Updated Form S-4 Filed by Rosecliff
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.
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.
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:
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Spectral MD Holdings, Ltd. |
IR@Spectralmd.com |
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Christine Marks, VP of Marketing and Commercialization |
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SP Angel Corporate Finance LLP (NOMAD and Joint Broker for Spectral MD) |
Tel: +44 (0)20 3470 0470 |
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Stuart Gledhill / Harry Davies-Ball (Corporate Finance) Vadim Alexandre / Rob Rees (Sales & Broking) |
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The Equity Group Inc. (US Investor Relations) |
dsullivan@equityny.com |
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Devin Sullivan, Managing Director |
Tel: 212-836-9608 |
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Walbrook PR Ltd (UK Media & Investor Relations) |
spectralmd@walbrookpr.com |
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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.
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:
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Three Months Ended |
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Year Ended |
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2023 |
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2022 |
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2022 |
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2021 |
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Research and development revenue |
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$ |
5,078 |
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$ |
5,844 |
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$ |
25,368 |
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$ |
15,239 |
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Gross profit |
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2,181 |
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2,390 |
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10,837 |
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7,052 |
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Gross margin |
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42.9 |
% |
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40.9 |
% |
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42.7 |
% |
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46.3 |
% |
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Operating income (loss) |
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(3,637 |
) |
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(621 |
) |
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(2,647 |
) |
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(4,179 |
) |
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Net loss |
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(3,609 |
) |
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(528 |
) |
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(2,912 |
) |
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(3,988 |
) |
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Adjusted EBITDA |
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(3,335 |
) |
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|
(284 |
) |
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|
(1,481 |
) |
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|
(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 |
||||
|
2023 |
|
2022 |
||||
|
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 |
|||||||||
|
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 |
|||||||||
|
|
|
2023 |
|
2022 |
|
|
|
|
|||||
|
|
|
(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 |
|||||||||||
|
2023 |
|
2022 |
|
|
|
|
|||||||||
|
|
|
(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 |
||||||||||
|
2023 |
|
2022 |
|
|
|
|
||||||||
|
|
|
(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 |
||||||||||
|
2023 |
|
2022 |
|
|
|
|
||||||||
|
|
|
(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 |
||||||
|
|
|
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 |
||||||||
|
|
|
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 |
||||||||
|
|
|
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 |
||||||||||
|
|
|
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 |
||||||||||
|
|
|
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 |
|||||||||||
|
|
|
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 |
||||||||||||
|
2023 |
|
2022 |
|
2022 |
|
2021 |
||||||||||
|
(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 |
||||||
|
2023 |
|
2022 |
||||||
|
|
|
(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 |
||||||
|
|
|
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, |
||
|
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 and 135,409,564 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively |
|
136 |
|
|
135 |
|
|
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 |
||
|
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)
|
|
|
|
|
Additional |
|
Accumulated |
|
Total |
||||
|
|
|
Shares |
|
Amount |
|
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 |
|
|
|
|
|
|
Additional |
|
Accumulated Deficit |
|
Total Stockholders' Equity |
||||
|
|
|
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 |
||
|
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 of ASC 842 |
|
- |
|
|
609 |
|
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 |
||||
|
Warrant liability |
|
$ |
113 |
|
$ |
- |
|
$ |
- |
|
$ |
113 |
|
|
|
Fair value measured as of December 31, 2022 |
||||||||||
|
|
|
Fair value at |
|
Quoted prices |
|
Significant |
|
Significant |
||||
|
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, |
||
|
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 |
||
|
|
|
2023 |
|
2022 |
|
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, |
|
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 $0.1 million under a lease that expires in March 2024. The lease has been excluded from the tables below as the term is twelve months.
The following table summarizes quantitative information about the Company's operating leases for the three months ended March 31, 2023 (US dollars in thousands):
|
|
|
Three Months Ended |
||||||
|
|
|
2023 |
|
2022 |
||||
|
|
|
|||||||
|
Operating cash flows from operating leases (in US$) |
|
$ |
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 |
||||
|
|
|
2023 |
|
2022 |
||
|
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 |
||
|
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 |
||
|
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 |
||
|
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 |
||
|
|
|
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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