Heart Test Laboratories, Inc. (d/b/a HeartSciences) — Form 10-Q
Reporting period: Quarter and six months ended October 31, 2022 (fiscal second quarter of fiscal 2023). Financial statements are unaudited.
Business context and reporting period
The company is an early-stage medical technology developer focused on the MyoVista, a 12-lead ECG designed to use AI-based analysis to identify cardiac dysfunction. The device is not cleared for U.S. marketing; the company is preparing a revised FDA De Novo submission and conducting clinical validation and device testing. Revenue to date has been minimal and primarily from limited international activity.
Financial highlights
| Metric | Three months ended October 31, 2022 | Six months ended October 31, 2022 | Prior comparable period |
|---|---|---|---|
| Revenue | $0 | $3,200 | $0 for three months; $7,484 for six months |
| Gross profit | $0 | $1,164 | $0 for three months; $1,728 for six months |
| Research and development | $848,976 | $1,283,174 | $545,773 and $946,887 |
| Selling, general and administrative | $925,929 | $1,922,992 | $411,083 and $686,143 |
| Net loss | $1,806,511 | $3,379,814 | $1,034,770 and $1,536,621 |
| Net loss per share, basic and diluted | $0.22 | $0.49 | $0.31 and $0.46 |
- Six-month operating cash use was $2.89 million, versus $1.49 million in the prior-year period. Investing cash use was $7,247.
- Financing provided $5.06 million, mainly from the IPO. Cash and cash equivalents rose to $3.08 million at October 31, 2022, from $918,260 at April 30, 2022.
- At October 31, current assets were $4.13 million and current liabilities were $3.14 million; working capital was approximately $988,000. Total liabilities were $3.69 million.
- Notes payable totaled $1.13 million, all current: a $1.0 million secured loan accruing interest at 12% annually and a $130,000 non-interest-bearing convertible note. The secured loan matures September 30, 2023. Operating lease liabilities totaled approximately $580,000.
- The company reported an accumulated deficit of $57.8 million. It raised approximately $5.2 million net in its June 2022 IPO. The $1.5 million notes and bridge notes and accrued interest converted into equity upon the IPO.
Material changes versus prior comparable periods
- Six-month revenue declined 57% to $3,200; management attributed the decline to reducing new international distributor engagement while preparing for FDA submission and updating its European conformity certification.
- Six-month R&D expense increased 36%, primarily due to software and hardware development and clinical validation work.
- Six-month SG&A expense increased 180%, mainly reflecting public-company costs and higher payroll and stock-based compensation.
- Six-month net loss more than doubled. The prior-year period included a $250,200 gain from forgiveness of a Paycheck Protection Program loan; there was no comparable gain in 2022.
- Common shares outstanding increased from 3.32 million at April 30 to 8.21 million at October 31, primarily from the IPO and conversions of notes and preferred stock.
Outlook, risks and unusual items
- Management expected to submit a revised FDA De Novo application later in fiscal 2023, ending April 30, 2023. The filing provides no revenue, earnings or other quantitative operating guidance, and FDA clearance is not assured.
- Management’s forecasts indicated existing resources would be insufficient to support operations significantly beyond the second calendar quarter of 2023 and repay the $1.0 million secured notes at maturity. Management said it plans to seek additional equity, debt or strategic-partner funding, with no assurance it will be available on acceptable terms. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Inventory was $677,669, mainly components for MyoVista. The company warned that further hardware changes, lack of FDA clearance or weak market acceptance could result in additional inventory write-downs.
- The company extended its office, industrial and laboratory lease through May 2028, recognizing an additional $549,227 right-of-use asset and lease liability. It also reported patents granted in September and October 2022 and a November 29, 2022 multi-year AI-algorithm collaboration with Rutgers.
- Disclosure controls were deemed ineffective due to material weaknesses in accounting resources, month-end reporting, independent review, and accounting analysis of equity and inventory. Remediation efforts are underway but are not yet considered complete.
- The company reported no material pending legal claims known as of October 31, 2022. It noted continuing risks relating to FDA review, financing, competition, COVID-19 and other early-stage company uncertainties.
Important facts for investors to verify
- Progress, timing, cost and clinical evidence for the revised FDA submission and the likelihood of clearance.
- Cash burn, funding plans, runway beyond the second quarter of calendar 2023, and repayment of the secured loan due September 2023.
- Whether inventory remains usable and whether additional obsolescence reserves or write-downs are needed.
- Remediation and testing of the disclosed material weaknesses in internal controls.
- Potential dilution from outstanding warrants, preferred-stock conversion rights and future financing.