Corporate Governance

Principle Two: Understanding Shareholder needs and Expectations

The Board recognizes its significant responsibility towards the Company’s shareholders and is committed to maintaining good communication and investor relations and having a constructive dialogue with all its shareholders. The Chief Executive Officer holds regular meetings with institutional shareholders to keep them updated on the Company’s performance, strategy and management and provide periodic briefings to analysts who cover the industry.

The Board have engaged Walbrook PR to provide investor relations services allowing all investors to have the opportunity to ask questions and provide feedback via Walbrook PR – either by phone or email at [email protected]. Through Walbrook, the Board will also allow all investors to attend Company investor presentations (held physically or virtually) and to submit questions to the management.

In addition, all shareholders are encouraged to attend the Company's Annual General Meeting and any other Special Meetings which are held throughout the year. In 2022, the Company held its Annual General Meeting on 27 September 2022. Proper consideration will be given to conducting these meetings in locations relevant to the Company’s activities whether in person or in virtual format. Factors to be considered include the location of the Company’s shareholders, the Company’s operations, with the health and safety of participants being of paramount importance.

The Board will use the Company's website (www.spectralmd.com) to provide access to current information about the Company’s activities.

Principle Three: Stakeholder Responsibilities

The Board recognizes that the long-term success of the Company is reliant upon the efforts of the employees of the Company and its customers, stakeholders, suppliers and regulators. The Board has identified its key stakeholders and has put in place a range of processes and systems to ensure that there is close Board oversight and contact with these groups and seeks feedback from them whenever possible.

Employee Annual Assessment Process

All employees of the Company participate in a structured Company-wide annual assessment process which is designed to ensure that there is an open and confidential dialogue with each person to assess performance and set goals for the forthcoming year. The mutual feedback process ensures that the Company can communicate developments in the business to ensure employees' efforts are coordinated with Company strategy.

FDA consultation/BARDA meetings

The Company has had multiple interactions with the FDA since 2013 directly overseen by the Chief Executive Officer with a dedicated management team responsible for the Company’s regulatory processes including the Breakthrough Device Designation regulation. The Company has recently engaged with the FDA for informational pre-submission and pre-submission meetings to ensure that the regulatory pathway and data collection for the system meet the FDA’s requirements.

Since 2013, the Company’s relationship with BARDA has been managed through formal monthly “Project-Core-Team” meetings consisting of leadership representation from BARDA and officers of the Company (including the Chief Executive Officer). There are additional meetings and communications by phone or email to ensure that the Company is fulfilling the contractual requirements of the contract.

Suppliers and Manufacturing partners

The Board ensures that all key relationships with customers and suppliers are the responsibility of, or are closely supervised by, one of the Directors or senior management.

The Company currently outsources all of its manufacturing through a contract manufacturing service, Cobalt Production Solutions (“Cobalt”) based in Plano, Texas. Cobalt is involved with manufacturing the DeepView® GEN 3 system and will continue to do so for the foreseeable future.

In addition to Cobalt, the Company integrates several other highly specialized contract manufacturers in the areas of optics, system design, and electronics. The Company employs experienced regulatory and quality control personnel to ensure that manufacturing processes and quality management systems are in compliance with FDA and CE Mark regulations and standards. As the Company expands into the European market, the Company will consider manufacturing systems in the EU in preparation for commercialization. The Company does not have plans to develop its own manufacturing facility at this time.

Principle Four: Risk Management

The Audit Committee is responsible to the Board for ensuring that procedures are in place and are being followed to identify, evaluate and manage the significant risks faced by the Company. The Audit Committee reviews the risks on a regular basis and will discuss them quarterly at board level and formally in the Annual Report. The following principal risks have been identified:

Specific risks relating to terms of key contracts

The Company currently has agreements with each of: (i) BARDA; and (ii) the Defense Health Agency (“DHA”) to support continued funding and development of the next generation of the DeepView^® wound imaging device.

BARDA

The base period of the BARDA contract expired at the end of April 2021, however BARDA has exercised Option 1A in March 2021, and Option 1B in September 2021, to provide funding to initiate the Burn Training study. BARDA may exercise further options to extend the term of the contract subject to contract milestones and decision gates. While the Company has no reason to believe that these further options will not be exercised, and whilst these contracts have been renewed or extended historically, there is no guarantee that the contracts will be extended. As these contracts are very significant to the Company, a decision by BARDA not to exercise further options could have an adverse impact on the Company’s business, prospects, results of operations and financial condition.

While the government has a right to terminate the BARDA contract, the government generally does not terminate funding awards unless there is reason, such as: the funding contract becomes too costly or proving impossible, the agency seeks to avoid a dispute with another branch of government, or the agency has decided to restructure its contractual arrangements and perform work in-house. Thus, it is unlikely that BARDA will terminate its contract with Company. If, however, BARDA terminates the contract, the Company may be entitled to settlement costs for payment for work already performed, but not yet paid for; costs incurred in anticipation of performance; and costs arising from termination and settling the termination, for example. While such Termination Settlement is available, the termination of the BARDA contract is considered low risk.

To mitigate this risk, the Company maintains a very close relationship with BARDA, through a project team made up of senior management including the CEO and the Head of Regulatory Affairs. Project milestones and scope are closely controlled by the Company to ensure the development goals presented to BARDA are achieved in full, and that momentum towards the development’s completion is maintained. In the very unlikely event that BARDA did terminate the contract, the Company would review the adoption of suitable mitigation measures including rescheduling of the Burns development program, cost savings, and raising funds from alternative sources to complete the development, depending on the progress of the Burns development and DFU development and commercialization.

DHA

The DHA Department of Defense Small Business Technology Transfer (STTR) Phase II contract expired on 26 January 2021. The Company entered a supplemental Phase II contract in July of 2021 that extends until October 2023 to pursue research and development of commercial applications. Though the Company has no reason to believe that it will not be offered a Phase III contract, and while DHA contracts have been renewed or extended historically, there is no guarantee that the contract will be extended after the base period. As this contract is a key contract for the Company, non-extension of the contract could have an adverse impact on the Company’s business, prospects, results of operations and financial condition.

To mitigate this risk, the Company maintains a very close relationship with DHA, through a project team made up of senior management including the Chief Executive Officer and the Head of Regulatory Affairs. Project milestones and scope are closely controlled by the Company to ensure the development goals presented to DHA are achieved in full, and that momentum towards the development’s completion is maintained. In the very unlikely event that DHA did not extend the contract, the Company would review the adoption of suitable mitigation measures including rescheduling of the Burns development program, cost savings, and raising funds from alternative sources to complete the development, depending on the progress of the Burns development and DFU development and commercialization.

Loss of a major customer

The Company has not made any commercial sales and receives almost all of its revenue from fixed fees and costs payable by BARDA. While the Company believes it has a very good working relationship with BARDA, the loss of the Company’s contract with BARDA may have an adverse impact on the Company’s business, prospects, results of operations and financial condition. The Company expects diversification of customers in future years once it begins commercial sales activity.

Risk mitigation is described above in relation to BARDA and the DHA.

Commercial Risk

The DeepView^® system has yet to be launched into the US, EU and other markets and so adoption and market penetration can only be estimated. Widespread adoption of new medical device technologies typically follows early adoption and promotion by key opinion and thought leaders in the relevant sectors. Whilst the Directors are optimistic about the Company’s prospects, there is no certainty that anticipated outcomes and sustainable revenue streams will be achieved.

The Company has taken steps to mitigate this risk by establishing a strong relationship with the Skin Wounds, and Trauma (SWaT) Research Centre of the Royal College of Surgeons in Ireland (RCSI)& University of Medicine and Health Sciences, a well-respected institution in the field. The Company will be able to leverage this relationship to access other institutions and individuals that should increase awareness and early adoption of the systems both in the EU and US. Further, the Company has established an Advisory Board of key opinion leaders to ensure that the DeepView^® developments result in commercializable products. The Burns application has received FDA breakthrough designation which will also provide strong promotional benefits in commercialization, and access to advantageous treatment reimbursement rates.

Research and Development Risk

The Company will be operating in the life sciences and medical device development sector and will look to exploit opportunities within that sector. The Company will therefore be involved in complex scientific research and industry experience indicates that there may be a risk of delay or failure to produce results. To obtain the necessary regulatory approvals required to commercialize the Company’s products, the Company will need to conduct clinical trials and demonstrate successful outcomes against an agreed comparator. There is a risk that safety and efficacy issues may arise when the products are tested. There is also a risk that there will be delays to the development of the products or that unforeseen technical problems arise as the Company’s technology becomes increasingly automated. These risks are common to all new medical products and there is also a risk that the clinical trials may not be successful.

The Company is mitigating such risks through the recruitment and retention of highly skilled and experienced senior managers and other employees with world leading capabilities in science, product and business development, project management and regulatory affairs to realize high performing technologically breakthrough products on schedule, and to the satisfaction of clinicians and regulatory authorities.

Product development timelines

Product development timelines are at risk of delay, particularly since it is not always possible to predict the rate of patient recruitment into clinical trials. There is a risk therefore that product development could take longer than presently expected by the Directors. If such delays occur the Company may require further working capital.

The Directors shall seek to minimize the risk of delays by careful management of projects and have strongly embedded processes and systems of program management to provide this. In the development of earlier generations of the DeepView^® product, the Company has demonstrated its ability to plan and execute its development projects in a timely manner.

Regulatory approvals and compliance

The Company will need to obtain various regulatory approvals (including the FDA and EMA approvals) and otherwise comply with extensive regulations regarding safety, quality and efficacy standards in order to market its future products. These regulations, including the time required for regulatory review, vary from country to country and the review and approval processes can be lengthy, expensive and uncertain. While efforts will be made to ensure compliance with government standards, there is no guarantee that any products will be able to achieve the necessary regulatory approvals to promote that product in any of the targeted markets and any such regulatory approval may include significant restrictions on the uses for which the Company’s products can be promoted and used. 

To ensure that the Company has the best possibility of receiving appropriate regulatory approvals to market its products, it has conducted thorough clinical and product market research through key clinical opinion leaders and institutes to refine its technology offering and to ensure that it produces and overwhelmingly compelling clinical case for regulatory approval and adoption. Further, the Company has established a process of active engagement with the regulatory authorities in determining the optimal regulatory pathway to approval, to minimize the regulatory lead time and to ensure the satisfaction of the safety, quality and efficacy standards expected by those authorities. The Company has established world leading expert teams of scientific, product and business development, project management and regulatory affairs staff to maximize the likelihood of success.

Technological change

The markets for the Company’s products and services are characterized by changing technology and customer requirements. Changing customer requirements and the introduction of products or services or enhancements embodying new technology may render the Company’s existing products and services obsolete, unmarketable or competitively impaired and may exert downward pressures on the pricing of existing products and services.

One of the Company’s key competitive advantages is that it is currently the only AI-enabled wound imaging system that translates raw physiological image data into an output that is directly correlated to a wound healing prediction. The Company intends to continue to invest in technical developments in order to mitigate the impact of future competition. The Company has also registered a portfolio of patents to defend its technological lead over other market offerings in the relevant clinical space.

Principle Five: A Well-Functioning Board of Directors

The Board comprises the Independent Non-Executive Chairman, Martin Mellish, the Chief Executive Officer,

Wensheng Fan, and three other Non-Executive Directors (“NED”): Gerry Beaney, Dr. Cynthia Cai and Richard Cotton. In 2022, Erich Spangenberg, the largest shareholder of the Company, was a member of the Board from 1 January 2022 through 31 October 2022. All current NEDs are independent. Erich Spangenberg, including the Spangenberg Entities, is the largest shareholder of the Company, owning approximately 40 percent. of the Company’s total issued share capital and was Chairman of the subsidiary prior to Admission. Mr. Spangenberg and his related entities have signed the Relationship Agreement which further governs his relationship with the Company and the Board.

The QCA Code recommends that at least two members of the board are non-executive Directors determined by the Board to be independent in character and judgement and free from relationships or circumstances which may affect, or could appear to affect, their judgement. The Company complies with this requirement with four non-executive Directors determined by the Board to be independent.

The Board meets at least every two months and at any other time deemed necessary for the good management of the business and at a location agreed between the Board members. It has established Audit, Remuneration and Nominations Committees, particulars of which appear under Principle Nine. Each Director has agreed to devote as much time as is required to carry out the roles and responsibilities that the Director has agreed to take on.

Notwithstanding that the Directors are based in various jurisdictions the Company will aim to ensure that face-to-face meetings occur where practicable and subject to any ongoing regulations relating to the Covid-19 pandemic.

The Directors are subject to re-election intervals as prescribed in the Company's Certificate of Incorporation, the effect of which is that no director may serve a term longer than three years without standing for re-election by the Company’s Shareholders at a general meeting.

Principle Six: Appropriate Skills and Experience of the Directors

The Company has put in place a board structure that can best provide the strategic advice and leadership required.

The Board currently consists of five Directors, who are supported by an experienced senior management team and an Advisory Board.

The Directors are of the view that the Company does not currently require a Board-level Chief Financial Officer given its current stage of development. Nils Windler, the Company’s Chief Financial Officer, is invited to attend all Board meetings and audit, remuneration and nomination committee meetings as required. In addition, the NEDs have appropriate financial experience: Richard Cotton previously served as Chief Financial Officer of FTSE250 listed Dechra Pharmaceuticals plc, whilst Gerry Beaney and Martin Mellish bring considerable public company advisory and audit committee experience, respectively.

As the Company grows and develops, the Board will keep its corporate governance framework under review to ensure it remains appropriate for the size, complexity and risk profile of the Company.

Currently, the Board has an appropriate balance of sector, financial, and public markets skills and experience and brings a range of skills and capabilities to the Company. The Board members are kept up to date on a regular basis on key issues and developments pertaining to the Company as well as their responsibilities as members of the Board and have access to management as required.

Principle Seven: Evaluation of Board Performance

Internal evaluation of the Board, its committees and individual Directors is seen as an important component of good governance. The Board will undertake this on an annual basis in the form of peer appraisal, facilitated by self-assessment questionnaires and discussions to determine the effectiveness and performance in each individual’s role. The criteria against which effectiveness is considered will be aligned to the strategy of the Company and management forecasts and budgets that are already in place. Development needs of individuals will form part of the appraisal process.

The Board may consider an externally facilitated review in the future.

In addition, NEDs’ independence will be reviewed on an ongoing basis.

Principle Eight: Corporate Culture

The Board recognizes that its decisions regarding strategy and risk will influence the corporate culture of the Company as a whole and that this will impact the performance of the Company. The Board is very aware that the tone and culture set by the Board will have an effect on all aspects of the Company as a whole and the way that employees behave. A large part of the Company's activities are centered on its interaction with government departments as well as addressing its healthcare customer needs. Therefore, the importance of sound ethical values and behaviors is crucial to the ability of the Company to successfully achieve its corporate objectives. The Board places great importance on this aspect of corporate life and seeks to ensure that this flows through all that the Company does. The Board assessment of the culture within the Company at the present time is one where there is respect for all individuals, there is open dialogue within the Company and there is a commitment to provide the best service possible to all the Company’s key customers while being sensitive to the needs of all stakeholders.

In addition, the Company takes a zero-tolerance approach to bribery and corruption and is committed to acting professionally, fairly and with integrity in all business dealings and relationships wherever they occur. The Company implements effective systems to counter bribery and corruption, including strict compliance with its anti-bribery and anti-corruption policy. The policy provides guidance to those working for the Company on how to recognize and deal with bribery and corruption issues and the potential consequences and applies to all persons working for the Company or on its behalf in any capacity, including employees at all levels, Directors, Officers, consultants and agents.

Furthermore, the Directors believe that serving the Company's target market of hospitals and other care and treatment centers, brings with it a level of public scrutiny in procurement that is transparent and easily accessible to the Board and external advisers that oversee the Company's activities.

Principle Nine: Maintenance of Governance Structures and Processes

Ultimate authority for all aspects of the Company's activities rests with the Board with the respective responsibilities of the Chairman and Chief Executive Officer arising as a consequence of delegation by the Board. The Chairman is responsible for the effectiveness and leadership of the Board, promoting a culture of openness and debate by facilitating the effective contribution of NEDs and ensuring constructive relations between Executive and Non-Executive Directors. The Chief Executive Officer is responsible for ensuring that the Directors receive accurate, timely and clear information. Management of the Company's day-to-day business resides with the Chief Executive Officer. As stated in Principle Two, primary contact with shareholders has been delegated by the Board to the Chief Executive Officer who may further delegate it with the consent of the Board.

NEDs are appointed not only to provide independent oversight and constructive challenges to the Executive Directors and senior management but also to provide strategic advice and guidance. There is a rigorous and transparent procedure for the appointment of new Directors to the Board. The search for Board candidates is conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the Board. The Company also maintains an Advisory Board for the purpose of providing additional insight and expertise in the areas in which the Company operates.  In 2022, Richard Cotton was appointed the Senior independent non-executive director.

During 2022, the Company held fourteen meetings which were attended by at least a majority of all of the then Directors. The attendance record of the Directors during that period of office is as follows:

* Mr. Spangenberg was a Director from 1 January 2022 through 30 October 2022.

The Board has delegated specific responsibilities to the Audit, Remuneration, and Nomination Committees to support the Board and improve effectiveness. The Committees have the necessary skills and knowledge to discharge their duties effectively.

Audit Committee

The Audit Committee’s role is to assist the Board with the discharge of its responsibilities in relation to internal and external financial reporting, audits and controls, including reviewing the Company’s annual and half-yearly financial statements, reviewing and monitoring the scope of the annual audit and the extent of the non-audit work undertaken by external auditors, advising on the appointment of external auditors and the tendering process and reviewing the effectiveness of the Company's corporate governance, internal audit and controls, insurance and risk management, whistle-blowing and fraud-prevention systems. The ultimate responsibility for reviewing and approving the Company's annual report and accounts and its half-year reports remains with the Board.

The Audit Committee is chaired by Richard Cotton and its other member is Gerry Beaney. The Board has satisfied itself that Richard Cotton has recent and relevant financial experience, having previously been Chief Financial Officer of FTSE250 listed Dechra Pharmaceuticals plc, and that the committee has competence relevant to the sector in which the Company operates. The Audit Committee will normally meet no fewer than three times in each financial year and at such other times as the chair of the committee requires. It has unrestricted access to the Company’s auditors.

Audit Committee Meeting Attendance during 2022:

Renumeration Committee

The Remuneration Committee has delegated responsibility for all elements of the remuneration of the Chair of the Board, the executive Director of the Company and such other senior executives of the Company as it is designated to consider. It must ensure that the remuneration policy and practices of the Company are designed to support strategy, purpose and values that are linked to the Company’s long-term success. The Remuneration Committee will also make recommendations to the Board on proposals for the granting of share options and other equity incentives under any share option scheme or equity incentive scheme in operation from time to time. In exercising this role, the Directors will have regard to the recommendations in the QCA Code. The remuneration of non-executive Directors will be a matter for the executive Director and Chairman. No Director may be involved in any decision as to their own remuneration.

The Remuneration Committee is chaired by Dr. Cynthia Cai. The other member of the committee is Richard Cotton. The Board has satisfied itself that Dr. Cai has recent and relevant experience, having previously held senior leadership positions at multinational organizations, and that the committee has competence relevant to the sector in which the Company operates. The Remuneration Committee will normally meet not less than twice in each financial year and as otherwise required by its chair.

Renumeration Committee Meeting Attendance during 2022:

In 2022, there were three meetings of the remuneration committee. Further, at three full board meetings, the directors approved bonuses and/or option awards to the CEO and certain senior employees as recommended by the remuneration committee.

Nomination Committee

The Nomination Committee leads the process for appointments, ensures plans are in place for orderly succession to both the Board and senior management positions and oversees the development of a diverse pipeline for succession. It is also responsible for periodically reviewing the Board’s structure and identifying potential candidates to be appointed as Directors, as the need may arise.

The Nomination Committee is chaired by Gerry Beaney. The other members of the committee are Martin Mellish and Wensheng Fan. The committee’s remit will extend to senior management and the Advisory Board to ensure candidates possess the attributes required for the role. Director candidates will also be assessed to ensure appropriateness to act as a director of a London AIM Market company.

Nomination Committee Meeting Attendance during 2022:

Special Committees

The Company also avails itself of special committees comprised of members of the Board.  These committees are used for discrete and timely matters generally relating to the Company’s audit and/or financial or other transactions that require the timely review of such matters. The Company had two meetings of its special committee during 2022 relating to the final approval of the Company’s Annual Report and potential discrete financing transactions. 

Special Committee Meeting Attendance during 2022: