated EU clinical study with the Royal College of Surgeons in
Ireland ("RCSI") conducted at Connolly Hospital in Dublin, Ireland.
Wensheng Fan, Chief Executive Officer of Spectral MD, said: "We are pleased
with the rate of progress and development made in 2022 and have delivered
strong operational results for both our Burn and DFU indications. Spectral MD
also exceeded financial expectations during the period through effective cost
management. Importantly, this will allow the Company to increase investment in
2023 to drive forwards our commercialization strategy for DFU.
"Our immediate strategy remains focused on commercialization planning
activities. We are in regular communication with BARDA to further develop our
infrastructure readiness for a federal level commercial contract and 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."
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
(mailto:spectralMD@walbrookpr.com)
Paul McManus / Louis Ashe-Jepson Mob: +44 (0)7980 541 893 / +44 (0)7747 515 393
Alice Woodings +44 (0)7407 804 654
About Spectral MD Holdings, Ltd. (www.spectralmd.com
(http://www.spectralmd.com/) )
Using its DeepView™ Wound Imaging Solution, an internally developed AI
technology and multispectral imaging system which has received FDA
Breakthrough Designation for the burn indication, Spectral MD is able to
distinguish between non-healing and healing human tissue invisible to the
naked eye. Spectral MD currently is able to provide 'Day One' healing
assessments for burn wounds and diabetic foot ulcers (DFU), with other
applications being explored.
Spectral MD has to date received substantial support from the US government
with contracts from institutions such as Biomedical Advanced Research and
Development Authority (BARDA), National Science Foundation (NSF), National
Institute of Health (NIH) and Defense Health Agency (DHA) in support of the
burn application for its DeepView™ solution.
Spectral MD started trading on the AIM market of the London Stock Exchange on
June 22nd, 2021, after raising US $16 million through an oversubscribed
initial public offering. The Company has two principal trading subsidiaries,
Spectral MD, Inc. and Spectral MD UK Limited.
Chief Executive's Review
I am pleased to present the audited results for the twelve months ended 31
December 2022 for Spectral MD, Holdings, Ltd. 2022 was a year focused on
sizable expansion, and development of our DeepView™ technology and
operations. Spectral MD continues to make significant advances in the
development of the DeepView™ Wound Imaging Technology for both Burn and DFU
indications, as the Company continues to work towards commercialization.
The development of each AI application involves an initial study for training
the AI algorithm followed by a separate clinical validation study,
subsequently followed by regulatory submission. Below is an update and outlook
on each application, and on other key strategic elements.
Burn Indication (BARDA)
Update
Spectral MD has received substantial support from the US Government, with
contracts from institutions such as the BARDA, National Science Foundation
("NSF"), National Institute of Health ("NIH") and Defense Health Agency
("DHA") in support of the Burn indication for its DeepView™ platform. Total
grant funding awarded to date from these organizations is over US$ 125
million, including the recently awarded US$ 8.2 million BARDA contract
expansion. The Company is in regular communication with BARDA to further
develop its infrastructure readiness for a federal level commercial contract.
This US$ 8.2 million contract expansion from BARDA awarded in August 2022
helps the Company further accelerate the commercialization pathway for the
Company's DeepView™ Wound Imaging System. The award expanded the current
clinical training study for burn wounds by adding clinical sites, further
increases DeepView™'s interoperability with health systems' electronic
health records ("EHR") and boosts the Company's manufacturing capacity
readiness.
In 2022, the Company made substantial progress in the Burn AI Training study,
completing adult enrollment, and getting close to the enrollment goal for
pediatrics. As of 31 December 2022, the Company's proprietary, and clinically
validated database for burns, is comprised of 6.7 terabytes and 263 billion
pixels. This database presents both a significant barrier to entry to would-be
competitors in wound care healing assessment, and a potential additional
commercial opportunity for the Company to develop further in the future.
Emergency Department Update
The unpredictability of severe burn injuries is a complex critical care
problem. As training in burn injuries is no longer required during medical
training residency, the appropriate determination of burn depths is extremely
low. In published literature, non-burn care providers are accurate 50% of the
time in predicting early healing potential in burn injuries using visual
clinical judgment. Due to the lack of lab tests and diagnostic tools, some
Emergency Department ("ED") physicians often adopt the "wait and see" approach
for wound progression for 3-7 days, thereby occupying valuable bed space,
additional costs, longer hospital stays and over-excision of viable skin. Some
physicians prefer to directly transfer the patient to a specialty burn center.
This practice is confirmed by the published Journal of Burn Care Research that
found 41% of patients with Total Body Surface Area ("TBSA") less than 10% were
unnecessarily transferred to burn centers for specialized treatment and
discharged within 24 hours.
In alignment with BARDA's emergency preparedness mission, the US$ 8.2 million
contract expansion awarded in August 2022 provides funding to expand the
current Burn AI dataset to include ED patient enrollment. The addition of EDs
will facilitate establishing a clinical benchmark for DeepView®'s ED burn
healing assessment, which the Company anticipates will have a major impact in
the delivery of care for burns in that setting.
In February 2022, the Company and the FDA conducted a pre-submission meeting
for alignment on the Company's ED strategy. The FDA's feedback confirmed the
Company's ED approach and stated that they see utility of DeepView™ in
Emergency Rooms across the US.
Burn Image Assessment Study (BIAS) Update
The goal of the Institutional Review Board ("IRB") approved Burn Image
Assessment Study ("BIAS") was to quantify the current US clinical visual
judgment of burn wound healing assessment from ED and Burn healthcare
professionals to determine clinicians' accuracy of burn wound healing
assessment from still images.
In 2022, the BIAS study was conducted at four national conferences, American
Burn Association ("ABA"), Southern Region Burn Conference ("SRBC"), American
Academy of Emergency Medicine ("AAEM"), and American College of Emergency
Physicians ("ACEP"). The Company invited Emergency Medicine and Burn
clinicians from across the country to participate in the BIAS study at its
exhibit booth.
The BIAS study demonstrated that ED physicians incorrectly selected immediate
referral to a burn center or surgery in 31% of healing wounds and failed to
select immediate referral or surgery in 74% of non-healing wounds. This
reinforces DeepView™'s value proposition that ED physicians need clinical
decision support in assessing healing potential of burn wounds.
Outlook
In February 2023, Spectral MD completed the enrollment for pediatrics in the
Burn AI Training Study. Following completion of enrollment for pediatrics, the
Company plans to complete its pre-submission to the FDA to achieve alignment
on the Burn Validation Study protocol. The Company also plans to initiate its
Burn AI Validation Study in 2023, with data collected supporting its FDA
submission for DeepView™'s Burn indication.
The Company continues to be in regular communication with BARDA to further
develop its infrastructure readiness for a potential federal level commercial
contract award. A federal contract opportunity for Health and Human Services
Burn Wound Imaging technology has been initiated and the Company responded
with its proposal. Spectral MD will be evaluated for contract fulfillment. The
Company is fully committed to upscaling its operations and infrastructure in
the near term to ramp up commercial readiness by the end of 2024 and into 2025
for deployment of DeepView™ technology into health systems across the US.
While our commercial priority for the Burn indication continues to be BARDA,
the Company is also optimistic about the opportunity to gain regulatory
approval in the UK following amendments to the UK regulatory regime post
Brexit. The Company is evaluating an accelerated UK regulatory submission
pathway for 2023.
DFU Indication
Update
The Company made substantial progress in its US DFU clinical validation study
(the "US DFU Clinical Study") in 2022 and is on track with additional sites
being incorporated in Q1 2023. The endpoint of the clinical study is to
predict on "Day One" if the DFU wound will reduce in size by 50% by week four.
The Company performed an interim analysis showing improvement of the AI
diagnostic accuracy by five percentage points to 86%.
The data collected from the clinical study will be used to augment the
Company's existing proprietary and clinically validated database of DFU data
and healthcare matrix information; and to validate the DeepView™ DFU AI
algorithm as the Company prepares for US regulatory submission in 2023.
Outlook
In H1 2023, the Company will continue to enroll subjects in the US DFU
Clinical Study to finalize its admission goal. Following effective cost
management mainly related to the US DFU Clinical Study, the Company expects to
increase investment in its DFU indication in 2023 to drive its
commercialization strategy. Post period end, the Company continued to enroll
subjects in the US DFU clinical study, and we look forward to the enrollment
progress which is expected to conclude by mid-2023. In preparation of
submitting for regulatory approval, Spectral MD plans to conduct a
pre-submission meeting with the FDA to ensure alignment for its future final
regulatory submission. In H2 2023, the Company will submit for FDA and UKCA
regulatory evaluations. Regulatory approvals are expected to be granted by end
of 2023 for UKCA and in H1 2024 for FDA.
In February 2023, the Company also initiated a clinical study in the EU with
the Royal College of Surgeons in Ireland conducted at Connolly Hospital in
Dublin, Ireland. The EU clinical study will collect data from DFU patients
monitored up to 12 weeks. The intention of the clinical study is to further
develop DeepView AI® -DFU algorithm and support the 2023 Company's regulatory
submissions for UKCA, US FDA, and EU CE Mark.
Technology Miniaturization (DeepView SnapShot® M)
Update
The Company has previously been awarded STTR Phase I (US$ 150k), Phase II (US$
624k), and Sequential Phase II (US$ 1.1 million) amounting to US$ 1.8 million.
This funding enabled the Company to improve upon key optical and computing
capabilities, which led to the DeepView SnapShot®M, a fully handheld
prototype and wireless version of the cart-based Deep View™ solution with
similar performance to the Company's cart-based system.
Outlook
The Company is committed to the development and clinical research of the
DeepView SnapShot®M technology and is working towards advancing the current
prototype.
People and Organization
Update
With the Company accelerating towards commercialization, much focus has been
given to the development, hiring, and retention of highly skilled individuals
with proven commercial track records. In 2022, the Company saw a headcount
growth of +29% with the addition of 16 full-time employees. The Company
currently has 71 full-time employees in the US and UK. Spectral MD hired three
additional personnel in the UK to accelerate regulatory and commercialization
goals. The Company continues to prioritize recruitment in the areas of
operations, production, regulatory, marketing, government contracts, and
product development, which it believes will enable it to meet technology, IP,
clinical, regulatory and commercialization readiness goals in 2023 and 2024.
In November 2022, the Company successfully strengthened the leadership team by
appointing Dr. Niko Pagoulatos as Chief Operating Officer of Spectral MD. As
Chief Operating Officer of Spectral MD, reporting to CEO Wensheng Fan, Dr.
Pagoulatos will accelerate growth and operational performance of the Company
with specific focus on scientific research, engineering, product development
leading to global portfolio launch and clinical adoption. In addition to Dr.
Pagoulatos' appointment, in 2022 the Company also added Christine Marks, VP of
Marketing and Commercialization, Vince Capone, General Counsel and Company
Secretary, and promoted Mary Regan, VP of Clinical Affairs, to the leadership
team.
Outlook
The Company expects to strengthen its professional team to meet the demand for
commercial sales contracts, including the potential federal level commercial
contract. The Company will dedicate funding support toward human and
infrastructure readiness to execute its go-to marketing strategy. Additional
personnel to include sales, clinical research staff, clinical educators, field
service technicians and product management as Spectral MD advances toward
regulatory and commercial milestones.
Intellectual Property (IP) Development
Developing and protecting Spectral MD's intellectual property is one of the
Company's key priorities. In 2022, the Company filed a total of nine new
patent applications, including two US continuation/divisional applications,
five foreign applications, one international Patent Cooperation Treaty
application (high-precision, single-aperture, MSI snapshot imaging with
multiplexed illumination), and one new provisional application (topological
characterization and assessment of tissue).
Five new patents were approved, including a Japanese patent in the
Snapshot® family and US patents in the DFU family, the Snapshot
family, the MSI amputation site analysis/tissue classification
family, and the original MSI Photoplethysmography (PPG) tissue
classification family.
Furthermore, during the period Spectral MD has completed validation of
trademark registrations across all future major commercial markets.
R&D Pipeline Strategy
During 2022, the Company has begun to further assess other disease indications
for DeepView™, leveraging its AI data pipeline infrastructure developed for
the Burn and DFU clinical indications. Spectral MD's AI data pipeline
infrastructure is one of the key company assets developed and refined over 10+
years of AI development, and it enables the Company to develop AI for
additional clinical indications faster and more cost-efficiently than the
original two Burn and DFU clinical indications; it is designed for large
scale, i.e., large data volumes from a plurality of clinical sites, and
seamless integration of DeepView™ imaging data with corresponding patient
clinical data to drive AI training.
Additional analysis will result in an expanded and prioritized roadmap of
future commercial opportunities building on the universal imaging platform to
include innovative technologies such as AI-3D Wound Measurement, AI-Venous Leg
Ulcer ("VLU") indication, AI-Critical Limb Ischemia ("CLI") indication,
AI-Digital Health, AI-Guided Therapy, and AI-Cosmetics. More specifically,
DeepView™'s 3D Wound Measurement patent-pending technology will offer
physicians millimetric level wound size measurement accuracy with single image
acquisition and without requiring external reference markers for seamless
integration into the clinical workflow. Plurality of indications is an
important criterion in BARDA's evaluation of potential commercial contracts.
The Company will continue to evaluate and investigate its data
commercialization strategy, further expand its database of proprietary and
clinically validated wound data points and continue to work towards assessing
additional monetary value of this dataset.
Financial Review
Revenue of US$ 25.4 million represents research and development revenue in
2022. This is the result of the realization of non-dilutive research and
development contracts with BARDA and DHA (2021: US$ 15.2 million). This 67%
increase versus 2021 arises from the increase in research and development
activities for the DeepView(TM) AI-Burn indication and the handheld prototype
DeepView SnapShot®M.
The cost of sales in 2022 was US$ 14.5 million (2021: US$ 8.2 million) and
gross profit was US$ 10.9 million (2021: US$ 7.0 million). This is entirely
associated with BARDA research and development contract activities, invoiced
to BARDA monthly.
During 2022, operating expenses increased US$ 2.2 million year over year to
US$ 13.5 million (2021: US$ 11.3 million). This is predominantly driven by the
DeepView(TM) AI-DFU indication development, and by scaling up the
organizational infrastructure to support near term commercialization.
During 2022, the operating loss was US$ (2.6) million (2021: loss of US$ (4.2)
million). During 2022, adjusted EBITDA was a loss of US$ (1.5) million (2021:
loss of US$ (2.8) million).
Cash and cash equivalents totaled US$ 14.2 million at the end of 2022 (2021:
US$ 16.1 million). The 2022 cash figure represents a strong working capital
performance, as management has made permanent improvements in the accounts
receivable cycle.
Notes Payable totaled US$ 0.2 million at the end of 2022 (2021: US$ 0.6
million). During 2022, the Company repaid the remaining balance of a
promissory note entered in 2020 with JPMorgan Chase Bank, N.A., as lender,
pursuant to the Paycheck Protection Program ("PPP") of the US government
COVID-19 small business stimulus.
In conjunction with the closing of Company's initial public offering on the
AIM market in 2021, the Company issued 762,712 warrants, with a strike price
of US$ 0.89 and a five-year life, to SP Angel, who acts as nominated advisor
and joint broker to the Company. As of 31 December 2022, the strike price was
US$ 0.71. The change in the strike price is due to the change in exchange
rates as the warrants will settle in shares denominated in British Pounds. The
fair value was calculated to be US$ 0.1 million at the end of 2022 (2021: US$
0.2 million).
Effective 1 January 2022, the Company accounts for its leases under Accounting
Standards Codification ("ASC") 842, Leases. Under this guidance, arrangements
meeting the definition of a lease are classified as operating or financing
leases and are recorded in the condensed consolidated balance sheets as both a
right of use asset and a lease liability, calculated by discounting fixed
lease payments over the lease term at the rate implicit in the lease or the
Company's incremental borrowing rate. See additional discussion regarding
lease accounting in the Consolidated Financial Statements and Footnotes.
Following the first anniversary of the Company's admission to the AIM market,
the 'Regulation S' market trading restrictions were removed from the shares of
common stock, saved for those held by certain controlling shareholder thus
enabling wider market access to acquire and sell stock via multiple trading
platforms. Additionally, the removal of the charter restriction on the
Spangenberg entities' acquisition of certain further shares announced on 7
July 2022 provides further sources of potential market liquidity.
Closing Statements
We continue to demonstrate that Spectral MD's technology has the potential to
be of tremendous benefit to patients and a powerful new tool for clinicians in
distinguishing between damaged and healthy human tissue invisible to the naked
eye, providing 'Day One' healing assessments for burn wounds and DFU. We
believe DeepView™ is a market leading technology, supported by the largest
known burn wound database in the US, and has the potential to disrupt current
treatment pathways, improving the standard of care for many patients across
multiple geographical markets and applications. We remain confident in our
strategic approach and that our transformative technology is well positioned
ahead of regulatory submissions planned in 2023.
Wensheng Fan
Chief Executive Officer
27 February 2023
Risk Management
The Company continues to assess, monitor, and mitigate the risks in the
business. 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 - BARDA awarded an expansion of Option 1B in August 2022. Federal
contract opportunity initiated for Health and Human Services Burn Wound
Imaging technology. Company responded with proposal and will be evaluated for
contract fulfillment.
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 - BARDA awarded an expansion of Option 1B in August 2022. Federal
customers in future years following commercialization contract opportunity initiated for Health and Human Services Burn Wound
and costs payable by BARDA Imaging technology. Company responded with proposal and will be evaluated for
contract fulfillment.
Commercial The DeepView® system has yet to be launched into the US., UK, EU and other Unchanged Maintaining strong relationships and project focus Effective - Increased marketing team by two product managers (US & UK).
markets and so adoption and market penetration can only be estimated Outlined evidence needed in US & UK to support claims post regulatory
approval and securing physicians to run case studies.
Research and development Complex scientific research is necessary in the life sciences and medical Unchanged Recruiting and retaining highly skilled employees Effective - hired 16 new employees with world leading capabilities in 2022
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 maintaining Effective - engaged in regular discussion to update FDA and established
strong relationships with regulatory authorities partnerships with world leading expert teams of scientific and regulatory
affairs staff.
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 2022
enhancements embodying new technology
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.
The following table presents the Company's Adjusted EBITDA as of December 31,
2022 and December 31, 2021:
2022 2021
US$ US$
Net loss (2,912) (3,988)
Adjust:
Depreciation Expense 11 1
Provision for Income Taxes 106 (98)
Interest Expense 12 17
EBITDA (2,783) (4,068)
Additional Adjustments:
Stock based Compensation 1,155 1,365
Change in fair value of warrant liability (57) (298)
Foreign exchange transaction loss 253 188
Other income (49) -
Adjusted EBITDA (1,481) (2,813)
Independent Auditors Report
To the Stockholders and Board of Directors Spectral MD Holdings, Ltd:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Spectral MD
Holdings, Ltd and its subsidiaries (the Company) as of December 31, 2022 and
2021, the related consolidated statements of operations, changes in equity,
and cash flows for each of the years in the two-year period ended December 31,
2022, and the related notes (collectively, the consolidated financial
statements). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2022 and 2021, and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2022, in
conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company
has changed its method of accounting for leasing transactions as of January 1,
2022 due to the adoption of Accounting Standards Codification 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of
the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
We have served as the Company's auditor since 2021.
Dallas, Texas February 24, 2023
Consolidated Balance Sheets
For the year ended 31 December 2022, and 2021
(in thousands, except share and per share data)
2022 2021
US$ US$
Assets
Current assets:
Cash and cash equivalents 14,174 16,121
Accounts receivable, net 2,294 1,435
Unbilled revenue 618 71
Prepaid expenses and other current assets 601 840
Total current assets 17,687 18,467
Non-current assets:
Property and equipment, net 21 32
Right-of-use assets 1,008 -
Other noncurrent assets - 40
Total Assets 18,716 18,539
Liabilities and stockholders' equity
Current liabilities:
Accounts payable 2,759 1,414
Accrued expenses 2,631 2,603
Lease liabilities, short-term 680 -
Notes payable 175 583
Warrant liability 129 186
Total current liabilities 6,374 4,786
Lease liabilities, long-term 346 -
Total Liabilities 6,720 4,786
Commitments and contingencies (Note 8)
Stockholders' Equity
Common stock (US$0.001 par value); 400,000,000 shares authorized;
135,409,564 and 135,034,564 shares issued and outstanding as of
December 31, 2022 and 2021, respectively 135 135
Additional paid-in capital 23,795 22,640
Accumulated deficit (11,934) (9,022)
Total Stockholders' equity 11,996 13,753
Total Liabilities and Stockholders' Equity 18,716 18,539
See accompanying notes to the consolidated financial statements
Consolidated Statement of Operations
For the year ended 31 December 2022, and 2021
(in thousands, except share and per share data)
2022
2021
US$
US$
Research and development revenue 25,368 15,239
Cost of revenue (14,531) (8,187)
Gross profit 10,837 7,052
Operating costs and expenses:
General and administrative 13,484 11,231
Total operating costs and expenses 13,484 11,231
Operating income (loss) (2,647) (4,179)
Other income (expense):
Interest expense (12) (17)
Change in fair value of warrant liability 57 298
Foreign exchange transaction loss (253) (188)
Other income 49 -
Total other income (expense) (159)
93
(Loss) income before income taxes (2,806) (4,086)
Benefit (provision) for income taxes (106)
98
Net (loss) income (2,912) (3,988)
Dividend on Series A preferred stock - (1,259)
Net loss attributable to common stockholders (2,912) (5,247)
Net (loss) income per share of common stock Basic and Diluted (0.05)
(0.02)
Weighted average common shares outstanding Basic and Diluted
135,442,441 100,291,815
See accompanying notes to the consolidated financial statements
Consolidated Statements of Changes in Equity
For the year ended 31 December 2022, and 2021
(In thousands, except share data)
Additional Accumulated Total Stockholders'
Preferred Stock Common Stock Paid-in Capital Deficit Equity
Shares Amount Shares Amount US$ US$
US$ US$ US$
Balance at December 31, 2020 4,324,330 1,114 61,347,000 61 6,096 (5,034) 1,123
Issuance of common stock for cash - 19,067,797 19 15,595 - 15,614
Issuance cost, net of $0.5 million warrant liability - - - (1,479) - (1,479)
Cumulative dividend on Series A preferred stock - - - (1,259) - (1,259)
1,259
Conversion of preferred stock to common cash (4,324,330) (2,373) 53,889,765 54 2,319 - 2,373
Stock options exercised for cash - - 42,500 - 4 - 4
Stock-based compensation 687,502 1 1,364 - 1,365
Net loss - - - - - (3,988) (3,988)
Balance at December 31, 2021 - - 135,034,564 135 22,640 (9,022) 13,753
Stock-based compensation - - 375,000 - 1,155 - 1,155
Net loss - - - - - (2,912) (2,912)
Balance at December 31, 2022 - - 135,409,564 135 23,795 (11,934) 11,996
See accompanying notes to the consolidated financial statements
Consolidated Statements of Cash Flows
For the year ended 31 December 2022, and 2021
(in thousands)
2022 2021
US$ US$
Cash flows from operating activities:
Net (loss) income (2,912) (3,988)
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation expense 11 1
Stock based compensation 1,155 1,365
Amortization of right-of-use assets 557 -
Change in fair value of warrant liability (57) (298)
Changes in operating assets and liabilities:
Accounts receivable (859) 1,256
Unbilled revenue (547) (71)
Prepaid expenses and other current assets 615 (257)
Other assets 40 (9)
Accounts payable 1,345 (2,398)
Accrued expenses 51 1,481)
Lease liabilities (561) -
Net cash (used in) provided by operating activities (1,162) (2,918)
Cash flows from investing activity:
Purchases of property and equipment - (7)
Net cash (used in) provided by investing activity - (7)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrant, net of issuance costs - 14,618
Proceeds from stock option exercise - 4
Payments for notes payable (785) (701)
Net cash (used in) provided by financing activities (785) 13,921
Net increase (decrease) in cash and cash equivalents (1,947) 10,996
Cash and cash equivalents, beginning of period 16,121 5,125
Cash and cash equivalents, end of period 14,174 16,121
Supplemental cash flow information:
Cash paid for interest 23 12
Cash paid for income taxes - 255
Noncash operating and financing activities disclosure:
Cumulative dividend on Series A preferred stock - 1,259
Conversion of preferred stock to common stock - 2,373
Prepaid asset acquired for debt 376 474
Software and prepaid software maintenance acquired for debt - 41
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, 2022 and 2021, the Company had approximately US$14.2
million and US$16.1 million, respectively in cash, and an accumulated deficit
of US$11.9 million and US$ 9.0 million, respectively. The Company has
historically funded its operations through the issuance of notes and the sale
of preferred stock and common stock. During 2022, the Company was awarded
additional funding of $8.2 million associated with option 1B of the contract
with BARDA. During 2021, the Company executed Options 1A and 1B of the
contract with BARDA for funding of US$39.4 million and during 2022 was awarded
additional funding of $8.2 million associated with option 1B, resulting in
aggregated funding for Options 1A and 1B of US$ 47.6 million, of which US$
13.6 million is remaining as of December 31, 2022. The BARDA contract funding
is to execute the clinical training study of DeepView® Wound Imaging System
for burn wound healing assessment. See Research and Development Revenue below.
With the Company's closing on its initial public offering (the "Offering")
during 2021 (see Note 4) and the remaining funding under the BARDA contract,
the Company believes it will have sufficient working capital to fund
operations for at least one year beyond the release date of the consolidated
financial statements. Additionally, the contract with BARDA has a potential
funding of up to US$ 96.9 million, in aggregate for Option 1A, 1B and 2, if
all future options are executed.
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 US ("GAAP") as
determined by the Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC").
Also see Note 3 - Previously Reported Financial Statements relating to the
immaterial correction of an error in the consolidated balance sheet as of
December 31, 2021, consolidated statement of operations, consolidated
statement of changes in equity, and consolidated statement of cash flows for
the year ended December 31, 2021.
Principles 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 US financial institutions.
Accounts Receivable, Net and Unbilled Revenue
Accounts receivable represent amounts due from US government agencies pursuant
to research and development contracts associated with the Company's DeepView®
Wound Imaging System. Accounts receivable amounted to approximately US$ 2.3
million and US$ 1.4 million as of December 31, 2022 and 2021, 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, 2022 and 2021.
The Company records unbilled revenue when revenue is recognized prior to
billing customers. Unbilled revenue amounted to approximately US$ 0.6 million
and US$ 0.1 million as of December 31, 2022 and 2021, respectively.
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 US 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, 2022 and 2021, receivables were concentrated
from one customer (which is a US. government agency) representing 96% and 94%
of total net receivables, respectively. No allowance for doubtful accounts
were recorded as of December 31, 2022 and 2021.
One customer (which is a U.S. government agency) accounted for 98% of the
recognized research and development revenue for both the years ended December
31, 2022 and 2021.
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 US dollar. The functional currency of Spectral MD Holdings,
Ltd. is the US 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 US. 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. As of December 31, 2022 and December
31, 2021, the Company's translation adjustments are not material.
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, 2022 and December 31, 2021 the Company recorded US$ 0.3 million
and US$ 0.2 million foreign exchange transaction loss, respectively, primarily
related to the Company's bank account denominated in British Pounds and
accounts payable denominated in British Pounds, included in foreign exchange
transaction loss in the consolidated statements of operations.
Leases
Effective January 1, 2022, the Company accounts for its leases under
Accounting Standards Codification ("ASC") 842, Leases. Under this guidance,
arrangements meeting the definition of a lease are classified as operating or
financing leases and are recorded in the consolidated balance sheets as both a
right of use asset and a lease liability, calculated by discounting fixed
lease payments at the rate implicit in the lease or the Company's incremental
borrowing rate factoring the term of the lease. The incremental borrowing rate
used by the Company is an estimate of the interest rate the Company would
incur to borrow an amount equal to the lease payments on a collateralized
basis over the term of the lease. Because the Company does not generally
borrow on a collateralized basis, it uses the interest rate it pays on its
noncollateralized borrowings as an input to deriving an appropriate
incremental borrowing rate, adjusted for the amount of lease payments, the
lease term and the effect on that rate of designating specific collateral with
a value equal to the unpaid lease payments for that lease. Lease liabilities
are increased by interest and reduced by payments each period, and the right
of use asset is amortized over the lease term. For operating leases, interest
on the lease liability and the amortization of the right of use asset results
in straight-line rent expense over the lease term. Variable lease expenses are
recorded when incurred. For the period ending December 31, 2022 and December
31, 2021, the Company did not have any finance leases.
The Company adopted ASC 842 using the modified retrospective transition
approach. The Company did not have a cumulative effect of adoption as of
January 1, 2022. The Company elected a package of practical expedients, under
which the Company does not need to reassess (a) whether any expired or
existing contracts are or contain leases, (b) the lease classification for any
expired or existing leases, or (c) initial direct costs for any existing
leases. In calculating the right of use assets and lease liabilities, the
Company elects to combine lease and non-lease components. The Company
excludes short-term leases having initial terms of 12 months or less from the
new guidance as an accounting policy election.
The Company accounted for leases prior to January 1, 2022 under ASC 840,
Leases. For the year ended December 31, 2022, the Company recognized rent
payments in the Company's operating leases on a straight-line basis over the
lease term.
Derivative Liabilities
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 balance sheet date until exercised, and any change in
fair value is recognized in the Company's consolidated statements of
operations.
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 in July 2021. 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. As of December 31,
2021, the change in fair value of the derivative instrument was immaterial
when the Company marked its derivative instrument to fair value. For the year
ended December 31, 2022, the Company did not have any derivative instruments,
other than the stock purchase warrants, discussed above.
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 (modified for additional
funding in 2022) 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, 2022 and 2021 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, 2022 and
2021.
Comprehensive Loss
Comprehensive loss is equal to net loss as presented in the consolidated
statements of operations, as the Company did not have any material other
comprehensive income or loss for the periods presented.
Net Loss per Share of Common Stock
Basic net loss share of common stock is computed by dividing the net loss
attributable to common stockholders by the weighted-average number of shares
of common stock outstanding during the period. Diluted net loss 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 is 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 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 adopted ASU 2016-02
on January 1, 2022. The Company recorded a right-of-use asset and lease
liabilities each of approximately US$ 0.6 million upon the adoption of ASU
2016-02. See Note 9.
Recently Issued Accounting Standards
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.
In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820 "Fair Value
Measurement of Equity Securities Subject to Contractual Sale Restrictions".
The FASB is issuing this Update (1) to clarify the guidance in Topic 820, Fair
Value Measurement, when measuring the fair value of an equity security subject
to contractual restrictions that prohibit the sale of an equity security, (2)
to amend a related illustrative example, and (3) to introduce new disclosure
requirements for equity securities subject to contractual sale restrictions
that are measured at fair value in accordance with Topic 820. For public
business entities, the amendments in this Update are effective for fiscal
years beginning after December 15, 2023, and interim periods within those
fiscal years. Early adoption is permitted for both interim and annual
financial statements that have not yet been issued or made available for
issuance. The Company is still evaluating the impact of this pronouncement on
the consolidated financial statements.
3. IMMATERIAL CORRECTIONS
SEC Staff Accounting Bulletin No. 99, "Materiality," and FASB, Statement of
Financial Accounting Concepts No. 2 "Qualitative Characteristics of Accounting
Information" indicate that quantifying and aggregating errors is only the
beginning of an analysis of materiality and that both quantitative and
qualitative factors must be considered in determining whether individual
errors are material. The Company evaluated the corrections related to
incorrectly recording certain revenues and operating expenses for the year
ended December 31, 2021. As a result, adjustments for the immaterial
correction of the error were applied for comparative purposes, as shown below.
The consolidated balance sheet as of December 31, 2021, consolidated statement
of operations, consolidated statement of changes in equity, and consolidated
statement of cash flows for the year ended December 31, 2021 have been
adjusted as presented in the following tables (in thousands):
As Previously Reported As Adjusted
December 31, 2021 Adjustments December 31, 2021
US$ US$ US$
Assets
Current assets:
Unbilled revenue - 71 71
Prepaid expenses and other current assets 858 (18) 840
Total current assets 18,414 53 18,467
Total Assets 18,486 53 18,539
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 1,740 (326) 1,414
Accrued expenses 2,391 212 2,603
Total current liabilities 4,900 (114) 4,786
Total Liabilities 4,900 (114) 4,786
Stockholders' Equity
Accumulated deficit (9,189) 167 (9,022)
Total stockholders' equity 13,586 167 13,753
Total Liabilities and Stockholders' Equity 18,486 53 18,539
As Previously Reported As Adjusted
2021 Adjustments 2021
US$ US$ US$
Research and development revenue 15,168 71 15,239
Gross profit 6,981 71 7,052
Operating costs and expenses:
General and administrative 11,327 (96) 11,231
Total operating costs and expenses 11,327 (96) 11,231
Operating loss (4,346) 167 (4,179)
Loss before income taxes (4,253) 167 (4,086)
Net loss (4,155) 167 (3,988)
Net loss attributable to common stockholders (5,414) 167 (5,247)
As Previously Reported As Adjusted
2021 Adjustments 2021
US$ US$ US$
Cash flows from operating activities:
Net loss (4,155) 167 (3,988)
Changes in operating assets and liabilities:
Unbilled revenue - (71) (71)
Prepaid expenses and other current assets (275) 18 (257)
Accounts payable (2,072) (326) (2,398)
Accrued expenses 1,269 212 1,481
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, 2022 and December 31, 2021, by level within the fair value
hierarchy (in thousands):
Fair value measured at December 31, 2022
Warrant Liability Fair Value at December 31, 2022 Quoted prices to active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3)
US$ US$ US$ US$
$ 129 $ - $ - $ 129
Fair value measured at December 31, 2021
Warrant Liability Fair Value at December 31, 2021 Quoted prices to active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3)
US$ US$ US$ US$
$ 186 $ - $ - $ 186
There were no transfers between Level 1, 2 or 3 during the year ended December
31, 2022 and December 31, 2021.
The following table presents changes in Level 3 liabilities measured at fair
value for the year ended December 31, 2022 and 2021 (in thousands).
US$-
Balance - January 1, 2021 $ -
Issuance of warrants 484
Change in fair value (298)
Balance - December 31, 2021 186
Change in fair value (57)
Balance - December 31, 2022 $ 129
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:
2022 2021
Strike price (per share in US$) US$0.71 US$0.80
Contractual term (years) 4.5 5.5
Volatility (annual) 72.6% 67.6%
Risk-free rate 4.0% 1.3%
Dividend yield (per share) 0.0% 0.0%
5. RESEARCH AND DEVELOPMENT REVENUE
For the years ended December 31, 2022 and 2021, the Company's revenues
disaggregated by the major sources was as follows (in thousands):
US$ US$
BARDA 24,827 14,968
Other US governmental authorities 541 271
Total revenue 25,368 15,239
6. ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31, 2022 and 2021 (in
thousands):
December 31, December 31,
2022 2021
US$ US$
Salary and wages 1,135 896
Provision operating expenses 736 957
Benefits 650 470
Franchise tax 110 246
Income Taxes - -
Deferred rent - 23
Accrued interest - 11
Total accrued expenses 2,631 2,603
7. NOTES PAYABLE
Insurance Note
In June 2022 and 2021, the Company entered into a financing agreements for a
portion of its insurance premium for approximately US$ 0.4 million (the "2022
Insurance Note") and US$ 0.5 million (the "2021 Insurance Note"),
respectively. The 2022 Insurance Note and 2021 Insurance Note bear interest at
6.7% per annum and 5.7% per annum, respectively, and are each payable in equal
monthly payments of principal and interest maturing in May 2023 and February
2022, respectively. The Company determined that the carrying amounts of the
2022 Insurance Note and 2021 Insurance Note approximate fair value due to the
short-term nature of borrowings and current market rates interest rates.
During the year ended December 31, 2022, the Company repaid approximately, US
$0.2 million of principal and interest for the 2022 Insurance Note. As of
December 31, 2022, the Company had an outstanding balance of $0.2 million for
the 2022 Insurance Note.
During the year ended December 31, 2022 and 2021, the Company repaid
approximately US $0.2 million and US $0.3 million, respectively, of principal
and interest for the 2021 Insurance Note. There was no outstanding balance for
the 2021 Insurance Note as of December 31, 2022.
PPP Loan
On April 13, 2020, the Company entered into a promissory note with JPMorgan
Chase Bank, N.A., as lender, pursuant to the Paycheck Protection Program
("PPP") of the Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act") for US$ 768,575 (the "PPP Loan"). The PPP Loan, which matured 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
each of the years ended December 31, 2022 and 2021, the Company repaid US$ 0.4
million of principal and interest for the PPP Loan. There was no outstanding
balance for the PPP Loan as of December 31, 2022
8. Commitments and Contingencies
Legal Matters
In the ordinary course of business, the Company may be subject to various
pending or threatened legal actions. In 2022, the Company was incorrectly
named as a defendant in a lawsuit. On January 13, 2023, the Company was
properly removed as a defendant in the above-mentioned matter. The Company is
not currently subject to any material legal proceedings.
9. Leases
The Company leases office space for its principal office in Dallas, Texas,
which was extended during 2022 to expire in May 2024. During 2022, the Company
entered into a lease for office space in the United Kingdom under a lease that
expires in May 2023.
The following table summarizes quantitative information about the Company's
operating leases for the year ended December 31, 2022 (US dollars in
thousands):
2022
Operating cash flows from operating leases (in US$) $ 594
Right-of-use assets obtained in exchange for new operating $ 632
lease liabilities (in US$)
Right-of-use assets obtained in exchange for new operating liabilities upon $ 955
lease extension (in US$)
Weighted average remaining lease term - operating 1.4
leases (in years)
Weighted average discount rate - operating leases 8.46%
The following table provides the components of the Company's lease cost
included in general and administrative expense in the consolidated statement
of operations (in thousands):
2022
US$
Operating leases
Operating lease cost $ 590
Variable lease cost 126
Total rent expense $ 716
Variable lease cost is primarily attributable to amounts paid to lessors for
utility charges and property taxes under an office space lease.
As of December 31, 2022, future minimum payments under
the non-cancelable operating leases under ASC 842 were as follows (in
thousands):
US$
Year ending December 31, 2023 $ 744
Year ending December 31, 2024 354
Total 1,098
Less: imputed interest (72)
Operating lease liabilities $ 1,026
For the year ended December 31, 2021, the Company recorded rent expense of
approximately US$ 0.8 million included in general and administrative expenses
in the consolidated statement of operations in accordance with ASC 840. The
future minimum lease minimum payments under the Company's lease agreement as
of December 31, 2021 are as follows (in thousands):
US$
Year ending December 31, 2022 $ 579
Year ending December 31, 2023 97
Year ending December 31, 2024 -
Total $ 676
10. Preferred Stock
As of December 31, 2022 and December 31, 2021, there were no authorized or
outstanding shares of preferred stock. Immediately prior to the Offering, all
outstanding shares of Series A preferred stock and unpaid cumulative dividends
were converted into 53,889,765 shares of common stock.
11. Stockholders' Equity
The Company was authorized to issue 400,000,000 shares of common stock, par
value US$0.001 per share, as of December 31, 2022 and December 31, 2021,
respectively. The Company had 135,409,564 and 135,034,564 shares of common
stock issued and outstanding as of December 31, 2022 and December 31, 2021,
respectively. As of December 31, 2022, the Company was in the process of
completing the issuance of an additional 370,000 shares of stock through the
exercise of certain stock options by former Company employees.
12. 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. In June 2021, in connection with the IPO, the 2018 Plan was amended so
that stock issued pursuant to the 2018 Plan would be the common stock of the
Company. 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. As of
December 31, 2022, 38,354,118 shares of common stock were authorized for
issuance under the 2018 Plan, of which 2,187,618 remain available for
issuance.
2022 Long Term Incentive Plan
On September 27, 2022, the Company's stockholders approved the adoption of the
2022 Long Term Incentive Plan (the "2022 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 2022 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. As of December 31, 2022, 20,000,000
shares of common stock were authorized for issuance under the 2022 Plan, of
which all remain available for issuance.
Restricted Stock
The RSAs generally vest over four years. A summary of RSA activities for the
twelve months ended December 31, 2022 are presented below:
Number of Waited Average Grant Date Fair Value per Share
Shares US$
Nonvested at January 1, 2021 1,750,002 US$0.10
Vested (687,500) US$0.10
Nonvested at December 31, 2021 1,062,502 US$0.10
Vested (750,000) US$0.10
Nonvested at December 31, 2022 312,502 US$0.10
Stock Options
The fair value of each employee and non-employee stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model.
The Company's common stock became publicly traded on July 22, 2021 and lacks
company-specific historical and implied volatility information. Therefore, it
estimates its expected stock volatility based on the historical volatility of
a publicly traded set of peer companies. Due to the lack of historical
exercise history, the expected term of the Company's stock options for
employees has been determined utilizing the "simplified" method for awards.
The expected term of stock options granted to non-employees is equal to the
contractual term of the option award. The risk-free interest rate is
determined by reference to the US. Treasury yield curve in effect at the time
of grant of the award for time periods approximately equal to the expected
term of the award. Expected dividend yield is zero based on the fact that the
Company has never paid cash dividends and does not expect to pay any cash
dividends in the foreseeable future.
In applying the Black Scholes option pricing model, the Company used the
following assumptions for stock options granted in 2022 and 2021,
respectively:
2022 2021
Exercise price (per share in US$) US$ 0.44 US$ 0.26
Expected term (years) 5.9 5.3
Volatility (annual) 68% 82%
Risk-free rate 2.7% 0.4%
Dividend yield (per share) 0% 0%
A summary of stock options activity for the years ended December 31, 2022 and
2021 is presented below:
Weighted Average Exercise Price Average Remaining Contractual
US$ Life (in years) Aggregate Intrinsic Value
US$
Stock Options
Outstanding at January 1, 2021 27,604,500 US$0.15 8.8 US$1,605
Options granted 7,208,000 US$0.26 8.9
Options exercised for cash (42,500) US$0.15
Options forfeited/expired (801,000) US$0.20
Outstanding at December 31, 2021 33,969,000 US$0.17 8.1 US$10,963
Options granted 4,285,000 US$0.44 9.2
Options exercised for cash - -
Options forfeited/expired (2,130,000) US$0.23
Outstanding at December 31, 2022 36,124,000 US$0.20 7.3 US$6,831
Options vested and exercisable
at December 31, 2022 25,429,771 US$0.15 6.8 US$5,842
For the year ended December 31, 2022 and 2021, the Company recorded
stock-based compensation expense of approximately US$ 1.2 million and US$ 1.4
million, respectively, in general and administrative expenses in the
consolidated statements of operations.
As of December 31, 2022, there was approximately US$ 1.6 million of
unrecognized stock-based compensation related to stock option grants that will
be amortized over a weighted average period of 1.1 years.
As of December 31, 2022, there was approximately US$ 26,000 of unrecognized
stock-based compensation related to restricted stock grants that will be
amortized over a weighted average period of 0.3 years.
During the year ended December 31, 2018, the Company granted of 10,039,926
stock options to investors (the "Investor Options") that were approved by the
Board of Directors outside of the 2018 Plan. During the year ended December
31, 2022, 358,572 Investor Options expire and the remaining 9,681,354 Investor
Options will expire in November 2023. The Investor Options have an exercise
price of US$1.20 per share. As of December 31, 2022, there is no unrecognized
stock-based compensation expense related to the Investor Options.
Warrants
On June 22, 2021, in conjunction with the closing of the Company's IPO, the
Company issued 762,712 warrants, with strike price of US$ 0.89 and a five-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, 2022, there are 762,712
warrants outstanding with an exercise price of US$ 0.71.
13. INCOME TAXES
As of December 31, 2022 and 2021, the Company had available federal net
operating loss carryforwards ("NOLs") of US$ 2.2 million and US$ 3.0 million,
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 (in thousands):
2022 2021
US US$
Deferred income tax assets:
Net operating loss carryforwards 429 601
Capitalized research expenses 420 -
Stock-based compensation 262 251
Lease liabilities 216 -
Other 279 196
Total deferred income tax assets 1,606 1,048
Deferred income tax liabilities:
Right-of-use assets 212 -
Other 6 1
Total deferred income tax liabilities 218 1
Net deferred income tax assets 1,388 1,047
Valuation allowance (1,388) (1,047))
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, 2022, and 2021. The net change in valuation allowance for the
years ended December 31, 2022 and 2021 was an increase of $US 0.3 million and
US$ 0.5 million, respectively.
The income tax provision consists of the following as of December 31 (in
thousands):
2022 2021
US$ US$
Current:
US Federal 5 (159)
US State 101 61
Total current provision 106 (98)
Deferred:
US Federal - -
US State - -
Total deferred provision - -
Total provision for income taxes 106 (98)
A reconciliation of the US. Statutory income tax rate to the Company's
effective tax rate is as follows:
2022 2021
US$ US$
Statutory federal income tax rate 21.0% 21.0%
State taxes, net of federal (2.8%) (1.1%)
Stock-based compensation (7.6%) (6.1%)
Other (2.2%) 1.4%
Change in valuation allowance (12.2%) (12.9%)
Provision for income taxes (3.8%) 2.3%
14. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share attributable to common
stockholders are the same for the year ended December 31, 2022 and 2021, since
the inclusion of all potential shares of common stock outstanding would have
been anti-dilutive due to the Company's net loss.
The table below summarizes potentially dilutive securities that were excluded
from the computation of net loss per common share as of the periods presented
because including them would be anti-dilutive.
2022 2021
Common stock options 45,805,354 33,969,000
Common stock warrants 762,712 762,712
Unvested restricted stock 312,500 1,062,502
Potentially dilutive securities 46,880,566 35,794,214
15. RELATED PARTY TRANSACTIONS
For the years ended December 31, 2022 and 2021, the Company did not have any
transactions with related parties.
16. SUBSEQUENT EVENTS
In February 2023, the Company paid aggregate bonuses of US$755,000 to various
employees of the Company, including US$385,000 to Mr. Fan. These amounts were
included in accrued expenses on the consolidated balance sheet as of December
31, 2022.
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