Heart Test Laboratories, Inc. (d/b/a HeartSciences) — Form 10-Q summary
Reporting period: Quarter and six months ended October 31, 2023. This is the company’s fiscal second quarter of fiscal 2024; interim financial statements are unaudited.
Business context
HeartSciences is a development-stage medical technology company working on the MyoVista, a 12-lead ECG device incorporating an AI algorithm intended to identify cardiac dysfunction. It also plans to offer additional AI-ECG algorithms, including through a cloud platform. U.S. sales require FDA clearance; revenue to date has been minimal and primarily related to international distributor activity.
Financial results and liquidity
| Metric | Three months ended Oct. 31, 2023 | Six months ended Oct. 31, 2023 | Comparable 2022 period |
|---|---|---|---|
| Revenue | $3,900 | $3,900 | $0 quarter; $3,200 six months |
| Gross profit | $2,380 | $2,380 | $0 quarter; $1,164 six months |
| Operating expenses | $1.572 million | $2.903 million | $1.775 million quarter; $3.206 million six months |
| Net loss | $1.748 million | $3.115 million | $1.807 million quarter; $3.380 million six months |
| Net loss per share | $0.16 | $0.29 | $0.22 quarter; $0.49 six months |
- Quarterly gross margin was approximately 61% on very low revenue. Revenue remains immaterial to the business.
- For the six-month period, R&D rose 3% to $1.323 million; SG&A fell 18% to $1.580 million. Quarterly R&D and SG&A declined 11% and 12%, respectively. Management attributed changes to clinical-study enrollment timing, personnel costs, lower legal and insurance expenses, and supplier credits.
- Interest expense increased to $178,000 for the quarter and $215,000 for six months, primarily reflecting the existing secured loan, the MSW Note and related financing costs.
- Operating cash use was $2.392 million for six months, versus $2.892 million in the prior-year period. Cash fell to $100,144 from $1.660 million at April 30, 2023. Investing cash use was $6,862; financing provided $838,991.
- At October 31, current assets were $1.812 million and current liabilities were $3.531 million, a working-capital deficit of approximately $1.719 million. Total liabilities were $4.018 million, including $1.417 million of current notes payable. Stockholders’ deficit was $1.650 million.
- Accumulated deficit was $63.9 million. Management said existing resources were insufficient to fund operations through commercialization and disclosed substantial doubt about the company’s ability to continue as a going concern.
Material changes, financing and subsequent events
- After October 31, the company sold 40,175,218 shares through its ATM facility for approximately $9.2 million net proceeds. It also raised approximately $91,000 under the Equity Line. The filing reports 63,611,630 common shares outstanding as of December 14, 2023, indicating substantial dilution after quarter-end.
- In November, the company converted the $500,000 MSW Note into 3,125,000 common shares and converted $585,006 of principal and interest on the JQA Note into 3,656,288 shares. Associated warrant exercise prices were amended downward.
- Mount Sinai’s licenses covering 13 AI cardiovascular algorithms, two data-science methods and three filed patents became effective after the financing condition was met. The company issued Mount Sinai common shares and warrants; a further financing threshold was satisfied on December 1, 2023. The licenses may be terminated if the specified financing condition is not met by June 30, 2024; the filing states it was satisfied on December 1.
- The company expanded the ATM authorization to up to $15 million. It also disclosed a separate proposed offering of up to $8 million that had not yet been declared effective by the SEC.
- Nasdaq notified the company of a minimum-bid-price deficiency, with a January 29, 2024 deadline to regain compliance. The company reported that it satisfied the stockholders’ equity requirement in November 2023 and would remain subject to a Nasdaq Panel monitor through November 22, 2024.
Outlook, risks and other matters
- Management expects no material commercial revenue in fiscal 2024. It targeted a revised FDA submission for the first half of calendar 2024 and anticipated an FDA determination during 2024 if submitted through the 510(k) pathway. FDA clearance is not assured, and additional capital would be needed for launch, working capital and R&D.
- The company is partway through a pivotal clinical validation study and device testing. It disclosed potential inventory write-downs if clearance, market acceptance or hardware/software changes affect inventory utility.
- Key risks include ongoing cash needs, regulatory and clinical uncertainty, commercialization execution, competition, and potential further equity dilution. Substantially all assets secure the $1 million loan; the founder-related royalty obligation also has a security interest in covered MyoVista technology.
- Management determined disclosure controls were ineffective at October 31, 2023 because of material weaknesses in approval and review documentation, accounting and SEC-reporting resources, and segregation of duties. Remediation efforts were underway; management had not concluded the weaknesses were remediated.
- The company reported no material pending legal claims and no material changes to the risk factors in its latest annual report.
Investor facts to verify
- Current cash, cash runway and financing needs after the post-quarter ATM sales, note conversions and any subsequent offerings.
- Updated share count and fully diluted capitalization, including ATM issuances, Mount Sinai securities, converted notes, preferred stock and outstanding warrants.
- Progress and timing of the MyoVista clinical validation and FDA submission/clearance, including the applicable regulatory pathway.
- Whether the Mount Sinai license conditions remain satisfied and what investment is required to develop and commercialize the licensed algorithms.
- Nasdaq bid-price compliance and progress in remediating the disclosed internal-control material weaknesses.