Final results

All key operational milestones outlined at admission to AIM achieved in a transformational year for the Company 

LONDON, U.K. AND DALLAS, TX, U.S – Spectral MD Holdings, Ltd. (AIM: SMD), a predictive analytics company that develops proprietary AI algorithms and optical technology for faster and more accurate treatment decisions in wound care, announces its audited final results for the year ended 31 December 2021.

Operational highlights

  • Key performance numbers from Expanded Proof-of-Concept (“ePOC”) showing accuracies of 92% and 88% in detection of severe thermal burn injury in adults and children, respectively
  • Awarded new contracts with the US Biomedical Advanced Research and Development Authority (BARDA) valued at US$40.5 million, with total funding now awarded from BARDA of over US$100 million
    • US$20.6 million Option 1A BARDA contract due to successful ePOC outcome, in March 2021
    • US$18.8 million Option 1B BARDA contract 6 months ahead of schedule, in September 2021
  • Initiated second stage of burn Artificial Intelligence (“AI”) clinical training study, where the research has been expanded from five to a total of ten clinical sites, and from 100 subjects to a total of 250 subjects
  • Successfully completed 150 subject Diabetic Foot Ulcer (“DFU”) AI training study on schedule across six clinical sites
  • Appointment of Nils Windler as Chief Financial Officer

Financial highlights

  1. Grant revenue of US$15.2 million, primarily from current BARDA contract
  2. Adj. EBITDA US$(3.0) million, including DFU development costs
  3. Cash on hand of US$16.1 million as of 31 December 2021
  4. Raised gross proceeds of £11.3 million (approximately US$15.6 million) through a successful initial public offering, with the entire share capital admitted to trading on AIM on 22 June 2021

Post-period end highlights

  1. Enrolled 80+ subjects across eight clinical sites in the second stage of the burn AI clinical training study, with the Company on track to meet the 250 subject enrollment target across 10-12 sites in the US by Q4 2022
  2. Training DFU algorithm performance determined at 81% accuracy for broad coverage – a robust and reliable result based on results from a considerably larger study population across multiple locations and practices
  3. DFU AI clinical study initiated with Royal College of Surgeons in Ireland, clinical agreement in progress and submitted for regulatory review
  4. Full hand-held engineering prototype is being developed for a miniaturized version of DeepView®

 

Wensheng Fan, Chief Executive Officer of Spectral MD, said: “In 2021, Spectral MD achieved all key operational milestones outlined at the time of our IPO. It has been a transformational year for the Company, from the positive readout from our clinical trials for both our burn and DFU indications, to the accelerated US Government funding for our applications and the successful IPO, raising gross proceeds of £11.3 million (US$15.6 million). I am particularly proud of the Spectral MD team which we continue to build as we position the Company for further future success.

“The Company is well positioned to achieve further key milestones that are foundational to our planned regulatory approvals and commercialization plans. Over the course of 2022 and 2023, we will accelerate investment in key management hires and commercialization efforts to enhance the Company’s readiness to obtain significant government support for placement of our devices in over 5,000 US based hospitals. We will also continue to opportunistically evaluate additional indications, market opportunities and other initiatives to further enhance our commercial success and shareholder value.”

 

2021 Business Update and Outlook

BARDA - Biomedical Advanced Research and Development Authority

At IPO: The Company had been awarded the BARDA contract Option 1A (US$20.6 million), granted in March 2021, and Option 1B (US$18.8 million) was expected to be granted in 2022 to execute the adult and pediatric multi-center clinical training study.

Achieved: Spectral MD received the Option 1B US$18.8 million six months ahead of schedule in 2021 due to a successful ePOC outcome. The accelerated funding, which takes the total BARDA awarded contract funding into the Company to over US$100 million, will allow the Company to accelerate initiation of the second stage of the clinical training study with confidence.

Outlook: The Company expects to successfully complete the Option 1A and 1B 250 subject clinical study in 2022. Upon successful completion of the study, the Company expects to see high performing algorithm results across demographic and geographic variability in the study population. The Company is excited for the continued collaboration with BARDA, as it works together into the next contract phase.

DFU – Diabetic Foot Ulcers

At IPO: At IPO, the Company expected to meet the 150 subject enrollment goal for the DFU U.S. training study and complete the study by year end of 2021.

Achieved: The Company successfully completed the 150 subject DFU U.S. training study on schedule across six clinical sites in December 2021.

Outlook: Following successful completion of the training study, the DFU AI algorithm is being finalized, and additional newly developed product features are being incorporated. In 2022, the Company will start and expects to finish the validation study for the DFU AI algorithm in the U.S.. In Q2 2022, the Company expects to start the DFU clinical study in the EU, where the data collected will be combined and compared with U.S. data to expand DeepViewreadiness in both the U.S. and CE marked regions. The Company's focus will be on the continued development of the DFU AI model as we progress into the validation study.

DHA - Defense Health Agency

At IPO: The Company intended to develop a miniaturized, fully hand-held version of DeepView®.

Achieved: The DHA awarded the Company a US$1.1 million contract in June 2021, two years earlier than expected. The Company has developed an early scientific protype of the DeepView® technology with key optical and computing capabilities in a fully handheld, portable form.

Outlook: The Company will continue to develop the early scientific prototype into a fully engineered, production- ready model to support clinical studies.

Commercialization

At IPO: The Company stated it expected to commence commercial sales in the U.S. in Q4 of 2022 and UK and Germany in H2 2023.

Achieved: The Company has made substantial advancements on the commercialization pathway for DeepView® for both DFU and burn indications in 2021. Proceeds raised from its AIM IPO, combined with two successful BARDA contracts, positions Spectral MD to accelerate commercialization and achieve key business objectives.

Outlook: The Company’s primary focus in 2022 remains to develop its products towards commercialization for both DFU and burn indications. The Company will build upon its human resource capabilities and infrastructure readiness to support key commercial initiatives to distribute DeepView® in the U.S and Europe.

People/Human Resources

At IPO: At IPO, the Company had 48 full time employees. The focus for the Company was to hire personnel in all areas to permit the Company to execute its corporate objectives.

Achieved: Since IPO, the Company added 11 employees and at year end had 55 full-time employees in the US and UK, which includes key hires such as our newly appointed Chief Financial Officer and Head of UK/EU Clinical Research.

Outlook: The Company will continue to make additional hires over the course of 2022 and beyond. The new hires will be made in all areas, as needed to enable the Company to realize its technology, IP, clinical, regulatory, and commercial goals in 2022 and 2023.

Finance

At IPO: At IPO, the Company stated that it will (i) continue to fulfil its contractual obligations and meet milestones under the BARDA contract; and (ii) pursue the commercialization of the DFU application in the U.S., UK and EU.

Achieved: The Company was granted US$40.5 million of funding in 2021, including US$18.8 million post IPO, to accelerate its burn training study. In addition, through its AIM IPO it raised US$15.6 million in gross proceeds to finance clinical trials, regulatory approvals, and commercialization for our DFU indication.

Outlook: The Company has a strong current cash position of US$16.1 million which is expected to enable the Company to pursue its objectives and to enhance the prospects of its future success.

Market Abuse Regulation (MAR) Disclosure

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ('MAR'). Upon the publication of this announcement via Regulatory Information Service ('RIS'), this inside information is now considered to be in the public domain.

 

Chief Executive Officer’s Statement 

To the Members of Spectral MD

I am pleased to present the audited final results for the twelve months ended 31 December 2021 for Spectral MD, Holdings, Inc.. 2021 was a year focused on sizable expansion, and development of our DeepView® technology and operations.

  • In the year ended 31 December 2021 and the immediate post-period, the Company made substantial progress towards its goal of seeking FDA approval and commercialization of its DeepView® Wound Imaging Technology.
  • The Company’s results, across key performance metrics, reflect both the committed dedication to our mission and operational discipline.
  • Strong financial and clinical top line results, showing excellent AI performance metrics, give the Company great confidence in the DeepView® technology. We believe it will be instrumental in disrupting current treatment pathways and improving the standard of care for many patients across multiple geographical markets, and in multiple applications.

We look forward to building upon our strong momentum, whilst continuing to collaborate with BARDA and our clinical partners to scale and advance our transformative technology.

Financial review

The Company met its 2021 milestones for both its Burn and DFU applications and was able to end the year with a higher-than-expected cash position of US$16.1 million (2020: US$5.1 million). While grant revenue of US$15.2 million (2020: US$17.3 million) was broadly in line with market expectations, expenses of US$19.2M (2020: US$15.9 million) were lower, leading to a better-than-expected negative adjusted EBITDA of US$ (3.0) million (2020: US$ 3.7 million). The unfortunate circumstances of COVID-19 and resulting limitations of travel and in-person-meetings forced us and our partners to utilize remote technology to accomplish our goal, with a corresponding reduction in costs. Furthermore, we were able to utilize our U.S. resources to drive UK related milestones given the challenging COVID-19 environment in the UK and EU, which also contributed to lower expenses.

In June 2021, we successfully raised US$15.6 million as part of our IPO on the AIM market of the London Stock Exchange. Those funds are designated for clinical trials, regulatory approvals, and commercialization efforts for our DFU application through to 2023. Despite the COVID-19 circumstances, we completed the enrollment of our DFU training study as planned. Grant revenue from BARDA remains our largest source of revenue. Following the award of the first option of our BARDA Burns contract (US$20.6 million) in March 2021, we have been successful in securing additional funding of US$18.8 million through the second option of this contract in early September 2021, six months ahead of schedule.

Burn indication

Funding

Spectral MD has received substantial support from the U.S. government with contracts from institutions such as BARDA, National Science Foundation(“NSF”), National Institute of Health (“NIH”) and DHA in support of the burn application for its DeepView® solution. Total grant funding awarded to date from these organizations is over US$100 million, including US$40.5 million awarded during 2021. This grant funding is non-dilutive to our shareholders, and the Company believes it validates the important nature of its mission and technology.

Following the successful completion of the ePOC multi-center clinical study in Q1 of 2021, the Company received two additional grants, US$20.6 million in March 2021 and US$18.8 million in September 2021, to bolster the Company’s existing clinical database to train the AI algorithm, and to improve the DeepView® technology in early burn wound healing assessment. The US$20.6 million contract awarded under Option 1A was exercised by BARDA in March 2021 to execute the first stage of the clinical training study to train the DeepView® AI algorithm at five sites. The contract option funding of US$18.8 million under Option 1B of the Company’s current contract with BARDA was granted six months ahead of schedule, which enables Company to accelerate the initiation of the second stage of this clinical training study with confidence.

This Option 1B second stage will expand the study from five to a total of ten clinical sites, and from 100 to a total of 250 clinical subjects, and is expected to continue until Q4 2022. In the year ended 31 December 2021 and immediately post period, enrollment in the expanded clinical training study is strong and on schedule across eight clinical sites.

The updated U.S. Government Broad Agency Announcement announced in November 2021 effectively closes the door for potential competitors to Spectral MD for burn healing assessment technologies.

Clinical study results

The results from the ePOC multi-center clinical study were presented at three scientific presentations at the Southern Region Burn Conference held from 4-7 November 2021, in New Orleans, Louisiana. The top-line results showed an excellent AI performance metric. The results of the first multi-center study using Spectral MD's burn imaging technology included 124 adult and pediatric participants.

In adult participants, the performance showed 92% accuracy, with cross-validation from the AI model for identification of non-healing burn regions. This represents an improvement on the previously reported accuracy of 91% for the DeepView® Wound Imaging Solution in early healing assessment of adults.

In pediatric patients the AI performance showed 88% accuracy, underlining how the technology is responding with significant reliability to variability in the study population. Based on these strong results, the Company has bolstered its infrastructure to facilitate the expansion of the study to additional sites, and has begun enrollment in a larger study in order to complete the AI algorithm’s development.

FDA communication

In the year ended 31 December 2021, the Company submitted an FDA pre-submission request. This advises the FDA that the Company will expand the clinical data set to include burn wound data from emergency departments. The Company believes that the site-of-service for the DeepView® Wound Imaging technology will be utilized in both burn care centers and emergency departments. Expanding our data set to both burn care centers and emergency departments enables the Company to reach 5,400 potential public sites of services in the United States, in fulfilment of BARDA’s mass casualty countermeasures mission. The Company is excited to expand its focus to emergency departments, as it believes that DeepView® is well positioned to have a substantial impact on burn wound treatment in this setting.

DFU indication

In November 2021, the Company completed enrollment for its Institutional Review Board (IRB) approved multi-center training study to support the development of its DFU application for the DeepView® Wound Imaging System. The study enrolled a total of 150 adult subjects and was executed successfully and on schedule across six clinical sites in the US.

The DFU images and clinical data collected are currently being incorporated into the database for the development of DeepView®'s DFU algorithm. The data will also inform on key datapoints that will be captured in a planned validation study, and the incorporation of additional newly developed features. Data collected throughout the study will support the Company’s applications for FDA and CE mark approval for DeepView®'s DFU indication - one of the necessary milestones required to commercialize DeepView®'s DFU application. The completion of enrollment for the multi-center study is an important milestone and illustrates how the Company is delivering on the expected milestones it outlined at the time of its AIM IPO in June 2021.

The development of the DeepView® system for the DFU application and the user interface software have seen substantial progress in 2021. Verification and validation of the user application software for DFU along with the DFU system specification capabilities were completed by the end of 2021.

Defense Health Agency (DHA)

On 23 June 2021, the Company was awarded a two-year, US$1.1 million, Sequential Phase II Small Business Technology 5 Transfer (STTR) contract by the DHA within the U.S. Department of Defense. This funding enables the Company to research and develop a fully portable, handheld version of the DeepView® solution. The Company has previously been awarded STTR Phase I and Phase II contracts from the DHA. In July 2021, the Company held a kick-off meeting with DHA to review the two-year project timeline. It is anticipated that Stage One of the study will focus on system development, Stage Two will develop a fully handheld prototype and Stage Three will be a clinical study with the Burn Center at University Medical Center New Orleans to validate the system prototype. The Sequential Phase II contract will fund all three referenced stages.

In the 12-month period ended 31 December 2021, the Company has made considerable progress in the development of the miniaturized DeepView® technology. The Company has developed an early scientific prototype of the DeepView® technology with key optical and computing capabilities in a fully handheld, portable form. Upon review in a joint meeting with the DHA, both the Company and DHA are committed to developing this into a more engineered, production-ready prototype to support upcoming clinical studies. The Company is on track to meet the milestones for the study and looks forward to the continued progression of the miniaturized version of the DeepView® technology.

Proprietary and clinically validated wound image database for AI development

As of 31 December 2021, approximately 8.1 terabytes and 174 billion pixels worth of proprietary DFU and burn data have been acquired and utilized for the deep learning algorithms training. This presents a significant barrier to entry to would-be competitors in wound care healing assessments.

Intellectual Property (IP) development

The Company places a significant emphasis on obtaining and protecting its intellectual property. In 2021, the Company filed a total of 15 new applications, including 12 foreign applications (national phase filings in the Snapshot and DFU families), two international PCT applications (wound healing prediction with optical biomarkers, and histology/burns), and one new provisional application (updated Snapshot disclosure using single aperture and multiplexed illumination).

Four new patents were allowed or issued in 2021, including a U.S. patent in the Snapshot family, a China National patent in the Multi-spectral Imaging (MSI) tissue classification family, and Japan and European patents in the original MSI+ Photoplethysmography (PPG) tissue classification family. The granted European patent has been validated in Belgium, Germany, France, and the UK.

The Company has the following eight active patent application families:

  • Burn/Wound classification on MSI and PPG
  • Tissue classification on MSI and PPG
  • Amputation site analysis on MSI, machine learning and healthcare matrix
  • DFU healing potential prediction and wound assessment on MSI, machine learning and healthcare matrix
  • High-precision, multi-aperture, MSI snapshot imaging
  • Wound assessment on MSI, optical biomarkers, and machine learning
  • Burn/Histology assessment on MSI and machine learning
  • High-precision single-aperture snapshot imaging with multiplexed illumination

People and Organization

Continuing to build a focused and highly skilled team is critical to our growth. The Company added 27 employees during the fiscal year 2021 and currently has 55 full-time employees in the U.S. and UK and has and will continue to make additional hires over the course of 2022 and beyond. The new hires will be made in all areas, though in particular in operations, sales, marketing, and government contracts. This will further enable the Company to meet its technology, IP, clinical, regulatory, and commercial goals in 2022 and 2023.

In December 2021, the Company was pleased to announce the appointment of Nils Windler as Chief Financial Officer. Mr. Windler specializes in healthcare and life sciences and has more than 20 years’ finance and operations experience. In addition, Mr. Windler has a successful track record of leveraging his financial, operations and sales experience to drive revenue growth and to enhance profitability and has overseen organizational transformation at the previous companies at which he has served. He also has built a considerable reputation and expert knowledge having worked for multiple global organizations and has been responsible for business transformation at high growth companies. We are confident that his strong financial acumen, proven track record, and deep understanding of our industry makes him an ideal fit to lead Spectral MD's financial team. I look forward to working closely with Nils to accelerate commercialization, to execute our business initiatives, and to pursue our routes to markets.

Business outlook

The Company continues to believe that it has developed a unique diagnostic imaging solution that has no direct competition in the assessment of wound healing potential. Given the large addressable DFU market and the potential of the BARDA contract, the Company is optimistic that DeepView® has the potential to disrupt current treatment pathways, and to improve the standard of care for many patients across multiple geographical markets and applications. During 2021, the Company achieved several important milestones, and it remains highly focused on its goal of commercializing its transformative DeepView® technology. The Company is confident that it will continue to build upon the expansion and development it experienced in 2021. We are well-placed to address challenges and opportunities, based on underlying financial strength, a resilient organization, a validated technology, and a diversified business model.

Burn

We look forward to successfully completing the Options 1A and 1B 250 subject clinical study. Upon successful completion of the study, the Company expects to see high performing algorithm results across demographic and geographic variability in the study population. The Company is excited for the continued collaboration with BARDA, as we work together into the next contract phase. Spectral MD is in constant communication with BARDA to further develop our human resource leadership and infrastructure readiness for a federal level commercial contract. The Company is committed to up-scaling its operations and infrastructure to support BARDA’s procurement needs to distribute the DeepView® technology into clinics in the United States.

DFU

In 2022, the Company will start, and expects to finish, the validation study for the DFU AI algorithm in the U.S.. Further, in Q2 of 2022 the Company expects to start the DFU clinical study in the EU, where the data collected will be combined and compared with U.S data to expand DeepView® readiness in both the U.S. and CE marked regions. The Company is optimistic about the potential to accelerate the development of the DFU application and to expand into the UK and EU.

DHA

The Company believes that the recently awarded DHA contract has potential for U.S. Government procurement by the U.S. military and first responders as well as other militaries in the world, as permitted by law. A fully hand-held version of DeepView® not only expands the market to the U.S. military, but also has the potential to enable in-home use for DFU and other consumer applications, beyond the anticipated DHA applications. In 2022, we will continue to build upon the great progress achieved in 2021, towards the realization of a miniaturized device. The Company will continue to develop the early scientific prototype into a more engineered, production-ready prototype to support clinical studies. The Company is on track to meet the milestones for the study and looks forward to the continued progression of the miniaturized version of the DeepView® technology.

Commercialization

The Company’s primary focus for 2022 is the accelerated commercialization for both DFU and burn indications. We look forward to the planned validation study, now expected to start around late Q2 in 2022. Data collected will support the Company’s applications for FDA and CE mark approval for DeepView®'s DFU indication, one of the necessary milestones required to commercialize DeepView®'s DFU application. The Company is firmly focused on developing its resource infrastructure in a timely manner to prepare for the needs of a potential procurement contract with the U.S federal government. The Company expects that realization of each milestone will create significant value for the Company in commercializing its technology.

Financial

Throughout 2021, the Company demonstrated its financial stability and the value which it can generate, even during a pandemic environment. The Company will continue to build on the Option 1A and 1B funding under the BARDA contract throughout the rest of 2022 and into 2023 to drive the clinical training study of the DeepView® Wound Imaging Solution. The Company has a strong cash position of US$16.1 million at 31 December 2021, which will enable it to pursue its objectives and to realize its commercial opportunities.

R&D outlook

Based on the existing platform in development for chronic DFU and acute burn wounds, the Company sees the potential to expand into other wound types such as Venous Leg Ulcers, Critical Limb Ischemia, and Amputation. Furthermore, future generations of the Company’s algorithm potentially enable its utilization in the early detection and prevention of wounds, supporting wound treatment decision making, and in the provision of valuable information in the follow up evaluation of the therapy efficiency as well as in the insurance reimbursement process.

Closing statements

The Company has made substantial advances towards commercialization of DeepView® for both burn and DFU indications. Gross proceeds raised at the time of IPO of US$15.6 million combined with two successful BARDA contract awards positions Spectral MD to accelerate commercialization and achieve key business objectives in 2022.

We believe a critical metric in this phase of our Company’s history is ongoing government grant support, primarily from BARDA, but also from other sources. This non-dilutive grant funding, over US$100 million which has been awarded since the Company’s inception and US$40.5 million which was awarded in 2021, enables Spectral MD to conduct important R&D efforts, and to develop and improve the Company’s AI and optical technology performance. We believe that these R&D efforts also materially enhance the likely success of our future regulatory and commercial prospects.

Our primary focus is on achieving the core business objectives which we set out for the Company in its AIM admission document. We continue to opportunistically evaluate additional indications, market opportunities and other initiatives that may enhance our potential for commercial success and shareholder value.

 

Wensheng Fan

Chief Executive Officer
21 March 2022

Business Risks

The Company continues to assess, monitor, and mitigate the risks in the business. The principal risks, as reported in the corporate governance section of the AIM admission document, remain unchanged. The principal risks, and the current assessment of the risk status and mitigation effectiveness are listed in the table below.

 

RiskDescription Risk Status Mitigation Mitigation Effectiveness
BARDA Burn development is heavily dependent on BARDA funding Unchanged Maintaining strong relationships and project focus Effective – entered Option 1A commencing March 2021 and Option 1B in September 2021
DHA Development of a handheld device is reliant on funding Unchanged Maintaining strong relationships and project focus Effective – entered Phase II contract in June 2021
Loss of a major customer No commercial sales have been made; almost all revenue from fixed fees
and costs payable by BARDA
Unchanged Maintaining a strong relationship with BARDA and expect diversification of customers in future years following commercialization Effective - entered Option 1A commencing March 2021 and Option 1B in September 2021
Commercial The DeepView® system has yet to be launched into the U.S., UK, EU and other markets and so adoption and market penetration can only be estimated Unchanged Maintaining strong relationships and project focus Effective – expanding London office, establishing an EU presence in Dublin, Ireland, and engaging with potential CRO’s in both EU and UK
Research and development Complex scientific research is necessary in the life sciences and medical device development sector Unchanged Recruiting and retaining highly skilled employees Effective – hired 27 new employees with world leading capabilities in 2021
Product development timelines Unpredictability of the rate of patient recruitment into clinical trials Unchanged Maintaining strong relationships and project focus Effective – on schedule with trials
Regulatory approvals and compliance Obtain various regulatory approvals (including the FDA and EMA approvals) Unchanged Conducting thorough clinical and product market research and maintain strong relationship with regulatory authorities Effective – engaged in regular discussion to update FDA and established partnerships with world leading expert teams of scientific
and regulatory affairs staff, including recently hired Director of Regulatory Affairs
Technological change Changing customer requirements and the introduction of products or services or enhancements embodying new technology Unchanged Continues to invest in technical developments and apply for patents Effective – issued additional patents in 2021
Reimbursement Pending Medicare approval of the Medicare coverage of innovative technologies (MCIT) reimbursement pathway for FDA breakthrough designated devices Unchanged Continue to monitor Medicare’s assessment process
 
Effective – provides a guaranteed pathway for coding, coverage and payment for DeepView®’s burn application, hired a VP of Commercialization and Marketing to start in April 2022


 

SUPPLEMENTARY INFORMATION- DEFINITIONS AND RECONCILIATIONS OF NON-GAAP MEASURES

Non-GAAP measures as defined by the Company

The Company uses adjusted EBITDA as a non-GAAP metric when measuring performance, including when measuring current period results against prior periods adjusted EBITDA.

Because of their non-standardized definitions, non-GAAP measures (unlike GAAP measures) may not be comparable to the calculation of similar measures of other companies. Supplemental non-GAAP measures are presented solely to permit investors to more fully understand how Spectral MD management assesses underlying performance. Supplemental non-GAAP measures are not, and should not be viewed as, a substitute for GAAP measures.

Adjusted EBITDA

The Company defines adjusted earnings before interest, tax, depreciation and amortization ("adjusted EBITDA") as net income/(loss) excluding income taxes, depreciation of property, plant and equipment (including any related impairment charges), amortization of intangible assets (including any related impairment charges), interest expense, stock compensation, any non-operating financial income and expense.


Independent Auditors’ Report

The Board of Directors                      
Spectral MD Holdings, Ltd:

Opinion

We have audited the consolidated financial statements of Spectral MD Holdings, Ltd and its subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive (loss) income, changes in temporary equity and stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes to the consolidated financial statements.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the consolidated financial statements are issued.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.

In performing an audit in accordance with GAAS, we:

  • Exercise professional judgment and maintain professional skepticism throughout the audit.
  • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.
  • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.
  • Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.

 

/s/ KPMG LLP

 

Dallas, Texas
March 18, 2022

 


Consolidated Balance Sheets as of December 31, 2021 

  2021  2020  
  US$  US$  
Assets      
Current assets:      
Cash and cash equivalents  16,120,779 5,124,639 
Accounts receivable, net  1,434,954 2,690,911 
Prepaid expenses and other current assets  857,666 92,868 
Total current assets  18,413,399 7,908,418 
      
Non-current assets:      
Property and equipment, net  31,593 - 
Other noncurrent assets  39,695 31,046 
Total Assets  18,484,687 7,939,464 
      
Liabilities, temporary equity and stockholders' equity      
Current liabilities:      
Accounts payable  1,740,217 3,799,208 
Accrued expenses  2,390,687 1,122,129 
Notes payable  582,698 - 
Warrant liability  185,724 - 
Total current liabilities  4,899,326 4,921,337 
      
Non-current liabilities:      
Notes payable  - 768,575 
Total non-current liabilities  - 768,575 
Total Liabilities  4,899,326 5,689,912 
      
Series A preferred stock ($0.001 par value); no shares authorized, issued or outstanding as of December 31, 2021; 10,000,000 shares authorized and 4,324,330 shares issued and outstanding as of December 31, 2020  -  1,113,987 
      
Stockholders' Equity      
Common stock ($0.001 par value); 400,000,000 shares authorized; 135,034,564 shares and 61,347,000 shares issued and outstanding as of December 31, 2021 and 2020, respectively  135,035 61,347 
Additional paid-in capital  22,639,625 6,096,178 
Accumulated deficit  (9,189,292) (5,021,960) 
Accumulated other comprehensive loss  (7) - 
Total Stockholders' equity  13,585,361 1,135,565 
Total Liabilities, Temporary Equity and Stockholders' Equity  18,484,687 7,939,464 

See accompanying notes to the consolidated financial statements

 

Consolidated Statements of Operations and Comprehensive (Loss) Income
For the Years Ended December 31, 2021

     
 2021 2020
 US$ US$
 
Research and development revenue 15,167,827  17,300,884  
Cost of revenue (8,186,698) (9,314,427) 
Gross profit 6,981,129 7,986,457 
    
Operating costs and expenses:     
General and administrative 11,326,513 6,537,687 
Total operating costs and expenses 11,326,513 6,537,687 
Operating income (loss) (4,345,384) 1,448,770 
    
Other income (expense):     
Interest expense (17,342) (39,839) 
Change in fair value of warrant liability 297,779 - 
Foreign exchange transaction loss (187,582) - 
Other income - 426 
Total other income (expense) 92,855 (39,413) 
     
(Loss) income before income taxes (4,252,529) 1,409,357 
Benefit (provision) for income taxes 97,525 (174,626) 
Net (loss) income (4,155,004) 1,234,731 
Dividend on Series A preferred stock (1,258,959) - 
Net (loss) income applicable to common stockholders (5,413,963) 1,234,731 
Other comprehensive loss     
Foreign currency translation adjustment (7) - 
Total comprehensive (loss) income applicable to common stockholders (5,413,970) 1,234,731 
Net (loss) income per share of common stock     
Basic (0.05) 0.02 
Diluted (0.05) 0.00 
Weighted average common shares outstanding     
Basic 100,291,815 57,897,520 
Diluted 100,291,815 132,856,898 

See accompanying notes to the consolidated financial statements


 

Consolidated Statements of Changes in Temporary Equity and Stockholders’ Equity (Deficit)
For the Years Ended December 31, 2021

                 
           Accumulated Total
          Additional Other Stockholders'
       Paid-in Accumulated Comprehensive  Equity
  Preferred Stock  Common Stock Capital Deficit Loss (Deficit)
  Shares Amount  Shares Amount
   US$   US$ US$ US$ US$ US$
 Balance at December 31, 2019 4,324,330  1,113,987 53,809,092  53,809  3,481,825  (6,256,691)  - (2,721,057)
 Issuance of common stock to convert notes payable and accrued interest to related parties - - 1,754,790 1,755 357,977 - - 359,732
 Stock option exercised for cash - - 1,980,000  1,980 44,220 - - 46,200
 Stock compensation - - 3,803,118 3,803 2,212,156 - - 2,215,959
 Net income - - - - - 1,234,731 - 1,234,731
 Balance at December 31, 2020 4,324,330  1,113,987 61,347,000  61,347  6,096,178  (5,021,960)  - 1,135,565
 Issuance of common stock for cash - - 19,067,797 19,068 15,594,808 - - 15,613,876
 Issuance cost, net of $0.5 million warrant liability - - - - (1,479,218) - - (1,479,218)
 Cumulative dividend on Series A preferred stock - 1,258,959 - - (1,258,959) - - (1,258,959)
 Conversion of preferred stock to common stock (4,324,330) (2,372,946) 53,889,765 53,890 2,319,056 - - 2,372,946
 Stock option exercised for cash - - 42,500 43 4,383 - - 4,426
 Stock compensation - - 687,502 687 1,363,377 - - 1,364,064
 Foreign currency translation adjustment - - - - - - (7) (7)
 Prior period adjustment - - - - - (12,328) - (12,328)
 Net loss - - - - - (4,155,004) - (4,155,004)
 Balance at December 31, 2021 - - 135,034,564 135,035 22,639,625 (9,189,292) (7) 13,585,361

 

 

Statements of Cash Flows
For the Years Ended December 31, 2021

   
 2021 2020
 US$ US$
Cash flows from operating activities:    
Net (loss) income (4,155,004) 1,234,731
Adjustments to reconcile net (loss) income to net cash (used in)
  provided by operating activities:
   
Depreciation expense 723 -
Stock based compensation 1,364,064 2,215,959
Change in fair value of warrant liability (297,779) -
Changes in operating assets and liabilities:    
Accounts receivable 1,255,957 (1,913,451)
Prepaid expenses and other current assets (275,228) 8,580
Other assets (8,649) -
Accounts payable (2,071,319) 2,574,387
Accrued expenses 1,268,558 (300,634)
Net cash (used in) provided by operating activities (2,918,677) 3,819,572
Cash flows from investing activity:    
Purchases of property and equipment (7,216) -
Net cash used in investing activity (7,216) -
Cash flows from financing activities:    
Proceeds from issuance of common stock and warrant, net of issuance costs 14,618,161 -
Proceeds from PPP loan - 768,575
Proceeds from stock option exercise 4,426 46,200
Payments for notes payable (700,547) -
Payments for notes payable to related parties - (280,000)
Net cash provided by financing activities 13,922,040 534,775
Effect of foreign exchange rates on cash (7) -
Net increase in cash and cash equivalents 10,996,140 4,354,347
Cash and cash equivalents, beginning of period 5,124,639 770,292
Cash and cash equivalents, end of period 16,120,779 5,124,639
    
Supplemental cash flow information:    
Cash paid for interest 12,220 18,500
Cash paid for income taxes 254,963 12,989
    
Noncash financing activities disclosure:    
Cumulative dividend on Series A preferred stock 1,258,959 -
Conversion of preferred stock to common stock 2,372,946 -
Prepaid asset acquired for debt 473,913 -
Software and prepaid software maintenance acquired for debt 40,757 -
Issuance of common stock to convert notes payable and accrued interest to related parties - 359,732

 

See accompanying notes to the consolidated financial statements