Heart Test Laboratories, Inc. (d/b/a HeartSciences) — Form 10-Q
Reporting period: Three months ended July 31, 2022 (fiscal 2023 first quarter); comparative period ended July 31, 2021. The filing is for the Texas-incorporated issuer Heart Test Laboratories, Inc.
Business context
The company is developing the MyoVista, a 12-lead ECG intended to use proprietary technology to identify cardiac dysfunction. The device is not cleared for U.S. marketing. Revenue to date has been minimal and largely from international activity during development and distributor relationship-building.
Key financial metrics
| Metric | Quarter ended July 31, 2022 | Prior-year quarter |
|---|---|---|
| Revenue | $3,200 | $7,484 |
| Gross profit (reported as gross margin) | $1,164 | $1,728 |
| Operating expenses | $1.431 million | $676,174 |
| Operating loss | $1.430 million | $674,446 |
| Interest expense | $143,607 | $77,605 |
| Net loss | $1.573 million | $501,851 |
| Net cash used in operating activities | $1.812 million | $717,491 |
Gross margin was approximately 36% of revenue, versus approximately 23% in the prior-year quarter; the very small revenue base limits the usefulness of this comparison. The company reported no material income tax benefit.
- Liquidity at July 31, 2022: Cash and cash equivalents of $4.272 million; current assets of $5.436 million and current liabilities of $1.542 million.
- Debt: Notes payable totaled $1.130 million, comprising a $130,000 unsecured note and $1.0 million of secured notes. The $1.5 million convertible notes and Bridge Notes converted into equity in connection with the IPO. The $1.0 million secured loan is due September 30, 2023, bears 12% annual interest, and is secured by substantially all assets and intellectual property, subject to a technology royalty security interest.
- Equity and financing: June 2022 IPO proceeds were approximately $5.2 million net of offering costs. Stockholders’ equity was $2.887 million at July 31, 2022, compared with a $6.056 million deficit at April 30, 2022.
Material changes versus prior-year quarter
- Revenue fell approximately 57%, reflecting reduced international distributor engagement ahead of the planned FDA submission and updates to the device’s European conformity certification.
- Research and development expense increased 8% to $434,198, principally due to software consulting and hardware development, partly offset by University of Glasgow license credit memos.
- Selling, general and administrative expense rose 262% to $997,063, primarily from public-company preparation and ongoing costs and increased stock compensation.
- Net loss increased to $1.573 million from $502,000. The prior-year quarter included a $250,200 gain from forgiveness of a Paycheck Protection Program loan; the current quarter did not.
- Operating cash use increased to $1.812 million from $717,491. IPO financing contributed $5.173 million of net cash from financing activities in the quarter.
Outlook, risks, and unusual items
- Management expected to submit a revised FDA De Novo application later in the fiscal year ending April 30, 2023, following a pivotal clinical validation study and additional device testing. FDA clearance is uncertain and is central to U.S. commercialization.
- The company disclosed substantial doubt about its ability to continue as a going concern. It reported recurring losses, negative operating cash flows, and working-capital constraints; forecasts indicated available resources would not support operations significantly beyond the second calendar quarter of 2023 and repayment of the $1.0 million notes at maturity. Additional financing or strategic funding may be needed, with no assurance it will be available on acceptable terms.
- Further inventory write-downs may be required if FDA clearance or market acceptance is not achieved, or if additional hardware or software changes make inventory obsolete.
- Disclosure controls and procedures were deemed ineffective at July 31, 2022 due to material weaknesses involving accounting resources, month-end reporting, independent review, and equity accounting and inventory valuation. Remediation was underway.
- After quarter-end, the company amended Bridge Warrants, including lowering the exercise price to $4.25 and changing the related share and price-protection terms. Series C preferred shares also converted after quarter-end.
- The company reported no material pending legal claims known to it and no material changes to risk factors disclosed in its 2022 Form 10-K. COVID-19 and general financing, regulatory, commercialization, and market risks remain relevant.
Important facts for investors to verify
- Current cash runway, subsequent spending, and the availability and terms of any additional financing.
- Progress, timing, clinical results, and regulatory requirements for the revised MyoVista FDA De Novo submission and clearance.
- Whether the company remediates its disclosed financial-reporting material weaknesses effectively and on schedule.
- Current debt obligations, the September 2023 maturity and interest terms of the secured loan, and the implications of its collateral and royalty arrangements.
- Potential dilution from outstanding warrants, convertible Series C preferred stock, and other equity-linked securities.