1. Organization, Nature of Business and Liquidity

Spectral MD, Inc., headquartered in Dallas, Texas, was incorporated in Delaware on March 9, 2009.

On December 23, 2020, the Company formed its wholly-owned subsidiary in Delaware, Spectral MD Holdings, Ltd. (the "Company"). The subsidiary had no activity through December 31, 2020.

On June 21, 2021, Spectral MD Merger Sub, Inc. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of Spectral MD Holdings, Ltd., merged with and into Spectral MD, Inc. Following the merger, the separate corporate existence of Merger Sub ceased and Spectral MD, Inc. continued as the surviving corporation and through the merger became a wholly owned subsidiary of the Company. In connection with the merger, each share of the Spectral MD, Inc.'s common stock and the Spectral MD, Inc.'s preferred stock issued and outstanding immediately prior to the effective date were converted into one share of Common Stock. All of the stockholders of the Spectral MD, Inc. prior to the merger became stockholders of the Company immediately following the merger. All existing Common Stock of the Company held by the Spectral MD, Inc. were cancelled at the effective date of the merger.

On June 22, 2021, the Company was listed and started trading on the AIM market of the London Stock Exchange (the "AIM").

Effective June 21, 2021, all shares of the Company's common stock issued and outstanding were combined and reclassified on a six for one basis. The effect of this stock split has been retroactively applied to all periods presented

On July 22, 2021, the Company formed its wholly-owned subsidiary in the UK, Spectral MD UK Ltd., ("Spectral MD UK") in order to prepare for and initiate the regulatory approval process in the E.U. and U.K. 

The Company is devoting substantially all of its efforts towards research and development of its DeepView® Wound Imaging System. The Company has not generated any product revenue to date. The Company currently generates revenue from contract development and research services by providing such services to governmental agencies, primarily to the Biomedical Advanced Research and Development Authority ("BARDA"). The Company operates in one segment.

Liquidity

As of December 31, 2021 and 2020, the Company had approximately US$16.1 million and US$5.1 million, respectively in cash, and an accumulated deficit of US$8.9 million and US$5.0 million, respectively. The Company has historically funded its operations through the issuance of notes and the sale of preferred stock and common stock. In July 2021, the Company received net proceeds of approximately US$14.6 million from its initial public offering ("IPO") on the AIM on June 22, 2021 (see Note 3). Additionally, during 2021, the Company finalized its execution of Options 1A and 1B of the contract with BARDA, which may provide the Company with an additional US$39.4 million to execute the clinical training study of DeepView® Wound Imaging System for burn wound healing assessment. This contract option funding of US$39.4 million follows the US$27.3 million contract received from BARDA in July 2019 in the original award. In total, the contract has a potential funding of up to US$88.7 million if all future options are executed.

The Company evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year beyond the release date of the consolidated financial statements. Based on such evaluation and the Company's current plans as described above, management believes that the Company's existing working capital as of December 31, 2021, will be sufficient to satisfy its operating cash needs within one year beyond the release date of the consolidated financial statements.

During the early months of 2020, COVID-19 emerged and has subsequently spread world-wide. The World Health Organization has declared COVID-19 a pandemic resulting in federal, state, and local governments and private entities mandating various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories, and quarantining people who may have been exposed to the virus. Management has determined that there has been no significant impact to the Company's operations, however management continues to monitor the situation.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company's consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") as determined by the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC").

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Spectral MD, Inc. and Spectral MD UK. Significant inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company's balance sheets and the amounts of expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, revenue recognition, warrant liability, stock-based compensation expense, and income tax valuation allowances. Actual results could differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly-liquid investments with an original maturity of three months or less when purchased to be cash equivalents. All cash and cash equivalents are held in United States financial institutions.

Accounts Receivable

Accounts receivable represent amounts due from U.S. government agencies pursuant to research and development contracts associated with the Company's DeepView® Wound Imaging System. Accounts receivable amounted to approximately US$1.4 million and US$2.7 million as of December 31, 2021 and 2020, respectively.

The Company evaluates the collectability of its receivables based on a variety of factors, including the length of time the receivables are past due, the financial health of its customers and historical experience. Based upon the review of these factors, the Company recorded no allowance for doubtful accounts as of December 31, 2021 and 2020.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to credit risk consist principally of cash and cash equivalents and accounts receivable. All cash and cash equivalents are held in United States financial institutions which, at times, exceed federally insured limits. The Company has not recognized any losses from credit risks on such accounts. The Company believes it is not exposed to significant credit risk on cash and cash equivalents.

Additional credit risk is related to the Company's concentration of receivables. As of December 31, 2021 and 2020, receivables were concentrated from one customer (which is a U.S. government agency) representing 94% and 99% of total net receivables, respectively. No allowance for doubtful accounts were recorded as of December 31, 2021 and 2020.

One customer (which is a U.S. government agency) accounted for 98% of the recognized research and development revenue for each of the years ended December 31, 2021 and 2020.

Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 - Unadjusted quoted prices in active markets that are assessable at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

Fair Value of Financial Instruments

Financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.

Foreign Currency

The reporting currency for the consolidated financial statements of the Company is the U.S. dollar. The functional currency of Spectral MD Holdings, Ltd. is the U.S. dollar. The functional currency of the Company's subsidiaries is the local currency of the subsidiaries. The assets and liabilities of this subsidiary is translated into U.S. dollars at exchange rates in effect at the end of each reporting period. Revenues and expenses for these subsidiaries are translated at average exchange rates in effect during the applicable period. Translation adjustments are included in accumulated other comprehensive income as a component of stockholders' equity.

Monetary assets and liabilities denominated in currencies other than the functional currency are translated at exchange rates in effect at the balance sheet date. Resulting unrealized gains and losses are included in other income, net in the consolidated statements of operations. For the year ended December 31, 2021, the Company recorded a $160,782 foreign exchange transaction loss, primarily related to the Company's bank account denominated in British Pounds, included in foreign exchange transaction loss on the consolidated statement of operations and comprehensive (loss) income. The Company did not have any foreign exchange transaction gains or losses for the year ended December 31, 2020.

Derivative Liabilities 

The Company does not generally use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. During the year ended December 31, 2021, the Company entered into one derivative instrument, to set a foreign currency exchange rate, that settled during the year. The accounting for changes in fair value of derivatives depends on the intended use of the derivative and resulting designation. The Company did not designate its derivative instrument as a hedge for accounting purposes and, as a result, marked its derivative instrument to fair value and recognized a change in fair value of $26,800 included in foreign exchange transaction loss in the consolidated statement of operations and comprehensive (loss) income.

The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and FASB ASC Topic 815, "Derivatives and Hedging" ("ASC 815"). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. The Company accounts for its warrants issued to SP Angel, who acts as nominated adviser and broker to the Company for the purposes of the AIM Rules as derivative liabilities in accordance with ASC 815. Accordingly, the Company recognizes the instruments as liabilities at fair value, determined using the Black-Scholes option-pricing model, and adjusts the instruments to fair value at the end of each reporting period. The liabilities are subject to re-measurement at each consolidated balance sheet date until exercised, and any change in fair value is recognized in the Company's 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 by BARDA for the development of the Company's DeepView® Wound Imaging Solution. BARDA may award contracts that are less than 12 months depending on the scope of work and deliverables.

Payments from customers are generally received within 30 days of when the invoice is sent.

Because the Company's contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations.

Research and Development 

The Company expenses research and development costs as operating expenses as incurred. These expenses include salaries for research and development personnel, consulting fees, product development, pre-clinical studies, clinical trial costs, and other fees and costs related to the development of the technology.

Stock-Based Compensation

The Company accounts for all stock-based payments to employees and non-employees, including grants of stock options, restricted stock awards ("RSAs") and stock options with non-market performance conditions ("PSOs") to be recognized in the consolidated financial statements, based on their respective grant date fair values. The Company estimates the fair value of stock option grants and PSOs using the Black-Scholes option pricing model. The RSAs are valued based on the fair value of the Company's common stock on the date of grant. The assumptions used in calculating the fair value of the Company's stock and stock-based awards represent management's best estimates and involve inherent uncertainties and the application of management's judgment. The Company expenses stock-based compensation related to stock options and RSAs over the requisite service period. As the PSOs have performance conditions, compensation expense is recognized for each award if and when the Company's management deems it probable that the performance conditions will be satisfied. Forfeitures are recorded as they occur. Compensation previously recorded for unvested equity awards that are forfeited is reversed upon forfeiture. The Company expenses stock-based compensation to employees over the requisite service period, on a straight-line basis, based on the estimated grant-date fair value of the awards.

Income Taxes

Income taxes are recorded in accordance with ASC 740, Income Taxes ("ASC 740"), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company has no uncertain tax positions as of December 31, 2021 and 2020 that qualify for either recognition or disclosure in the consolidated financial statements under this guidance.

The Company's policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the consolidated statements of operations. There were no amounts accrued for interest or penalties for the years ended December 31, 2021 and 2020.

Net (Loss) Income per Share of Common Stock

Basic net (loss) income per share of common stock is computed by dividing the net (loss) income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted (loss) income 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, are calculated using the treasury stock method. For warrants that are liability-classified, during periods when the impact is dilutive, the Company assumes share settlement of the instruments as of the beginning of the reporting period and adjusts the numerator to remove the change in fair value of the warrant liability and adjusts the denominator to include the dilutive shares calculated using the treasury stock method. The Company applies the if-converted method to compute the potentially dilutive effect of the Series A preferred stock.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adoption of this standard on January 1, 2021 did not have an effect on its consolidated financial statements as it did not change the way collaborative development services and the related costs of these services are reflected in the Company's consolidated financial statements.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The Company will adopt ASU 2016-02 on January 1, 2022. The Company does not expect ASU 2016-02 to have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which was subsequently amended by ASU 2018-19 and ASU 2019-10. This standard requires the measurement of expected credit losses for financial instruments carried at amortized cost held at the reporting date based on historical experience, current conditions and reasonable forecasts. The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security's amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. With the issuance of ASU 2019-10 in November 2019, the standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2022. The Company will continue to assess the possible impact of this standard, but currently does not expect the adoption of this standard will have a significant impact on its consolidated financial statements, given its limited history of bad debt expense relating to trade accounts receivable.

In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. The ASU is effective for the Company on January 1, 2024. Early adoption is permitted, but no earlier than January 1, 2021. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

3. Initial Public Offering

The Company completed its initial public offering on AIM on June 22, 2021. The Company issued 19,067,797 shares of common stock for net proceeds of approximately US$14.6 million after deducting offering expenses of approximately US$1.0 million incurred by the Company (the "Offering"). The Company also issued 762,712 warrants to SP Angel, who acts as nominated adviser and broker to the Company for the purposes of the AIM Rules at the Placing Price. The initial fair value of warrants was approximately US$0.5 million (see Note 4). The proceeds of the Offering will be primarily used for Diabetic Foot Ulcer ("DFU") clinical trials in the United States (U.S.) and Europe, and FDA clearance in the U.S. and CE Mark application and approval in Europe to use DeepView for DFU application.

4. Fair Value Measurements

The following table presents information about the Company's financial liabilities that are measured at fair value on a recurring basis as of December 31, 2021, by level within the fair value hierarchy:

There were no transfers between Level 1, 2 or 3 during the year ended December 31, 2021. There was no warrant liability in 2020.

The following table presents changes in Level 3 liabilities measured at fair value for the year ended December 31, 2021 (in US$).

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:

5. Research and Development Revenue

 For the years ended December 31, 2021 and 2020, the Company's revenues disaggregated by the major sources was as follows:

6. Accrued Expenses

Accrued expenses consist of the following as of December 31, 2021 and 2020:

7. Notes Payable and Notes Payable to Related Parties

Notes Payable

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 matures on April 13, 2022 and bears interest at 1% per annum, can be prepaid at any time prior to maturity with no prepayment penalties. The Company could defer interest and principal payments until September 13, 2021. Beginning on September 13, 2021, the Company was required to make equal monthly payments of principal and interest until the loan maturity on April 13, 2022. The PPP Loan is subject to customary terms for payment defaults and breaches of representations and warranties. The Company did not request the PPP Loan to be forgiven. During 2021, the Company repaid US$355,270 of principal and interest for the PPP Loan. As of December 31, 2021 and 2020, the remaining principal is US$415,500 and US$768,575, respectively, and accrued interest is US$10,586 and US$5,554, respectively, for the PPP Loan.

Insurance Note

On June 21, 2021, the Company entered into a financing agreement for a portion of its insurance premium for US$473,913 ("Insurance Note"). The Insurance Note bears interest at 5.7% per annum and is payable in nine equal monthly payments of principal and interest beginning on July 21, 2021. As of December 31, 2021, the remaining principal is US$160,405.

Software Note

On February 28, 2021, the Company entered into a note for the purchase of software of US$40,757 ("Software Note") which is due in six equal payments beginning September 1, 2021. The imputed interest for the Software Note is immaterial. As of December 31, 2021, the remaining principal is US$6,793.

Notes Payable to Related Parties

2019 Notes Payable to Related Parties

On August 7, 2019, the Company entered into two promissory notes (the "Notes") with Granicus IP, LLC, an entity owned by the Company's then Chairman of the Board, and John H and Marcia Kirk Stevens Family Trust, an entity owned by the Company's then board member, each for US$100,000. The Notes bore interest at 10% per annum and were due on demand. During 2020, the Company repaid the Notes for US$218,500, including principal and accrued interest.

2013 Notes Payable to Related Parties 

During 2013, the Company entered into two demand notes (the "2013 Notes") with Erich Spangenberg, a shareholder of the Company, and LSC Holding, LLC, an entity affiliated with a shareholder of the Company, for US$136,220 and US$150,000, respectively, that bore interest at 7% per annum and 8% per annum, respectively.

During 2020, the Company issued 1,754,790 shares of its common stock to related parties to extinguish outstanding principal and accrued interest of US$359,732 and paid cash of US$80,000 for the remaining balance of the 2013 Notes.

The following table summarizes interest expense included in the consolidated statements of operations and comprehensive (loss) income for the years ended December 31, 2021 and 2020:

8. Commitments

Legal Matters

The Company is not currently subject to any material legal proceedings; however, the Company may from time to time become a party to various legal proceedings arising in the ordinary course of the Company's business.

Leases

In August 2017, the Company assumed a lease for its principal office in Dallas, Texas, which expires on March 1, 2023. Base rent in connection with the lease is US$47,645 per month, as of December 31, 2021. During 2021, the Company also entered into a short-term lease agreement for office space and property in the United Kingdom.

The Company recorded rent expense of US$779,812 and US$663,746 for the years ended December 31, 2021 and 2020, respectively.

Future minimum payments under the Company's lease agreement, as of December 31, 2021 is as follows: 

9. Preferred Stock

Effective June 21, 2021, the Company increased its authorized shares for preferred stock to 10,000,000 shares.

The preferred stock had the following key terms:

Liquidation:  In the event of certain voluntary or involuntary acquisition or sale transactions or upon the liquidation, dissolution or winding up of the Company (each, a "Distribution Event"), the holders of Series A preferred stock were entitled to receive out of the proceeds or assets of the Company legally available for distribution to its shareholders (the "Proceeds"), prior and in preference to any distribution of the Proceeds of such Distribution Event to the holders of common shares by reason of their ownership thereof, an amount per share equal to the Liquidation Value per share, plus a cumulative preference of 8% per annum, compounded annually from the date of issuance of the Series A preferred stock (collectively, the "Distribution Preference Amount"). In the event that the Proceeds shall be insufficient to enable the distribution in full of the Distribution Preference Amount to the holders of the Series A preferred stock for all of the preferred shares held by them, all of the Proceeds shall be distributed among the holders of Series A preferred stock on a pro rata, as-converted basis. Upon completion of the distribution required to the holders of Series A preferred stock, all of the remaining Proceeds available for distribution to shareholders shall be distributed among the holders of common shares pro rata based on the number of common shares held by each such holder.

The aggregate liquidative value of the Series A preferred stock was $2,283,845 as of December 31, 2020.

Conversion:  At any time after issuance, the Series A preferred stock was convertible, in whole or in part, into shares of the Company's common stock at the option of the Holder. Each Series A preferred share was automatically converted into common stock of the Company upon the closing a firmly underwritten public offering netting proceeds of at least $25 million at an offering price calculated based on a Company valuation of at least $150 million, and approved by holders of the Series A preferred stock. The number of shares of common stock issuable upon a conversion was determined by (i) multiplying the number of shares of preferred stock to be converted by the Liquidation Value, (ii) adding to the result a cumulative preference of 8% per annum, compounded annually from the date of issuance of the Series A preferred stock, and then (iii) dividing the result by the conversion price in effect immediately prior to such conversion. The conversion price of the Series A preferred stock is $0.2642 per share, subject to adjustment for stock dividends, reclassifications, recapitalizations and combinations.

Immediately prior to the Offering, all outstanding shares of Series A preferred stock and unpaid cumulative dividend were converted into 53,889,765 shares of common stock.

Voting:  Holders of Series A preferred stock voted on as-converted basis and have full voting rights and powers equal to the voting rights and powers of the holders of common shares, voting as a single class. Holders representing a Series A preferred majority, exclusively and as a separate class, were entitled to elect two (2) directors of the Company.

As of December 31, 2021, there were no outstanding preferred stock.

10. Stockholders' Equity

The Company was authorized to issue 400,000,000 and 25,000,000 shares of common stock, par value US$0.001 per share, as of December 31, 2021 and 2020, respectively. The Company had 135,034,564 and 61,347,000 shares of common stock issued and outstanding as of December 31, 2021, and 2020, respectively.

During the year ended December 31, 2021, the Company issued 19,067,797 shares of common stock for net proceeds of approximately US$14.6 million after deducting offering expenses of approximately US$1.0 million incurred by the Company. During the year ended December 31, 2021, the Company issued 42,500 shares of common stock for aggregate proceeds of US$4,426 from stock option exercises. During the year ended December 31, 2020, the Company issued 1,980,000 shares of common stock for aggregate proceeds of US$46,200 from stock option exercises.

During the year ended December 31, 2020, the Company issued 1,754,790 shares of its common stock to related parties to extinguish outstanding principal and accrued interest of US$359,732 of loans to related parties.

11. 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. 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.

Restricted Stock

 The RSAs generally vest over four years. A summary of RSA activities for the year ended December 31, 2021 and 2020 are presented below.

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 U.S. 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 2021 and 2020:

A summary of stock options activity for the years ended December 31, 2021 and 2020 is presented below:

During 2021 and 2020, the Company granted 180,000 and 1,320,000 stock options, respectively, to certain employees with certain performance conditions, including achieving a qualified financing or clinical milestones. For the year ended December 31, 2021, all of the performance conditions were achieved and the Company recorded US$200,948 of stock-based compensation expense for these awards based on the grant date fair value of each award in the consolidated statement of operations and comprehensive (loss) income. For the year ended December 31, 2020, management did not deem that it was probable that the performance conditions would be satisfied so expense was not recorded for these awards.

In November 2020, the Company modified the stock option awards to change the awards from vesting over four years to vesting over three years. Subsequent to November 2020, stock option awards generally vest over three years.

For the years ended December 31, 2021 and 2020, the Company recorded stock-based compensation of US$1,364,064 and US$2,215,959, respectively, in general and administrative expenses in the consolidated statements of operations and comprehensive (loss) income.

As of December 31, 2021, there was US$1,706,590 of unrecognized stock-based compensation related to stock option grants that will be amortized over a weighted average period of 0.9 years.

As of December 31, 2021, there was US$103,334 of unrecognized stock-based compensation related to restricted stock option grants that will be amortized over a weighted average period of 0.9 years.

During the year ended December 31, 2018, the Company issued 983,022 shares of common stock and 1,673,321 stock options (the "Investor Options") for an aggregate proceeds of US$973,192. The Investor Options have a two-year term and are exercisable at a price of US$1.20 per share. The Investor Options expired on December 31, 2020.

Warrants

On June 22, 2021, in conjunction with the closing of the Company's IPO, the Company issued 762,712 warrants, with strike price of $0.89 and a ten-year life, to SP Angel, who acts as nominated adviser and broker to the Company for the purposes of the AIM Rules. As of December 31, 2021, there are 762,712 warrants outstanding with an exercise price of US$0.80.

12. Income Taxes

As of December 31, 2021 and 2020, the Company had available federal net operating loss carryforwards ("NOLs") of US$3,042,616 and US$0, respectively, which are available to offset future federal taxable income. Under the Tax Cuts and Jobs Act, all NOLs incurred after December 31, 2017 are carried forward indefinitely for federal tax purposes. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") signed in to law on March 27, 2020, provided that NOLs generated in a taxable year beginning in 2020, 2019, or 2018, may now be carried back five years and forward indefinitely. In addition, the limitation of NOL utilization up to 80% of taxable income limitation is temporarily (for 2020, 2019 and 2018) removed, allowing NOLs to fully offset taxable income. Federal tax returns for the years 2018, 2019 and 2020 remain subject to audit.

 The tax effects of temporary differences that give rise to significant portions of the deferred tax asset is presented below:

ASC 740, "Income Taxes" requires that a valuation allowance be established when it is "more likely than not" that all, or a portion of, deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all the information available, management believes that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore, established a full valuation allowance as of December 31, 2021, and 2020. The net change in valuation allowance for the years ended December 31, 2021 and 2020 was an increase of US$548,222 and a decrease of US$279,423, respectively.

The income tax provision consists of the following as of December 31:

A reconciliation of the U.S. Statutory income tax rate to the Company's effective tax rate is as follows:

13. Related Party Transactions

There are no related party transactions or balances, other than as disclosed in Note 7, above. Salaries payable to related parties will be included in the Annual Report.

14. Net (Loss) Income Per Common Share

The reconciliations between basic and diluted net (loss) income per common share for the years ended December 31, 2021 and 2020 are as follows:

The table below summarizes potentially dilutive securities that were not considered in the computation of diluted net (loss) income per common share because the effect would be anti-dilutive. 

15. Subsequent Events

In February 2022, the Company granted approximately 2,175,000 stock options to various employees of the Company, including Wensheng Fan, CEO of the Company. All options are granted under the 2018 Long Term Incentive Plan.

In February 2022, the Company paid aggregate bonuses of US$265,000 to Mr. Fan, CEO of the Company, including a bonus of US$225,000 that was included in accrued expenses on the consolidated balance sheet as of December 31, 2021, and a discretionary bonus of US$40,000.