REG - Spectral MD Holdings - Updated Form S-4 Filed by Rosecliff
28/06/2023 07:00
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RNS Number : 2093E Spectral MD Holdings, Ltd. 28 June 2023
Spectral MD Holdings, Ltd
("Spectral MD" or the
"Company")
Unaudited results for the Quarter Ended 31 March 2023
Filing of Updated Form S-4 by Rosecliff Acquisition Corp I
LONDON, U.K. AND DALLAS, TX, U.S. -Spectral MD Holdings, Ltd. (AIM: SMD), an
artificial intelligence (AI) company focused on medical diagnostics for faster
and more accurate treatment decisions in wound care, notes that Rosecliff
Acquisition Corp I ("Rosecliff", Nasdaq: RCLF) has filed on 27 June 2023 an
amended Form S-4 filing (the "Filing"). Included in the Filing, the Company
has prepared unaudited financial statements for the quarter ended 31 March
2023 alongside a management discussion and analysis. The Filing is available
to view on the U.S. Securities and Exchange Commission (the "SEC") website
here (https://www.sec.gov/) .
Financial highlights for the quarter ended 31 March 2023
The Company is reporting R&D revenue of $5.1 million, down from $5.8
million in the first three months of 2022, and gross profit of $2.2 million,
down from $2.4 million primarily due to the Company completing enrollment and
transitioning to the closeout phase of the BARDA burn study. Gross Margin
continues to remain strong as the Company reported gross margin of 42.9% which
is up from 40.9% for the corresponding period in 2022 primarily due to
increased engineering payroll as a portion of total revenue. Lastly, our
operating loss of $3.6 million and adjusted EBITDA loss of $3.3 million were
higher than for the corresponding three-month period in 2022 ($0.6 million and
$0.2 million, respectively) due to the expanded work completed by the Company
in additional indications of its technology.
Operational highlights (including post period events)
· Entered into a Business Combination Agreement with Rosecliff
Acquisition Corp I valuing the Company at an enterprise value of $170 million,
which is expected to complete in Q3 2023. Upon completion of the Transaction,
the Combined Company expects to operate under the expected name Spectral AI
and to be listed on Nasdaq under the symbol MDAI.
· $4.0 million grant awarded from the Medical Technology Enterprise
Consortium to accelerate the development of DeepView SnapShot® M, a fully
handheld version of DeepView®.
· Completion of enrollment for US Burn AI Training Study performed
across 12 leading US burn centers, with data collected from adult and
pediatric subjects used to finalize DeepView AI®-Burn algorithm and make
sample size determinations for its US Burn AI Validation Study.
· US DFU clinical study is on track with additional sites incorporated
in Q1 2023, providing data to support FDA and UKCA regulatory submissions.
· Successful interim results for the DFU Indication showing AI
diagnostic accuracy improvement from 81% to 86%.
· Initiated EU clinical study for DFU Indication with the Royal College
of Surgeons in Ireland conducted at Connolly Hospital in Dublin, Ireland.
The full unaudited quarterly results and discussion document are included in
this announcement.
On April 11, 2023, Spectral MD announced that it had entered into a business
combination agreement with Rosecliff, a special purpose acquisition company
listed on Nasdaq (the "Transaction"). The Filing S-4 provides extensive
information on the business combination agreement including financial
statements, risk factors and the full terms of the Transaction to facilitate
informed decision-making by shareholders and potential investors.
As part of the filing, Rosecliff is expected to mail the definitive proxy
statement to Rosecliff stockholders in due course ahead of a special meeting
to approve the Transaction. Spectral MD anticipates sending a Circular to
shareholders ahead of a general meeting to approve the Transaction in Q3 2023.
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.
Additional Information and Where to Find It
This press release is provided for informational purposes only and contains
information with respect to a proposed business combination among Spectral MD,
Rosecliff, Ghost Merger Sub I Inc., a wholly-owned subsidiary of Rosecliff and
Ghost Merger Sub II LLC, a wholly-owned subsidiary of Rosecliff (the
"Transaction"). In connection with the proposed Transaction, Rosecliff filed
an amended registration statement on Form S-4 with the SEC, which includes a
preliminary proxy statement/prospectus (as amended from time to time, the
"Registration Statement"). A full description of the proposed Transaction has
been included in the Registration Statement filed by Rosecliff with the SEC.
Rosecliff's stockholders, investors and other interested persons are advised
to read the Registration Statement as well as other documents that have been
filed or will be filed with the SEC, as these documents will contain important
information about Rosecliff, Spectral MD, and the proposed Transaction. The
Registration Statement has not yet been declared effective by the SEC. If and
when the Registration Statement is declared effective by the SEC, the proxy
statement/prospectus and other relevant documents for the proposed Transaction
will be mailed to stockholders of Rosecliff as of a record date to be
established for voting on the proposed Transaction. Rosecliff investors and
stockholders will also be able to obtain copies of the proxy
statement/prospectus and other documents filed with the SEC, without charge,
once available, at the SEC's website at www.sec.gov (http://www.sec.gov) .
Participants in the Solicitation
Rosecliff, Spectral MD and certain of their respective directors, executive
officers, other members of management and employees may, under SEC rules, be
deemed participants in the solicitation of proxies from Rosecliff's
stockholders with respect to the proposed Transaction. Investors and security
holders may obtain more detailed information regarding the names and interests
in the proposed Transaction of Rosecliff's directors and officers in
Rosecliff's filings with the SEC, including Rosecliff's definitive proxy
statement, the Registration Statement and other documents filed with the SEC.
Such information with respect to Spectral MD's directors and executive
officers has also been included in the Registration Statement.
No Offer or Solicitation
This press release and the information contained herein do not constitute (i)
(a) a solicitation of a proxy, consent or authorization with respect to any
securities or in respect of the proposed Transaction or (b) an offer to sell
or the solicitation of an offer to buy any security, commodity or instrument
or related derivative, nor shall there be any sale of securities in any
jurisdiction in which the offer, solicitation or sale would be unlawful prior
to the registration or qualification under the securities laws of any such
jurisdiction or (ii) an offer or commitment to lend, syndicate or arrange a
financing, underwrite or purchase or act as an agent or advisor or in any
other capacity with respect to any transaction, or commit capital, or to
participate in any trading strategies. No offer of securities in the United
States or to or for the account or benefit of U.S. persons (as defined in
Regulation S under the U.S. Securities Act of 1933 (the "Securities Act")
shall be made except by means of a prospectus meeting the requirements of
Section 10 of the Securities Act, or an exemption therefrom. Investors should
consult with their counsel as to the applicable requirements for a purchaser
to avail itself of any exemption under the Securities Act.
Forward Looking Statements
This press release contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. This includes, without
limitation, all statements regarding (i) the proposed Transaction with
Rosecliff, including statements regarding anticipated timing of the proposed
Transaction, (ii) redemptions of Rosecliff common stock, (iii) valuation of
the proposed Transaction, (iv) the closing of the proposed Transaction, (v)
the ability to regain compliance with Nasdaq Capital Market listing
requirements and to maintain listing, or for the Combined Company to be
listed, on the Nasdaq Capital Market, (vi) Rosecliff and Spectral MD's
managements' expectations and expected synergies of the proposed Transaction
and the Combined Company, (vii) the use of proceeds from the proposed
Transaction, (viii) potential government contracts, and (ix) expected
beneficial outcomes and synergies of the proposed Transaction, (x) Spectral
MD's U.S. government contracts and future awards, (xi) FDA, CE and UKCA
regulatory submissions and approvals, (xii) target markets of burn wounds and
diabetic foot ulcers, (xiii) possible competitors, (xiv) future clinical
indications and use of BARDA, (xv) potential PIPE transaction and amount
raised, (xvi) future applications of Spectral MD products, (xvii) potential
indications and areas of interest supported by BARDA, (xviii) future and
pending U.S. patent applications and foreign and international patent
applications, (xvix) the AIM delisting and its effects for U.K. Spectral MD
shareholders, (xxx) the development of DeepView® technology and tools; (xxxi)
the effectiveness of the DeepView® platform in assessing burn wounds, (xxxii)
the reliability of any studies performed by Spectral MD, and (xxxiii) the
completion of any certifications. Generally, statements that are not
historical facts, including statements concerning our possible or assumed
future actions, business strategies, events or results of operations, are
forward-looking statements. These statements may be preceded by, followed by
or include the words "believes," "estimates," "expects," "projects,"
"forecasts," "may," "will," "should," "seeks," "plans," "scheduled,"
"anticipates" or "intends" or similar expressions. Such forward-looking
statements involve risks and uncertainties that may cause actual events,
results or performance to differ materially from those indicated by such
statements. These forward-looking statements are expressed in good faith, and
Spectral MD and Rosecliff believe there is a reasonable basis for them.
However, there can be no assurance that the events, results or trends
identified in these forwardlooking statements will occur or be achieved.
Forward-looking statements speak only as of the date they are made, and
neither Spectral MD nor Rosecliff is under any obligation, and expressly
disclaim any obligation, to update, alter or otherwise revise any
forward-looking statement, whether as a result of new information, future
events or otherwise, except as required by law.
Forward-looking statements are inherently subject to risks, uncertainties and
assumptions. In addition to risk factors previously disclosed in Rosecliff's
reports filed with the SEC and those identified elsewhere in this press
release, the following factors, among others, could cause actual results to
differ materially from forward-looking statements or historical performance:
(i) risks associated with product development and regulatory review, including
the time, expense and uncertainty of obtaining clearance, approval or De Novo
classification for Spectral MD's DeepView technology, (ii) Spectral MD's
ability to obtain additional funding when needed and its dependence on
government funding, (iii) expectations regarding Spectral MD's strategies and
future financial performance, including its future business plans or
objectives, prospective performance and opportunities and competitors,
revenues, products and services, pricing, operating expenses, market trends,
liquidity, cash flows and uses of cash, capital expenditures, and Spectral
MD's ability to invest in growth initiatives and pursue acquisition
opportunities; (iv) the risk that the proposed Transaction may not be
completed in a timely manner at all, which may adversely affect the price of
Rosecliff's securities; (v) the failure to satisfy the conditions to the
consummation of the proposed Transaction, including the adoption of the
business combination agreement by the stockholders of Rosecliff and the
stockholders of Spectral MD, and the receipt of certain governmental and
regulatory approvals; (vi) the lack of third party valuation in determining
whether or not to pursue the proposed Transaction; (vii) the ability of
Rosecliff to regain compliance with Nasdaq Capital Market listing requirements
and to maintain listing, or for the Combined Company to be listed, on the
Nasdaq Capital Market; (viii) the occurrence of any event, change or other
circumstances that could give rise to the termination of the business
combination agreement; (ix) the outcome of any legal proceedings that may be
instituted against Rosecliff or Spectral MD following announcement of the
proposed Transaction; (x) the risk that the proposed Transaction may not be
completed by Rosecliff's business combination deadline and the potential
failure to obtain an extension of the business combination deadline; (xi) the
effect of the announcement or pendency of the proposed Transaction on Spectral
MD's business relationships, operating results, and business generally; (xii)
volatility in the price of Rosecliff's securities due to a variety of factors,
including changes in the competitive and regulated industries in which
Rosecliff plans to operate or Spectral MD operates, variations in operating
performance across competitors, changes in laws and regulations affecting
Rosecliff's or Spectral MD's business, Spectral MD's inability to implement
its business plan or meet or exceed its financial projections and changes in
the combined capital structure; (xiii) Rosecliff's ability to raise capital as
needed; (ixv) the ability to implement business plans, forecasts, and other
expectations after the completion of the proposed Transaction and identify and
realize additional opportunities; (xv) the risk that the announcement and
consummation of the proposed Transaction disrupts Spectral MD's current
operations and future plans; (xvi) the ability to recognize the anticipated
benefits of the proposed Transaction; (xvii) unexpected costs related to the
proposed Transaction; (xviii) the amount of any redemptions by existing
holders of the Rosecliff common stock being greater than expected; (xix)
limited liquidity and trading of Rosecliff's securities; (xx) geopolitical
risk and changes in applicable laws or regulations; (xxi) the possibility that
Rosecliff and/or Spectral MD may be adversely affected by other economic,
business, and/or competitive factors; (xxii) operational risk; and (xxiii)
changes in general economic conditions, including as a result of the COVID-19
pandemic. The foregoing list of factors is not exhaustive. You should
carefully consider the foregoing factors and the other risks and uncertainties
described in the "Risk Factors" sections of the Rosecliff's Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, the Registration Statement and the
other documents filed by Rosecliff from time to time with the SEC. These
filings identify and address other important risks and uncertainties that
could cause actual events and results to differ materially from those
contained in the forward-looking statements.
Readers are cautioned not to put undue reliance on forward-looking statements,
and neither Spectral MD nor Rosecliff assumes any obligation and do not intend
to update or revise these forward-looking statements, whether as a result of
new information, future events, or otherwise, except as required by securities
and other applicable laws. Neither Spectral MD nor Rosecliff gives any
assurance that it will achieve its expectations.
For further information please contact:
Spectral MD Holdings, Ltd. IR@Spectralmd.com
Christine Marks, VP of Marketing and Commercialization
SP Angel Corporate Finance LLP (NOMAD and Joint Broker for Spectral MD) Tel: +44 (0)20 3470 0470
Stuart Gledhill / Harry Davies-Ball (Corporate Finance)
Vadim Alexandre / Rob Rees (Sales & Broking)
The Equity Group Inc. (US Investor Relations) dsullivan@equityny.com
Devin Sullivan, Managing Director Tel: 212-836-9608
Walbrook PR Ltd (UK Media & Investor Relations) spectralmd@walbrookpr.com
Paul McManus / Louis Ashe-Jepson /Alice Woodings Tel: +44 (0)20 7933
About Spectral MD
Spectral MD is a predictive AI company focused on medical diagnostics for
faster and more accurate treatment decisions in wound care for burn, DFU, and
future clinical applications. At Spectral MD, we are a dedicated team of
forward-thinkers striving to revolutionize the management of wound care by
"Seeing the Unknown"® with our DeepView® Wound Diagnostics System. The
Company's DeepView® platform is the only predictive diagnostic device that
offers clinicians an objective and immediate assessment of a wound's healing
potential prior to treatment or other medical intervention. With
algorithm-driven results that substantially exceed the current standard of
care, Spectral MD's diagnostic platform is expected to provide faster and more
accurate treatment insight, significantly improving patient care and clinical
outcomes. For more information, visit the Company at: www.spectralmd.com
(http://www.spectralmd.com) .
About Rosecliff Acquisition Corp I
Rosecliff is a blank check company formed for the purpose of effecting a
merger, capital stock exchange, asset acquisition, stock purchase,
reorganization or similar business combination with one or more businesses.
Its principals possess public and private market investing experience and
operational knowledge to bring value added benefits to Spectral MD. The
Rosecliff team has substantial experience investing in rapidly growing and
disruptive technologies across the financial, consumer, healthcare and
software industries, as well as a long-term track record in creatively
structuring transactions to unlock and maximize value.
SPECTRAL'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Unless otherwise indicated or the context otherwise requires, references in
this section to "we," "our," "us" or other similar terms refer to the business
and operations of Spectral MD Holdings, Ltd., and its subsidiaries prior to
the Business Combination. The following discussion and analysis of our
financial condition and results of operations should be read in conjunction
with the sections titled "Selected Historical Consolidated Financial
Information of Spectral" and our audited annual consolidated financial
statements as of and for the years ended December 31, 2022 and 2021 and
unaudited quarterly condensed consolidated financial statements as of March
31, 2023 and for the three months ended March 31, 2023 and 2022, and the
respective related notes included elsewhere in this proxy
statement/prospectus. In addition to historical data, this discussion contains
forward-looking statements about our business, results of operations, cash
flows, financial condition and prospects based on current expectations that
involve risks, uncertainties and assumptions. Our actual results could differ
materially from such forward-looking statements. Factors that could cause or
contribute to those differences include, but are not limited to, those
identified below and those discussed in the sections titled "Risk Factors" and
"Cautionary Note Regarding Forward-Looking Statements" included elsewhere in
this proxy statement/prospectus. Additionally, our historical results are not
necessarily indicative of the results that may be expected for any period in
the future.
Overview
We are an AI company focused on predictive medical diagnostics. We operate in
one segment. We are devoting substantially all of our efforts towards research
and development of our DeepView System, an internally developed MSI device
which has designated FDA BDD status. Our DeepView System uses proprietary
algorithms to distinguish between damaged and healthy human tissue invisible
to the naked eye, providing "Day One" healing assessments. DeepView's output
is specifically engineered to allow the physician to make a more accurate,
timely and informed decision regarding the treatment of the patient's wound.
Our focus from 2013 through 2021 was on the burn indication. In 2022 and 2023,
we expanded our focus to include the DFU indication.
In the case of DFUs, a non-healing assessment would provide the physician with
the appropriate justifications to use an advanced wound care therapy on "Day
One", in seconds, as opposed to the current approach that involves waiting up
to 30 days to see how the wound develops before making such clinical
assessment. The accuracy of DeepView is 86% for DFUs compared to current
clinical accuracy of 50% by physicians as set forth in industry literature.
For burn wounds, a non-healing assessment could aid the clinician in making an
immediate and objective determination for appropriate candidates for surgery
as well as determining what specific areas of the burn wound will require
excision and skin grafting. DeepView's current accuracy for burn wounds is 92%
for adults and 88% for pediatrics, compared with current physician accuracy of
50% to 70%, respectively, at best, as set forth in industry literature. In
head-to-head clinical study evaluations, our DeepView System provides higher
accuracy to "ground truth" on burn wound analysis than the accuracy of burn
physicians.
We have not generated any product revenue to date. We have received
substantial support from the U.S. government for our DeepView System's
application for burn wounds, including from agencies such as BARDA, which is
part of the HHS Office of the Assistant Secretary for Preparedness and
Response in the United States, established to aid in securing the
United States from chemical, biological, radiological, and nuclear threats,
as well as from pandemic influenza and emerging infectious diseases. We have
also received funding from the NSF, NIH and the DHA. Since 2013, we have
received approximately $130.0 million in funding from government contracts,
primarily from BARDA, which accounts for $122.8 million. This has allowed us
to develop our technology and further our clinical trials. We are currently in
our second contract with BARDA, referred to as BARDA Burn II, which was
signed in July 2019 and is due to be completed in July 2024. Under this
contract, we expect to further the DeepView System design, develop the AI
algorithm, and take the necessary steps to obtain FDA approval for our
DeepView GEN 3 System. In August 2022, we also received the Option 1B
extension of the BARDA Burn II contract, which is valued at an additional $8.2
million, bringing the total funding received from Option 1 of the BARDA Burn
II contract to a total of $47.6 million from July 2021, to execute the adult
and pediatric multi-center clinical training study. This grant funding is
non-dilutive to our shareholders, and we believe it validates the important
nature of its mission and technology.
In April 2023, we received a $4.0 million grant award from the Medical
Technology Enterprise Consortium ("MTEC"), which, building on prior awards
from DHA, is to be used to support military battlefield burn evaluation via a
handheld DeepView.
We anticipate that the DeepView System will have two revenue streams, a SaMD
(software as a medical device), and an imaging device component. The SaMD
model applies a SaaS treatment for the DeepView System which will feature a
software licensing fee that includes maintenance, image hosting, and access to
algorithm updates. The proprietary imaging device accesses artificial
intelligence algorithms and is a universal platform to house multiple clinical
applications. Pricing for these components will be evaluated and strategically
set per country and site-of-service for heightened customer adoption.
Proposed Business Combination
On April 11, 2023, we entered into the Business Combination Agreement with
Rosecliff Acquisition Corp I ("RCLF"), Ghost Merger Sub I Inc. ("Merger Sub
I") and Ghose Merger Sub II LLC ("Merger Sub II"). Pursuant to the Business
Combination Agreement, on the Closing, in sequential order: (a) Ghost Merger
Sub I will merge with and into Spectral, with Spectral continuing as the
surviving company and a wholly owned subsidiary of Spectral (the "Spectral
Merger") and then, (b) Spectral will merge with and into Ghost Merger Sub II
(the "SPAC Merger", together with the Spectral Merger (the "Mergers")), with
Ghost Merger Sub II surviving the SPAC Merger as a direct wholly-owned
subsidiary of Rosecliff. Ghost Merger Sub II will be renamed Spectral AI (the
"Combined Company"), (the "Business Combination"). It is intended that the
Combined Company's common stock and its public warrants will continue to be
listed on Nasdaq and trade under the ticker symbols "SPAI" and "SPAIW,"
respectively.
The Business Combination will be accounted for as a reverse recapitalization
in accordance with GAAP. Under the guidance in Accounting Standards
Codification ("ASC") 805, Business Combinations, RCLF, which is the legal
acquirer, will be treated as the "acquired" company for financial reporting
purposes and Spectral will be treated as the accounting acquirer. This
determination was primarily based on the following:
(i) Spectral expecting to have a majority of the voting power of the
Combined Company;
(ii) Spectral's senior management comprising all of the senior
management of the Combined Company;
(iii) Spectral's relative size compared to RCLF; and
(iv) Spectral's operations comprising the ongoing operations of the
post-combination company.
Accordingly, for accounting purposes, the Business Combination will be treated
as the equivalent of a capital transaction in which we are issuing stock for
the net assets of RCLF. The net assets of RCLF will be stated at historical
cost, with no goodwill or other intangible assets recorded. Operations prior
to the Business Combination will be ours.
The most significant changes in our future reported financial position and
results are expected to be a net decrease in cash (as compared to our
consolidated balance sheet as of March 31, 2023) of between a net decrease of
approximately $6.5 million, assuming maximum stockholder redemptions
permitted under the Business Combination Agreement, and a net decrease of $1.8
million, assuming no additional stockholder redemptions. Spectral is seeking
to raise up to an additional $30.0 million in funding through the issuance of
equity securities in a PIPE transaction in connection with the Business
Combination. There can be no assurance that Spectral will be successful in
raising any additional capital.
Public Company Costs
Upon consummation of the Business Combination, the Combined Company is
expected to continue as an SEC-registered and Nasdaq-listed company. We expect
to hire additional staff and implement new processes and procedures to address
public company requirements in anticipation of and following the completion of
the Business Combination. We also expect to incur substantial additional
expenses for, among other things, directors' and officers' liability
insurance, director fees, internal control compliance, and additional costs
for investor relations, accounting, audit, legal and other functions.
Key Operating and Financial Metrics
We regularly review a number of metrics, including the following key operating
and financial metrics, to evaluate our business, measure our performance,
identify trends in our business, prepare financial projections and make
strategic decisions. We believe the operating and financial metrics presented
are useful in evaluating our operating performance, as they are similar to
measures by our public competitors and are regularly used by security
analysts, institutional investors, and other interested parties in analyzing
operating performance and prospects. Adjusted EBITDA is a non-GAAP measure, as
it is not a financial measure calculated in accordance with GAAP and should
not be considered as a substitute for net (loss) income, calculated in
accordance with GAAP. See "- Non-GAAP Financial Measures" for additional
information on adopted non-GAAP financial measures and a reconciliation of
these non-GAAP measures to the most comparable GAAP measures.
The following table sets forth these metrics for the three months ended March
31, 2023 and 2022 and the years ended December 31, 2022 and 2021:
Three Months Ended Year Ended
March 31,
December 31,
2023 2022 2022 202
1
Research and development revenue $ 5,078 $ 5,844 $ 25,368 $ 15,239
Gross profit 2,181 2,390 10,837 7,052
Gross margin 42.9 % 40.9 % 42.7 % 46.3 %
Operating income (loss) (3,637 ) (621 ) (2,647 ) (4,179 )
Net loss (3,609 ) (528 ) (2,912 ) (3,988 )
Adjusted EBITDA (3,335 ) (284 ) (1,481 ) (2,813 )
Research and development revenue
We define research and development revenue as revenue generated from the
research, testing and development of the DeepView System as utilized in
connection with our burn indication. This research and development revenue
reflects applied research and experimental development costs relating to our
burn application as developed in connection with our BARDA and DHA contracts.
The 13% decrease for the three months ended March 31, 2023 versus the
comparative period in 2022 is primarily the result of the decrease in research
and development activities for the DeepView burn indication and the handheld
prototype DeepView SnapShot.
The 67% increase for the year ended December 31, 2022 versus the comparative
period in 2021 is primarily the result of the increase in research and
development activities for the DeepView burn indication and the handheld
prototype DeepView SnapShot.
Gross Profit and Gross Margin
We define gross profit as research and development revenue, less cost of
revenue, and define gross margin, expressed as a percentage, as the ratio of
gross profit to revenue. Gross profit and margin can be used to understand our
financial performance and efficiency and allows investors to evaluate our
pricing strategy and compare against our competitors. Our management uses
these metrics to make strategic decisions, pricing decisions, identifying
areas for improvement, set targets for future performance and make informed
decisions about how to allocate resources going forward.
For the three months ended March 31, 2023, our gross profit was approximately
$2.2 million compared to approximately $2.4 million in the three months
ended March 31, 2022. This is entirely associated with BARDA research and
development contract activities, which are invoiced to BARDA monthly and paid
at a cost-plus basis to us. The increase in gross margin to 42.9% for the
three months ended March 31, 2023 from 40.9% for the three months ended March
31, 2022 is primarily attributable to higher direct labor costs associated
with BARDA in the three months ended March 31, 2023 compared to the three
months ended March 31, 2022. BARDA direct labor costs have a higher gross
margin that other BARDA direct costs.
For the year ended December 31, 2022, our gross profit was approximately $10.8
million compared to approximately $7.1 million in the year ended December 31,
2021. This is entirely associated with BARDA research and development contract
activities, which are invoiced to BARDA monthly and paid at a cost-plus basis
to us. The decrease in gross margin from 46.3% for the year ended December 31,
2021 to 42.7% for the year ended December 31, 2022 is primarily attributable
to lower direct labor cost associated with BARDA in the year ended December
31, 2022 compared to the year ended December 31, 2021.
Adjusted EBITDA
We define adjusted earnings before interest, tax, depreciation and
amortization ("Adjusted EBITDA") as net 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. See "- Non-GAAP Financial Measures" for a
reconciliation of GAAP net loss to Adjusted EBITDA.
For the three months ended March 31, 2023, Adjusted EBITDA was a loss of
approximately $3.3 million compared to a loss of approximately $0.3 million in
the three months ended March 31, 2022, representing decreased research and
development costs and related revenues relating to the continued development
of our DFU indication, AI-3D and other indications for the DeepView System.
Additionally, transaction costs associated with the proposed Business
Combination are driving the lower Adjusted EBITDA in the three months ended
March 31, 2023 compared to the three months ended March 31, 2022.
For the year ended December 31, 2022, Adjusted EBITDA was a loss of
approximately $1.5 million compared to a loss of approximately $2.8 million
in representing the excess research and development costs relating to the
continued development of our DFU indication, AI-3D and other indications for
the DeepView System.
Key Factors that May Influence Future Results of Operations
Our financial results of operations may not be comparable from period to
period due to several factors. Key factors affecting our results of operations
are summarized below.
Revenue Sources. As a pre-commercialization company, we currently
generate revenue almost exclusively from two U.S. governmental agencies. We
are highly dependent upon the continuation of the existing U.S. governmental
contract awards as well as future governmental procurement or other awards.
Our operating results may not be comparable between periods as the timing and
amount of awards or procurements from the U.S. government may be inconsistent
with the timing of prior awards. In addition, it is possible that, depending
on the outcome of our SSN application to BARDA, we may receive additional and
potentially significant U.S. government awards. Our revenues may continue to
be almost exclusively dependent upon the terms of those awards.
Gross Margin. As we begin commercial sales of the DeepView System, it
is possible that our underlying assumptions for our revenue modeling will not
be acceptable to the general marketplace. We may need to adjust our pricing
and incentives to accelerate adoption and implementation of the DeepView
System, which may negatively impact future revenue and gross margin
percentages.
Managing our Supply Chain. We are reliant on contract manufacturers and
suppliers to produce our components. While we have not been subject to any
disruptions in our current production, there remain global supply chain
challenges and logistics constraints, including component shortages, which may
cause delays in critical components and inventory, longer lead times,
increased costs and delays in product shipments. Our ability to grow depends,
in part, on the ability of our contract manufacturers and suppliers to provide
high quality services and deliver components and finished products on time and
at reasonable costs. While we do not maintain sole-source suppliers, there is
a concentration of suppliers which could lead to supply shortages, long lead
times for components and supply changes. In the event we are unable to
mitigate the impact of delays and/or price increases in raw materials,
electronic components and freight, it could delay the manufacturing and
installation of our products, which would adversely impact our cash flows and
results of operations, including revenue and gross margin.
Components of Consolidated Statements of Operations
Research and Development Revenue
Our primary source of revenue is research and development revenue. Currently,
we are highly dependent upon the reimbursement from BARDA for the burn
diagnostic testing of our DeepView System. Our research and development
revenue is affected by the amount of research and development that is expended
each month with respect to our contract with BARDA. Our revenue growth is
dependent on a number of factors including expanding the research and
development expense under the BARDA contract, research and development
reimbursed expenses relating to other contract awards from U.S. governmental
agencies and the intended future commercial sales of our DeepView System.
Cost of Revenue
Our cost of revenues consists primarily of direct and indirect costs
associated with the research and development expenses relating to the BARDA
contract. Our revenue costs are affected by the extent of research and
development expenses as well as expansion of work on other U.S. governmental
projects and the expanded applications for our DeepView System.
Gross Profit
Gross profit may vary from period-to-period and is primarily affected by the
current reimbursement rates under the BARDA contract and other
U.S. governmental contract awards. These reimbursement rates are fixed under
each contact award. Our gross profit represents this reimbursement rate plus a
variable component relating to non-reimbursed expenses incurred in connection
with the work completed on these contracts.
Operating Costs and Expenses
Operating costs and expenses consist of general and administrative expenses.
These expenses relate to our operating expenses that are not reimbursed as
part of the research and development revenue and reflect our organization's
support and operations staff. General and administrative expense consist
primarily of salaries and benefits for this group of our employees and has
increased from prior three months based on the increase in our personnel in
these functions.
Other income (expense)
Other income (expenses) primarily consists of interest expense, change in fair
value of warrant liabilities, foreign exchange transaction gains/losses, and
the recognition of income from recent accounting pronouncements. Historic
foreign exchange transaction loss primarily relates to the reduced exchange
rate between the U.S. dollar and the British pound sterling for our deposit
accounts that are denominated in British pound sterling. In addition, this
amount includes costs associated with buying British pound sterling for
payment of our employees and vendors in the UK.
Results of Operations
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31,
2022
The following table sets forth a summary of our consolidated statements of
operations for the periods presented:
Three Months Ended
March 31,
2023 2022
US$
US$
Research and development revenue 5,078 5,844
Cost of revenue (2,897 ) (3,454 )
Gross profit 2,181 2,390
Operating costs and expenses:
General and administrative 5,818 3,011
Total operating costs and expenses 5,818 3,011
Operating loss (3,637 ) (621 )
Other income (expense):
Net interest income (expense) 45 (4 )
Change in fair value of warrant liability 16 66
Foreign exchange transaction gain 13 28
Other expense - (2 )
Total other income 74 88
Loss before income taxes (3,563 ) (533 )
(Provision) benefit for income taxes (46 ) 5
Net loss (3,609 ) (528 )
Net loss per share of common stock
Basic and Diluted (0.03 ) (0.00 )
Weighted average common shares outstanding
Basic and Diluted 135,995,446 135,159,564
Research and development revenue
Three Months Ended Change in
March 31,
2023 2022 $ %
(In
thousands,
except
percentages)
Research and development revenue $ 5,078 $ 5,844 $ (766 ) (13.1 )%
Research and development revenue decreased by 13.1%, or approximately $0.8
million, for the three months ended March 31, 2023, as compared to the three
months ended March 31, 2022, primarily due to decreased research and
development work performed pursuant to the BARDA Burn II contract. New patient
enrollments in our BARDA clinical study decreased in the three months ended
March 31, 2023 compared to the three months ended March 31, 2022 as the
Company is completing enrollment and transitioning to the closeout phase of
the study.
For the three months ended March 31, 2023 and 2022, the Company's revenues
disaggregated by the major sources was as follows (in thousands):
Three Months Ended Change in
March 31,
2023 2022 US$ %
US$
US$
(In thousands, except percentages)
BARDA $ 4,943 $ 5,709 $ (766 ) (13.4 )%
Other U.S. governmental authorities 135 135 - -
Total research and development revenue $ 5,078 $ 5,844 $ (766 ) (13.1 )%
Cost of Revenues and Gross Profit
Three Months Ended Change in
March 31,
2023 2022 US$ %
US$
US$
(In thousands, except percentages)
Cost of revenue $ 2,897 $ 3,454 $ (557 ) (16.1 )%
Gross profit 2,181 2,390 (209 ) (8.7 )%
Gross margin 42.9 % 40.9 %
Cost of revenue decreased by 16.1%, or approximately $0.6 million, for the
three months ended March 31, 2023, as compared to the three months ended March
31, 2022, primarily due to decreased activity to fulfill our U.S. governmental
contracts, represented by increased engineering payroll and benefits expense.
Gross margin increased by 2.0 basis points for the three months ended March
31, 2023, as compared to the three months ended March 31, 2022. The increase
in gross margin was primarily attributable to the expanded work completed by
the Company with respect to DFU and other indications of our DeepView System,
as a percentage of total research and development revenue, which are not
reimbursed on a cost-plus basis as part of our U.S. governmental contracts.
General and Administrative
Three Months Ended Change in
March 31,
2023 2022 US$ %
US$
US$
(In thousands, except percentages)
General and administrative $ 5,818 $ 3,011 $ 2,807 93.2 %
Percentage of revenue, net 114.6 % 51.5 %
General and administrative expense increased by 93.2%, or approximately $2.8
million, for the three months ended March 31, 2023, as compared to the three
months ended March 31, 2022. The increase was primarily due to an increase in
our administrative staffing since 2022. Our headcount grew from 54 employees
as of March 31, 2022 to 77 full-time employees as of March 31, 2023.
Additionally, R&D activities outside of BARDA have increased in the three
months ended March 31, 2023 compared to the three months ended March 31, 2022.
Other income (expense)
Three Months Ended Change in
March 31,
2023 2022 US$ %
US$
US$
(In thousands, except percentages)
Net interest income (expense) $ 45 $ (4 ) $ 49 *
Change in fair value of warrant liability 16 66 (50 ) (75.8 )%
Foreign exchange transaction gain 13 28 (15 ) (53.6 )%
Other expense - (2 ) 2 *
Total other income $ 74 $ 88 $ (14 ) (15.9 )%
____________
* Not meaningful
Net interest income (expense) for the three months ended March 31, 2023
primarily relates to cash interest received by us from our deposit accounts.
Change in the fair value of warrant liability decreased by approximately
$50,000 for the three months ended March 31, 2023, as compared to the three
months ended March 31, 2022. The gain during the three months ended March 31,
2023, was primarily due to the reduced present value calculation of the
warrants issued to SP Angel Corporate Finance LLP ("SP Angel") as part of the
Offering (defined below) in 2021. In conjunction with the closing of the
Offering, we issued 762,712 warrants, with a strike price of $0.89 per share
and a five-year life, to SP Angel, who acts as our nominated advisor ("NOMAD")
and joint broker. As of March 31, 2023, the strike price of the warrants was
$0.73 per share. The change in the strike price is due to the change in
exchange rates, as the warrants will settle in shares denominated in British
pound sterling. As our stock price had a greater decline for the three months
ended March 31, 2022 as compared to the three months ended March 31, 2023, the
fair value of the warrants correspondingly had a greater decrease in the three
months ended March 31, 2022.
Foreign exchange transaction gain remained relatively consistent between the
three months ended March 31, 2023, as compared to the three months ended March
31, 2022.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
The following table sets forth a summary of our consolidated statements of
operations for the periods presented:
Year Ended
December 31,
2022 2021
(in thousands)
Research and development revenue $ 25,368 $ 15,239
Cost of revenue (14,531 ) (8,187 )
Gross profit 10,837 7,052
Operating 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):
Net interest income (expense) 21 (17 )
Change in fair value of warrant liability 57 298
Foreign exchange transaction loss (253 ) (188 )
Other income 16 -
Total other income (expense) (159 ) 93
(Loss) income before income taxes (2,806 ) (4,086 )
(Provision) benefit for income taxes (106 ) 98
Dividends - 1,259
Net (loss) income (2,912 ) (3,988 )
Research and development revenue
Year Ended Change in
December 31,
2022 2021 $ %
(In thousands, except percentages)
Research and development revenue $ 25,368 $ 15,239 $ 10,129 66.5 %
Research and development revenue increased by 66.5%, or approximately
$10.1 million, for the year ended December 31, 2022, as compared to the year
ended December 31, 2021, primarily due to increased research and development
work performed pursuant to the BARDA Burn II contract. In 2022, with our
larger staffing, we were able to perform significantly more research and
development work for our government procured contracts than in prior years.
For the years ended December 31, 2022 and 2021, the Company's revenues
disaggregated by the major sources was as follows (in thousands):
Year Ended Change in
December 31,
2022 2021 $ %
(In thousands, except percentages)
BARDA $ 24,827 $ 14,968 $ 9,859 65.9 %
Other U.S. governmental authorities 541 271 270 99.6 %
Total research and development revenue 25,368 15,239 10,129 66.5 %
Cost of Revenues and Gross Profit
Year Ended Change in
December 31,
2022 2021 $ %
(In thousands, except percentages)
Cost of revenue $ 14,531 $ 8,187 $ 6,344 77.5 %
Gross profit 10,837 7,052 3,785 53.7 %
Gross margin 74.6 % 86.1 %
Cost of revenue increased by 77.5%, or approximately $6.3 million, for the
year ended December 31, 2022, as compared to the year ended December 31,
2021, primarily due to increased activity to fulfill our U.S. governmental
contracts, represented by increased engineering payroll and benefits expense.
Gross margin decreased by (11.5) basis points for the year ended December 31,
2022, as compared to the year ended December 31, 2021. The decrease in gross
margin was primarily attributable to the expanded work completed by the
Company with respect to DFU and other indications of our DeepView System,
which are not reimbursed on a cost-plus basis as part of our
U.S. governmental contracts.
General and Administrative
Year Ended Change in
December 31,
2022 2021 $ %
(In thousands, except percentages)
General and administrative $ 13,484 $ 11,231 $ 2,253 20.1 %
Percentage of revenue, net 53.2 % 73.7 %
General and administrative expense increased by 20.1%, or approximately
$2.3 million, for the year ended December 31, 2022, as compared to the year
ended December 31, 2021. The increase was primarily due to an increase in our
administrative staffing since 2021. Our headcount grew from 55 employees to 71
full-time employees as of December 31, 2022, which includes an increase in
our general and administrative employees from 23 to 36 full-time employees.
Other income (expense)
Year Ended Change in
December 31,
2022 2021 $ %
(In thousands, except percentages)
Net interest income (expense) $ 21 $ (17 ) $ 38 (223.5 )%
Change in fair value of warrant liability 57 298 (241 ) (80.1 )%
Foreign exchange transaction loss (253 ) (188 ) (65 ) (34.6 )%
Other income 16 - 16 -
Total other income (expense) (159 ) 93 (252 ) (271.0 )%
Net interest income (expense) for the year ended December 31, 2022 primarily
relates to approximately $37,000 of cash interest received by us from our
deposit accounts, resulting from our conservative treasury policy implemented
in 2022 to generate some cash interest on our large deposit accounts as
interest rates significantly increase from 2021 to 2022. This is partially
offset by interest expense of $12,000 which includes the interest obligations
relating to our 2022 Insurance Note (defined below). Interest expense of
$17,000 for the year ended December 31, 2021 includes the interest
obligations relating to our 2021 Insurance Note (defined below).
Change in the fair value of warrant liability decreased by approximately
$241,000 for the year ended December 31, 2022, as compared to the year ended
December 31, 2021. The gain during the year ended December 31, 2022 was
primarily due to the reduced present value calculation of the warrants issued
to SP Angel as part of the Offering (defined below) in 2021. In conjunction
with the closing of the Offering, we issued 762,712 warrants, with a strike
price of $0.89 per share and a five-year life, to SP Angel, who acts as our
nominated advisor ("NOMAD") and joint broker. As of December 31, 2022, the
strike price of the warrants was $0.71 per share. The change in the strike
price is due to the change in exchange rates, as the warrants will settle in
shares denominated in British pound sterling. As our stock price declined
throughout much of 2022, the fair value of the warrants correspondingly
decreased from 2021.
Foreign exchange transaction loss primarily relates to the reduced exchange
rate between the U.S. dollar and the British pound sterling through much of
2022 for our deposit accounts that are denominated in British pound sterling.
In addition, this amount includes costs associated with buying British pound
sterling for payment of our employees and vendors in the UK.
Non-GAAP Financial Measures
We use Adjusted EBITDA as a non-GAAP metric when measuring performance,
including when measuring current period results against prior periods'
Adjusted EBITDA. This non-GAAP financial measure should be considered in
addition to results prepared in accordance with GAAP and should not be
considered as a substitute for, or superior to, GAAP results. In addition,
Adjusted EBITDA should not be construed as an indicator of our operating
performance, liquidity or cash flows generated by operating, investing and
financing activities, as there may be significant factors or trends that it
fails to address.
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. We caution investors that non-GAAP financial information, by
its nature, departs from traditional accounting conventions. Supplemental
non-GAAP measures are presented solely to permit investors to more fully
understand how Spectral management assesses underlying performance.
Adjusted EBITDA
We define 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 our Adjusted EBITDA for the three months ended
March 31, 2023 and 2022 and the years ended December 31, 2022 and
December 31, 2021:
Three Months Ended Year Ended
March 31,
December 31,
2023 2022 2022 202
1
(in thousands)
Net loss $ (3,609 ) $ (528 ) $ (2,912 ) $ (3,988 )
Adjust:
Depreciation expense 2 4 11 1
Provision (benefit) for income taxes 46 (5 ) 106 (98 )
Net interest (income) expense (45 ) 4 (21 ) 17
EBITDA (3,606 ) (525 ) (2,816 ) (4,068 )
Additional Adjustments:
Stock based compensation 300 333 1,155 1,365
Change in fair value of warrant liability (16 ) (66 ) (57 ) (298 )
Foreign exchange transaction (gain) loss (13 ) (28 ) 253 188
Other loss (income) - 2 (16 ) -
Adjusted EBITDA (3,335 ) (284 ) (1,481 ) (2,813 )
Liquidity and Capital Resources
Sources of Liquidity
As of March 31, 2023, December 31, 2022 and 2021, we had approximately $10.3
million, $14.2 million and $16.1 million, respectively, in cash, and an
accumulated deficit of approximately $15.5 million, $11.9 million and
$9.0 million, respectively.
Prior to our initial public offering (the "Offering") on the AIM Market of the
London Stock Exchange in June, 2021, we historically funded our operations
through the issuance of notes and the sale of preferred stock and common
stock. We raised approximately $17.0 million from the oversubscribed Offering
on the AIM market to fund the development of the DFU indication for our
Deepview System. During 2022, we were awarded additional funding of
$8.2 million associated with option 1B of our contract with BARDA. During
2021, we executed Options 1A and 1B of the contract with BARDA for funding of
$39.4 million and during 2022 we were awarded additional funding of
$8.2 million associated with option 1B of the BARDA contract, resulting in
aggregate funding for Options 1A and 1B of $47.6 million, of which
$8.4 million remains as of March 31, 2023. The purpose of the BARDA contract
funding is to execute the clinical training study of our DeepView System for
burn wound healing assessment. See "Research and Development Revenue" above.
With the proceeds from closing of our Offering during 2021 and the remaining
funding under the BARDA contract, we believe that we have sufficient working
capital to fund operations for at least 12 months beyond the release date of
the consolidated financial statements. Additionally, our contract with BARDA
has a potential funding of up to $96.9 million, in the aggregate, for Option
1A, 1B and 2, if all future options are executed.
Our future capital requirements will depend on many factors, including the
revenue growth rate, the success of future product development and capital
investment required, and the timing and extent of spending to support further
sales and marketing and research and development efforts. In addition, we
expect to incur additional costs as a result of operating as a U.S. public
company. We believe that the $4.5 million in the trust assets of RCLF will
remain in RCLF through the Business Combination. In addition, we are seeking
to raise up to an additional $30.0 million in funding through the issuance of
equity securities in a PIPE transaction in connection with the Business
Combination. If we are unable to secure additional capital through the PIPE
transaction, we may seek alternative financing arrangements to support our
future growth. There can be no assurance that we will be successful in raising
any additional capital. If additional financing is required from outside
sources, we cannot be sure that any additional financing will be available to
us on acceptable terms, if at all. If we are unable to raise additional
capital when desired, our business, operating results, and financial condition
could be adversely affected.
Cash Flows
The following table summarizes our cash flows for the three months ended March
31, 2023 and 2022:
Three Months Ended
March 31,
2023 202
2
(In thousand)
Net cash used in operating activities $ (3,754 ) $ (1,168 )
Net cash used in financing activities (104 ) (477 )
Cash Flows Used in Operating Activities
Net cash used in operating activities increased by approximately $2.6 million
for the three months ended March 31, 2023, as compared to the three months
ended March 31, 2022, resulting primarily from a decrease in net income,
adjusted for non-cash items of approximately $3.0 million, partially offset by
a decrease in cash used in accrued expenses of $0.5 million resulting from
higher accrued expenses as of December 31, 2021 as compared to December 31,
2022. There was also a decrease in cash provided by accounts receivable of
$1.5 million which was offset by an increase in cash used by accounts payable
of $1.6 million due to lower research and development revenue and related cost
of revenue.
Cash Flows Used in Financing Activities
Net cash used in financing activities decreased approximately $0.4 million for
the three months ended March 31, 2023 compared to the three months ended March
31, 2022. This was primarily attributable to repayment of the Company's
Paycheck Protection Program Loan during the three months ended March 31, 2022.
The following table summarizes our cash flows for the years ended December 31,
2022 and 2021:
Year Ended
December 31,
2022 2021
(in thousands)
Net cash used in operating activities $ (1,162 ) $ (2,918 )
Net cash used in investing activities - (7 )
Net cash (used in) provided by financing activities (785 ) 13,921
Cash Flows Used in Operating Activities
Net cash used in operating activities decreased by approximately $1.8 million
for the year ended December 31, 2022, as compared to the year ended
December 31, 2021, resulting primarily from a decrease in administrative
expenses as compared to research and development expenses as our research and
development revenue grew significantly between 2021 and 2022.
Cash Flows Used in Investing Activities
Net cash used in investing activities increased by $7,000 for the year ended
December 31, 2022, compared to the year ended December 31, 2021, primarily
due to the capitalization of certain back-office software licensing
obligations.
Cash Flows (Used In) Provided by Financing Activities
Net cash (used in) provided by financing activities decreased approximately
$12.9 million for the year ended December 31, 2022 compared to the year
ended December 31, 2021. This was primarily attributable to the Offering in
2021 and the receipt and subsequent repayment of the Paycheck Protection
Program Loan provided to us in 2021.
Current Indebtedness
As of March 31, 2023, we do not have any long-term debt. We have $0.1 million
of current indebtedness obligation relating to our D&O insurance. In
June 2022, we entered into a financing arrangement for a portion of our
insurance premium for approximately $0.4 million (the ''Note"). The Note
bears interest at 6.7% per annum and is payable in equal monthly payments of
principal and interest, maturing in May 2023.
Related Party Transactions
For the three months ended March 31, 2023 and 2022 and the years ended
December 31, 2022 and 2021, we did not have any transactions with related
parties.
Off-Balance Sheet Arrangements
During the periods presented, we did not have any off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies
The preparation of our consolidated financial statements and related notes
requires us to make judgments, estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities.
We have based our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates due to risks and uncertainties,
including uncertainty in the current economic environment due to the global
impact of COVID-19, inflation, and supply chain issues. As of the date of
issuance of these financial statements, we are not aware of any specific event
or circumstance that would require us to update our estimates, judgments or
revise the carrying value of our assets or liabilities. For a description of
our significant accounting policies, see Note 2, "Summary of Significant
Accounting Policies," in our audited financial statements included elsewhere
in this proxy statement/prospectus. An accounting policy is considered to be
critical if it requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time the estimate is made, and
if different estimates that reasonably could have been used, or changes in the
accounting estimates that are reasonably likely to occur periodically, could
materially impact the consolidated financial statements. We believe the
following critical accounting policies reflect the more significant estimates
and assumptions used in the preparation of our consolidated financial
statements.
Research and Development Revenue Recognition
We generate 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. We use the 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 we meet the criteria associated with satisfying the performance
obligation over time.
Equity-Based Compensation
We measure expense 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") based on their
respective grant date fair values. We estimate 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 our common stock on the date of grant. We
recognize expense for stock-based compensation related to stock options and
RSAs over the requisite service period on a straight-line basis. As the PSOs
have performance conditions, compensation expense is recognized for each award
if and when our management deems it probable that the performance conditions
will be satisfied. Forfeitures are recorded as they occur.
The assumptions used in calculating the fair value of our stock and
stock-based awards represent management's best estimates and involve inherent
uncertainties and the application of management's judgment. Our common stock
became publicly traded on July 22, 2021 and lacks company-specific historical
and implied volatility information. Therefore, we estimate 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 our 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 we have never paid cash dividends and does not
expect to pay any cash dividends in the foreseeable future.
Leases
We account for our leases in accordance with Accounting Standards Codification
("ASC") 842, Leases, following the U.S. GAAP implementation of the new
accounting standard. Our leases are classified as operating leases and are
included on our 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 our incremental borrowing rate factoring the term of
the lease. The incremental borrowing rate is an estimate of the interest rate
we would incur to borrow an amount equal to the lease payments on a
collateralized basis over the term of the lease. Because we do not generally
borrow on a collateralized basis, we use the interest rate we pay on our
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.
Income Taxes
Income taxes are recorded in accordance with ASC 740, Income Taxes, which
provides for deferred taxes using an asset and liability approach. We
recognize deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Deferred tax assets and liabilities are determined based on the
difference between the 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. We have recorded
a full valuation allowance to reduce our net deferred income tax assets to
zero. In the event we were to determine that we would be able to realize some
or all of our deferred income tax assets in the future, an adjustment to the
deferred income tax asset valuation allowance would increase income in the
period such determination was made.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, of the notes to our
consolidated financial statements included elsewhere in this proxy/prospectus
for recently adopted accounting standards and recently issued accounting
standards as of the dates of the statement of financial position included in
this proxy/prospectus.
Emerging Growth Company
We are an emerging growth company, as defined in the JOBS Act. The JOBS Act
provides that an emerging growth company can take advantage of an extended
transition period for complying with new or revised accounting standards. This
provision allows an emerging growth company to delay the adoption of some
accounting standards until those standards would otherwise apply to private
companies. We have elected to use the extended transition period under the
JOBS Act for the adoption of certain accounting standards until the earlier of
the date we (i) are no longer an emerging growth company or
(ii) affirmatively and irrevocably opt out of the extended transition period
provided in the JOBS Act. As a result, our financial statements may not be
comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. These
risks primarily include interest rate, foreign exchange, credit and inflation
risks.
Interest Rate Sensitivity
We maintain a large amount of our assets in cash and cash equivalents. Our
cash and cash equivalents are held primarily in cash deposits. The fair value
of our cash and cash equivalents would not be significantly affected by either
an increase or decrease in interest rates due mainly to the short-term nature
of these instruments. Additionally, changes to interest rates will impact on
the cost of our future borrowings. With respect to our current "borrowings",
the interest rate on the Note for insurance premiums is fixed. Changes in
prevailing interest rates could have a material impact on our results of
operations.
Foreign Currency Risk
Our revenue is denominated in U.S. dollars. Our expenses are generally
denominated in the currencies in which our operations are located, which is
primarily in the United States and UK, with an insignificant portion of
expenses incurred in our wholly owned subsidiaries in the UK and denominated
in British pound sterling.
We do not generally use derivative instruments to hedge exposures to cash
flow, market, or foreign currency. During the six months ended June 30,
2021, we entered into one derivative instrument, to set a foreign currency
exchange rate, that settled in July 2021. For the 2022 fiscal year, we did
not have any derivative instruments, Any foreign currency forward contracts
entered in the future will be accounted for as derivatives whereby the fair
value of the contracts will be reported as other current assets or current
liabilities, and gains and losses resulting from changes in the fair value
will be reported in other income (expense), net, in the accompanying
consolidated statements of operations.
Credit Risk
Financial instruments that subject us to concentrations of credit risk consist
primarily of cash, cash equivalents and accounts receivable. The vast majority
of our cash and cash equivalents are held in U.S. financial institutions
which, at times, exceed federally insured limits. We have not recognized any
losses from credit risks on such accounts. We believe we are not exposed to
significant credit risk on cash and cash equivalents.
Additional credit risk is related to our concentration of receivables and
revenues. One customer (which is a U.S. government agency) represents the
majority of our research and development revenue and accounts receivable.
Inflation Risk
The recent increase in inflation partially contributed to the increase in the
cost of our products as well as operating costs. If the cost of our products,
employee costs, or other costs continue to be subject to significant
inflationary pressures, such inflationary pressure may have an adverse effect
on our ability to maintain current levels of gross margin and selling, general
and administrative expenses. Further, we may not be able to offset these
increased costs through price increases. As a result, our inability to quickly
respond to inflation could harm its cash flows and results of operations in
the future.
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 and
December 31, 2022
Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2023 and 2022
Unaudited Condensed Consolidated Statements of Changes in Members' Deficit for
the three months ended March 31, 2023 and 2022
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2023 and 2022
Notes to Unaudited Consolidated Financial Statements
Spectral MD Holdings, Ltd.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
March 31, December 31,
2023
2022
US$
US$
Assets
Current assets:
Cash and cash equivalents 10,316 14,174
Accounts receivable, net 1,884 2,294
Unbilled revenue 388 618
Prepaid expenses and other current assets 741 601
Total current assets 13,329 17,687
Non-current assets:
Property and equipment, net 19 21
Right-of-use assets 835 1,008
Total Assets 14,183 18,716
Commitments and contingencies (Note 7)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 2,018 2,759
Accrued expenses 2,361 2,631
Lease liabilities, short-term 791 680
Notes payable 71 175
Warrant liability 113 129
Total current liabilities 5,354 6,374
Lease liabilities, long-term 142 346
Total Liabilities 5,496 6,720
Stockholders' Equity
Common stock ($0.001 par value); 400,000,000 shares authorized; 136,076,515 136 135
and 135,409,564 shares issued and outstanding as of March 31, 2023 and
December 31, 2022, respectively
Additional paid-in capital 24,094 23,795
Accumulated deficit (15,543 ) (11,934 )
Total stockholders' equity 8,687 11,996
Total Liabilities and Stockholders' Equity 14,183 18,716
See accompanying notes to the condensed consolidated financial statements
Spectral MD Holdings, Ltd.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
Three Months Ended March 31,
2023 2022
US$
US$
Research and development revenue 5,078 5,844
Cost of revenue (2,897 ) (3,454 )
Gross profit 2,181 2,390
Operating costs and expenses:
General and administrative 5,818 3,011
Total operating costs and expenses 5,818 3,011
Operating loss (3,637 ) (621 )
Other income (expense):
Net interest income (expense) 45 (4 )
Change in fair value of warrant liability 16 66
Foreign exchange transaction gain 13 28
Other expense - (2 )
Total other income 74 88
Loss before income taxes (3,563 ) (533 )
(Provision) benefit for income taxes (46 ) 5
Net loss (3,609 ) (528 )
Net loss per share of common stock
Basic and Diluted (0.03 ) (0.00 )
Weighted average common shares outstanding
Basic and Diluted 135,995,446 135,159,564
See accompanying notes to the condensed consolidated financial statements
Spectral MD Holdings, Ltd.
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except share data)
Common Stock Additional Accumulated Total
Paid-in
Deficit
Stockholders'
Capital
Equity
Shares Amount US$ US$ US$
US$
Balance at December 31, 2022 135,409,564 135 23,795 (11,934 ) 11,996
Stock-based compensation 562,500 1 299 - 300
Stock option exercises 104,451 - - - -
Net loss - - - (3,609 ) (3,609 )
Balance at March 31, 2023 136,076,515 136 24,094 (15,543 ) 8,687
Common Stock Additional Accumulated Deficit Total Stockholders' Equity
Paid-in
Capital
Shares Amount US$ US$ US$ US$
Balance at December 31, 2021 135,034,564 135 22,640 (9,022 ) 13,753
Stock-based compensation 187,500 - 333 - 333
Net loss - - - (528 ) (528 )
Balance at March 31, 2022 135,222,064 135 22,973 (9,550 ) 13,558
See accompanying notes to the condensed consolidated financial statements
Spectral MD Holdings, Ltd.
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2023 and 2022
(in thousands)
Three Months Ended March 31,
2023 2022
US$
US$
Cash flows from operating activities:
Net loss (3,609 ) (528 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense 2 4
Stock-based compensation 300 333
Amortization of right-of-use assets 173 128
Change in fair value of warrant liability (16 ) (66 )
Changes in operating assets and liabilities:
Accounts receivable 410 (1,100 )
Unbilled revenue 230 (197 )
Prepaid expenses and other current assets (140 ) 262
Other assets - 40
Accounts payable (741 ) 881
Accrued expenses (270 ) (773 )
Lease liabilities (93 ) (152 )
Net cash used in operating activities (3,754 ) (1,168 )
Cash flows from financing activities:
Payments for notes payable (104 ) (477 )
Net cash used in financing activities (104 ) (477 )
Net decrease in cash and cash equivalents (3,858 ) (1,645 )
Cash and cash equivalents, beginning of period 14,174 16,121
Cash and cash equivalents, end of period 10,316 14,476
Supplemental cash flow information:
Cash paid for interest 2 1
Noncash operating and financing activities disclosure:
Recognition of Right-of-use assets and related lease liabilities upon adoption - 609
of ASC 842
See accompanying notes to the condensed consolidated financial statements
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
1. ORGANIZATION, NATURE OF BUSINESS AND LIQUIDITY
Spectral MD Holdings, Ltd, (the "Company"), headquartered in Dallas, Texas,
was incorporated in Delaware on March 9, 2009. The Company currently trades
on the AIM market of the London Stock Exchange (the "AIM").
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 March 31, 2023 and December 31, 2022, the Company had approximately
US$ 10.3 million and US$ 14.2 million, respectively in cash, and an
accumulated deficit of US$ 15.5 million and US$ 11.9 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$ 8.4 million is remaining as of March 31, 2023.
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 "IPO") during 2021 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 condensed 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 condensed 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").
The accompanying condensed consolidated balance sheet as of March 31, 2023,
the condensed consolidated statements of operations, shareholders' equity, and
cash flows for the three months ended March 31, 2023 and 2022 are unaudited.
The interim condensed consolidated financial statements have been prepared on
the same basis as the audited annual consolidated financial statements and, in
management's opinion, include all adjustments consisting of only normal
recurring adjustments necessary for the fair statement of the Company's
financial position as of March 31, 2023 and its results of operations and
cash flows for the three months ended March 31, 2023 and 2022. The results
of operations for the three months ended March 31, 2023 and 2022 are not
necessarily indicative of the results to be expected for the full fiscal year
or any other period.
These interim condensed consolidated financial statements should be read in
conjunction with the Company's annual consolidated financial statements for
the years ended December 31, 2023 and 2022.
Principles of Consolidation
The condensed 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.
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Use of Estimates
The preparation of these condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the amounts reported in the condensed 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$
1.9 million and US$ 2.3 million As of March 31, 2023 and December 31,
2022, 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 March 31, 2023 and December 31, 2022.
The Company records unbilled revenue when revenue is recognized prior to
billing customers. Unbilled revenue amounted to approximately US$ 0.4 million
and US$ 0.6 million as of March 31, 2023 and December 31, 2022,
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.
Primarily 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 March 31, 2023 and December 31, 2022, receivables were
concentrated from one customer (which is a US. government agency) representing
95% and 96% of total net receivables, respectively. No allowance for doubtful
accounts were recorded as of March 31, 2023 and December 31, 2022.
One customer (which is a U.S. government agency) accounted for 97% and 98%,
respectively, of the recognized research and development revenue for
the three months ended March 31, 2023 and 2022.
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
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
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 condensed consolidated financial statements of
the Company is the US dollar. The functional currency of the Company and its
wholly owned subsidiary Spectral MD, Inc. is the US dollar. The functional
currency of Spectral MD UK is its local currency, the British pound. The
assets and liabilities of Spectral MD UK is translated into US. dollars at
exchange rates in effect at the end of each reporting period, and the revenues
and expenses 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 March 31,
2023 and December 31, 2022, 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 condensed consolidated statements of operations. For the
three months ended March 31, 2023 and 2022, the Company recorded
approximately US$ 13,000 and US$ 28,000 foreign exchange transaction gain,
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 condensed consolidated statements of
operations.
Leases
The Company accounts for its leases under 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 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 three months
ended March 31, 2023 and 2022, the Company did not have any finance leases.
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
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.
Warrant Liability
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 Corporate Finance LLP ("SP Angel"), who acts as
nominated adviser and broker to the Company for the purposes of the AIM Rules.
As of March 31, 2023, there are 762,712 warrants outstanding with an
exercise price of US$ 0.73.
The Company accounts for its warrants issued to SP Angel 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 condensed 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 (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.
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
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 condensed 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
condensed consolidated financial statements or tax returns. Deferred tax
assets and liabilities are determined based on the difference between the
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 March 31, 2023 and December 31, 2022
that qualify for either recognition or disclosure in the condensed
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 condensed consolidated statements of operations. There were no
amounts accrued for interest or penalties for the three months ended
March 31, 2023 and 2022.
Comprehensive Loss
Comprehensive loss is equal to net loss as presented in the condensed
consolidated statements of operations, as the Company did not have any
material other comprehensive income or loss for the periods presented.
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
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.
Recently Adopted 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. The Company adopted this standard on January 1, 2023,
with no impact on its condensed consolidated financial statements and related
disclosures.
Recently Issued Accounting Standards
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
condensed 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 condensed consolidated financial statements.
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
3. 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
March 31, 2023 and December 31, 2022, by level within the fair value
hierarchy (in thousands):
Fair value measured as of March 31, 2023
Fair value at Quoted prices Significant Significant
March 31,
in active
other
unobservable
2023
markets
observable
inputs
US$
(Level 1)
inputs
(Level 3)
US$
(Level 2)
US$
US$
Warrant liability $ 113 $ - $ - $ 113
Fair value measured as of December 31, 2022
Fair value at Quoted prices Significant Significant
December 31,
in active
other
unobservable
2022
markets
observable
inputs
US$
(Level 1)
inputs
(Level 3)
US$
(Level 2)
US$
US$
Warrant liability $ 129 $ - $ - $ 129
There were no transfers between Level 1, 2 or 3 during the three months
ended March 31, 2023 and 2022.
The following table presents changes in Level 3 liabilities measured at fair
value for the three months ended March 31, 2023 and 2022 (in thousands).
US$
Balance - January 1, 2023 $ 129
Change in fair value (16 )
Balance - March 31, 2023 $ 113
Balance - January 1, 2022 $ 186
Change in fair value (66 )
Balance - March 31, 2022 $ 120
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:
March 31, December 31,
2023
2022
Strike price (per share in US$) US$ 0.73 US$ 0.71
Contractual term (years) 4.2 4.5
Volatility (annual) 71.7 % 72.6 %
Risk-free rate 3.6 % 4.0 %
Dividend yield (per share) 0.0 % 0.0 %
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
4. RESEARCH AND DEVELOPMENT REVENUE
For the three months ended March 31, 2023 and 2022, the Company's revenues
disaggregated by the major sources was as follows (in thousands):
Three Months Ended
March 31,
2023 2022
US$
US$
BARDA 4,943 5,709
Other U.S governmental authorities 135 135
Total revenue 5,078 5,844
5. ACCRUED EXPENSES
Accrued expenses consist of the following As of March 31, 2023 and
December 31, 2022 (in thousands):
March 31, December 31,
2023
2022
US$
US$
Salary and wages 733 1,135
Provision for operating expenses 646 736
Benefits 825 650
Franchise tax 157 110
Total accrued expenses 2,361 2,631
6. NOTES PAYABLE
Insurance Note
In June 2022 and 2021, the Company entered into 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 three months ended March 31, 2023, the Company repaid
approximately, US $0.1 million of principal and interest for the 2022
Insurance Note. As of March 31, 2023 and December 31, 2022, the Company had
an outstanding balance of $0.1 million and $0.2 million, respectively, for
the 2022 Insurance Note.
During the three months ended March 31, 2022, the Company repaid the
remaining balance of approximately US $0.2 million for the 2021 Insurance
Note. There was no outstanding balance for the 2021 Insurance Note as of
December 31, 2022.
PPP Loan
On April 13, 2020, the Company entered into a promissory note with JPMorgan
Chase Bank, N.A., as lender, pursuant to the Paycheck Protection Program
("PPP") of the Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act") for US$ 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
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
6. NOTES PAYABLE (cont.)
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 the year ended December 31,
2022, the Company repaid US$ 0.4 million of principal and interest for the
PPP Loan, of which $0.3 million was repaid during the three months ended
March 31, 2022. There was no outstanding balance for the PPP Loan as of
December 31, 2022.
7. 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.
8. 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.
During 2023, the Company entered into a lease for office space in the United
Kingdom for annual payments of $0.1 million under a lease that expires in
March 2024. The lease has been excluded from the tables below as the term is
twelve months.
The following table summarizes quantitative information about the Company's
operating leases for the three months ended March 31, 2023 (US dollars in
thousands):
Three Months Ended
March 31,
2023 2022
US$
US$
Operating cash flows from operating leases (in US$) $ 115 $ 155
Right-of-use assets exchanged for operating lease liabilities (in US$) $ - $ 609
Weighted average remaining lease term - operating leases (in years) 1.2 0.9
Weighted average discount rate - operating leases 8.5 % 3.9 %
The following table provides the components of the Company's lease cost
included in general and administrative expense in the condensed consolidated
statement of operations (in thousands):
Three Months Ended
March 31,
2023 2022
US$
US$
Operating leases
Operating lease cost $ 194 $ 132
Variable lease cost 59 70
Total rent expense $ 253 $ 202
Variable lease cost is primarily attributable to amounts paid to lessors for
utility charges and property taxes under an office space lease.
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
8. Leases (cont.)
As of March 31, 2023, future minimum payments under
the non-cancelable operating leases under ASC 842 were as follows (in
thousands):
US$
Nine months ending December 31, 2023 $ 629
Year ending December 31, 2024 354
Total 983
Less: imputed interest (50 )
Operating lease liabilities $ 933
9. Stockholders' Equity
The Company was authorized to issue 400,000,000 shares of common stock, par
value US$0.001 per share, as of March 31, 2023 and December 31, 2022,
respectively. The Company had 136,076,515 and 135,409,564 shares of common
stock issued and outstanding as of March 31, 2023 and December 31, 2022,
respectively. As of March 31, 2023, the Company was in the process of
completing the issuance of an additional 210,000 shares of stock through the
exercise of certain stock options by former Company employees.
10. 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 March 31, 2023, 38,354,118 shares of common stock were
authorized for issuance under the 2018 Plan, of which 2,027,618 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 March 31,
2023, 20,000,000 shares of common stock were authorized for issuance under
the 2022 Plan, of which all remain available for issuance.
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
10. Stock-based Compensation (cont.)
Restricted Stock
The RSAs generally vest over four years. A summary of RSA activities for the
twelve months ended March 31, 2023 are presented below:
Number of Weighted
Shares
Average
Grant Date
Fair Value
per Share
US$
Nonvested as of January 1, 2023 312,502 $ 0.10
Vested (187,500 ) $ 0.10
Nonvested as of March 31, 2023 125,002 $ 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 the three months ended
March 31, 2022:
Three Months
Ended
March 31,
2022
Exercise price (per share in US$) $ 0.48
Expected term (years) 6.0
Volatility (annual) 67 %
Risk-free rate 1.7 %
Dividend yield (per share) 0 %
There were no stock options granted in the three months ended March 31,
2023.
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
10. Stock-based Compensation (cont.)
A summary of stock options activity for the three months ended March 31,
2023 is presented below:
Stock Options Weighted Weighted Aggregate
Average
Average
Intrinsic Value
Exercise
Remaining
US$
Price
Contractual Life
(in thousands)
US$
(in years)
Outstanding at January 1, 2023 36,124,000 $ 0.20 7.3 US$ 6,831
Options exercised (160,000 ) $ 0.17
Outstanding as of March 31, 2023 35,964,000 $ 0.20 7.1 US$ 6,076
Options vested and exercisable as of March 31, 2023 27,349,103 $ 0.16 6.7 US$ 5,384
For the three months ended March 31, 2023 and 2022, the Company recorded
stock-based compensation expense for stock options and restricted stock of
approximately US$ 0.3 million in both periods, in general and administrative
expenses in the condensed consolidated statements of operations.
As of March 31, 2023, there was approximately US$ 1.3 million of
unrecognized stock-based compensation related to stock option grants that will
be amortized over a weighted average period of 1.0 years.
As of March 31, 2023, there was approximately US$ 6,000 of unrecognized
stock-based compensation related to restricted stock grants that will be
amortized over a weighted average period of 0.1 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. As of March 31, 2023, 9,681,354
Investor Options are outstanding and will expire in November 2023. The
Investor Options have an exercise price of US$0.20 per share. As of March 31,
2023, there is no unrecognized stock-based compensation expense related to the
Investor Options.
11. INCOME TAXES
The Company recorded a provision for income taxes of approximately $46,000 for
the three months ended March 31, 2023, and a benefit for income taxes of
$5,000 for the three months ended March 31, 2022. The effective tax rate was
(1.3)% for the three months ended March 31, 2023, and the effective benefit
tax rate was 0.9% for the three months ended March 31, 2022.
The tax provision for interim periods is determined using an estimate of the
Company's annual effective tax rate, adjusted for discrete items arising in
that quarter. The Company's effective tax rate differs from the
U.S. statutory tax rate in the three months ended March 31, 2023 primarily
due to changes in valuation allowances on deferred tax assets as it is more
likely than not that some or all of the Company's deferred tax assets will not
be realized.
The Company evaluates its tax positions on a quarterly basis and revises its
estimate accordingly. There were no material changes to the Company's
uncertain tax positions, interest, or penalties during the three months ended
March 31, 2023.
Spectral MD Holdings, Ltd.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2023
12. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share attributable to common
stockholders are the same for the three months ended March 31, 2023 and
2022, 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.
Three Months Ended
March 31,
2023 2022
Common stock options 45,645,354 45,352,259
Common stock warrants 762,712 762,712
Unvested restricted stock 125,000 875,000
Potentially dilutive securities 46,533,066 46,989,971
13. RELATED PARTY TRANSACTIONS
For the three months ended March 31, 2023 and 2022, the Company did not have
any transactions with related parties.
14. SUBSEQUENT EVENTS
Proposed Business Combination
On April 11, 2023, the Company entered into a Business Combination Agreement
(as it may be amended, supplemented or otherwise modified from time to time),
by and among Rosecliff Acquisition Corp I ("Rosecliff"), Rosecliff Ghost
Merger Sub I Inc. and Ghost Merger Sub II LLC, whereby all of the Company's
shares would be exchanged by Rosecliff for 17,000,000 ordinary shares of
Rosecliff with an aggregate equity value of $170.0 million.
Pursuant to the Business Combination Agreement, on the Closing, in sequential
order: (a) Ghost Merger Sub I will merge with and into the Company, with the
Company continuing as the surviving company as a wholly owned subsidiary of
Rosecliff (the "Spectral Merger") and then, (b) the Company will merge with
and into Ghost Merger Sub II (the "SPAC Merger", together with the Spectral
Merger (the "Merger")), with Ghost Merger Sub II surviving the SPAC Merger as
a direct wholly-owned subsidiary of Rosecliff. Ghost Merger Sub II will be
renamed Spectral AI (the "Combined Company").
Both Rosecliff and the Company are required to obtain approval of their
respective stockholder for the Merger. Additionally, the Company is required
to obtain stockholder approval to delist its shares from the AIM market of the
London Stock Exchange. Rosecliff and the Company will seek stockholder
approval shortly after the effective date of Rosecliff's S-4 Registration
Statement to approve the proposed transaction relating to the Mergers. The
Merger is expected to close in the third quarter 2023.
Revenue
In April 2023, the Company entered into a contract with the Medical
Technology Enterprise Consortium (MTEC) collaborating with the U.S. Army
Medical Material Development Activity (USAMMDA) which is expected to provide
$4.0 million of revenue to the Company for further evaluation of its handheld
DeepView® Wound Imaging System.
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