Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited financial statements and the notes presented herein included in this Quarterly Report on Form 10-Q and the audited financial statements and the related notes set forth in our 2022 Annual Report on Form 10-K. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in “Cautionary Note Regarding Forward-Looking Statements” and under “Risk Factors” as identified under Part 1, Item 1A of our 2022 Annual Report on Form 10-K .
Overview
We are a medical technology company focused on applying innovative AI-based technology to an ECG (also known as an EKG) to expand and improve an ECG’s clinical usefulness. Our objective is to make an ECG a far more valuable cardiac screening tool, particularly in frontline or point-of-care clinical settings. HeartSciences’ first product candidate for FDA clearance, the MyoVista wavECG, or the MyoVista, is a resting 12-lead ECG that is also designed to provide diagnostic information related to cardiac dysfunction which has traditionally only been available through the use of cardiac imaging. The MyoVista also provides conventional ECG information in the same test. Our business model, which involves the use of the MyoVista device and consumables for each test, is expected to be “razor-razorblade” as the electrodes used with the MyoVista are proprietary to HeartSciences, and new electrodes are required for every test performed. As of September 12, 2022, we had 12 full-time employees.
Our device is not cleared for marketing by the FDA and our future success is dependent upon receiving FDA De Novo clearance for the MyoVista. Additional funding may be required in order to achieve FDA clearance for the MyoVista and, if clearance is achieved, would then be required to support the sales launch of the MyoVista into the U.S., provide working capital and support further research and development, or R&D.
We believe that there is currently no low-cost, front-line, medical device that is effective at screening for heart disease. As a result, we believe that frontline physicians face a significant challenge in determining if a patient has heart disease. Although many think of the ECG as the frontline heart disease test, in 2012, the United States Preventive Services Task Force, or USPSTF, conducted an evaluation of conventional ECG testing and stated: “There is no good evidence that an ECG helps physicians predict heart risks in people with no symptoms any better than traditional considerations such as current or former smoking, blood pressure and cholesterol levels.”
ECG devices record the electrical signals of a patient’s heart. The ECG is a ubiquitous, relatively low-cost, simple and quick test; it is portable and can be performed in a wide range of clinical settings by a non-specialist clinician or clinical aide. There are three basic categories of heart disease: electrical (such as an arrhythmia), structural (such as valvular disease) and ischemic (such as coronary artery disease, or CAD). Conventional resting ECGs have limited sensitivity in detecting structural and ischemic disease and are typically used for diagnosing cardiac rhythm abnormalities, such as atrial fibrillation, also known as Afib, or acute coronary syndrome, such as a myocardial infarction, which is also known as a heart attack. However, traditional ECGs have a limited role in identifying cardiac dysfunction associated with structural and ischemic disease.
HeartSciences has designed the MyoVista to help address these limitations and extend the clinical capability of an ECG in detecting cardiac dysfunction. We apply AI-machine learning to the signal processed electrical signal of the heart. Our first algorithm, which is not yet FDA cleared, is designed to detect cardiac dysfunction caused by heart disease and/or age-related cardiac dysfunction.
The editorial comment associated with the study titled “Prediction of Abnormal Myocardial Relaxation from Signal Processed Surface ECG” presented below discusses recent applications of machine learning to data derived from surface 12-lead ECGs in relation to cardiac dysfunction:
“These are some of the most significant advances in electrocardiography since its inception, which has historically had a limited, if any, role in the evaluation of cardiac dysfunction. In the past, our cardiovascular community was resigned to the fact that surface ECGs are poor indicators for cardiac dysfunction.”
Khurram Nasir, MD, MPH, MSC, Department of Cardiology, Houston Methodist DeBakey Heart & Vascular Center, Houston, Texas, et. al., Journal of American College of Cardiology Editorial Comment Volume 76 Number 8 2020.
Almost all forms of heart disease, including CAD and structural disease, affect heart muscle, or cardiac, function prior to symptoms. Impaired cardiac function is first observed as impaired cardiac relaxation which is an early indicator of diastolic
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dysfunction and usually continues to increase in severity as heart disease progresses. The diastolic phase of the cardiac cycle occurs when the heart muscle relaxes (following contraction). Diastolic dysfunction may also be related to age-related cardiac dysfunction.
If we receive FDA clearance for the MyoVista, our main target markets would be frontline healthcare environments in the U.S., such as primary care, to assist physician decision making in the cardiology referral process. Currently, cardiology referral decisions are often based on a patient’s risk factors and/or a conventional ECG test. Accordingly, many patients with heart disease are left undetected while no treatment or intervention is required for most patients referred for cardiac imaging. We believe that adding the capability to detect cardiac dysfunction to a standard 12-lead resting ECG could help improve cardiac referral pathways and be valuable for patients, physicians, health systems and third-party payors.
New Class II devices, such as the MyoVista, require FDA De Novo premarket review. The MyoVista along with its proprietary software and hardware is classified as a Class II medical device by the FDA. Premarket review and clearance by the FDA for these devices is generally accomplished through the 510(k) premarket notification process or De Novo classification request, or petition process. We previously submitted an FDA De Novo classification request in December 2019. Based on feedback and communications with the FDA during 2020, we have been making modifications to our device and are partially through a new, pivotal clinical validation study and the device testing and development necessary for a revised FDA De Novo submission, which we expect to take place later in the fiscal year ending April 30, 2023.
We are using the funding from the IPO to continue our work towards FDA resubmission and clearance. Although our current aim is to achieve FDA clearance, which would allow us to market the MyoVista in the U.S., with the net proceeds of the IPO, there is no assurance that this will be the case. Additional funding will be required to support the sales launch of the MyoVista into the U.S., provide working capital and support further R&D. Our independent registered public accounting firm has issued an opinion on our audited financial statements included on our 2022 Annual Report on Form 10-K that contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern because we have experienced recurring losses, negative cash flows from operations, and have a working capital deficiency. These events and conditions indicate that a material uncertainty exists that may cast significant doubt on our ability to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.
Results of Operations
Revenues
Revenues, which have been minimal to date, consist mainly of sales of devices, electrodes and other supplies in the establishment of distributor relationships outside the U.S. during the approval, development and improvement of the MyoVista.
Cost of Sales
Cost of sales consists primarily of costs related to materials, components and subassemblies. Cost of sales also includes certain direct costs such as those incurred for shipping and freight.
Operating Expenses
Our operating expenses have consisted solely of research and development expenses and selling, general and administrative expenses.
Research and Development Expenses
Our research and development activities primarily consist of clinical, regulatory, engineering and research work associated with our MyoVista device. Research and development expenses include payroll and personnel-related costs for our research and development, clinical and regulatory personnel, including expenses related to stock-based compensation for such employees, consulting services, clinical trial expenses, regulatory expenses, prototyping and testing. Research and development expenses also include costs attributable to clinical trial expenses including clinical trial design, site development and study costs, data, related travel expenses, the cost of products used for clinical activities, internal and external costs associated with regulatory compliance and patent costs. We have expensed research and development costs as they have been incurred.
Selling, General and Administrative Expenses
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Our selling, general and administrative expenses consist of payroll and personnel-related costs for field support personnel, business development, consulting, stock-based compensation, and for administrative personnel that support our general operations such as executive management and financial accounting. Selling, general and administrative expenses also include costs attributable to professional fees for legal and accounting services, premises costs, IT, insurance, consulting, recruiting fees, travel expenses and depreciation.
Interest Expense
Interest expense relates to our loan facilities and convertible notes.
Other Income (Expense), Net
Other income (expense), net primarily consists of forgiveness of loans issued under the CARES Act.
The following table summarizes our results of operations for the periods presented on our statement of operations data.
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Three Months Ended July 31, |
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2022 |
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2021 |
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$ Change |
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% Change |
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(In thousands, except percentages, unaudited) |
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Revenue |
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$ |
3 |
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$ |
7 |
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$ |
(4 |
) |
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(57 |
)% |
Cost of sales |
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2 |
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6 |
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(4 |
) |
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(65 |
)% |
Gross margin |
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1 |
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2 |
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(1 |
) |
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(33 |
)% |
Operating expenses: |
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Research and development |
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434 |
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401 |
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33 |
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8 |
% |
Selling, general and administrative |
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997 |
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275 |
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722 |
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262 |
% |
Total operating expenses |
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1,431 |
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676 |
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755 |
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112 |
% |
Loss from operations |
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(1,430 |
) |
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(674 |
) |
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(756 |
) |
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112 |
% |
Interest expense |
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(144 |
) |
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(78 |
) |
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(66 |
) |
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85 |
% |
Gain on extinguishment of debt |
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— |
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250 |
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(250 |
) |
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-100 |
% |
Other income (expense), net |
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(144 |
) |
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173 |
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|
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(316 |
) |
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(183 |
)% |
Net loss |
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$ |
(1,574 |
) |
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$ |
(502 |
) |
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$ |
(1,072 |
) |
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214 |
% |
Revenues declined from $7,000 to $3,000 during the three months ended July 31, 2022 when compared to the same periods ended July 31, 2021, a decrease of approximately 57%. Our revenues to date have been mainly generated in the establishment of distributor relationships outside the United States as part of obtaining feedback during product development and improvement. The decrease in revenue is due to our proactive reduction in new international distributor engagement in the run up to FDA submission and until we update our certificate of conformity called a CE Mark under the new European Union Medical Device Regulation regime to reflect hardware and software improvements being incorporated into the device for FDA submission.
Cost of sales for the three months ended July 31, 2022 was $2,000, compared to $6,000 in the three months ended July 31, 2021. The decrease of $4,000, or 65%, is consistent with the decrease noted in revenue above.
Research and development expenses for the three months ended July 31, 2022 were $434,000, compared to $401,000 in the three months ended July 31, 2021. The increase of $33,000, or 8%, was primarily due to the increase of $140,000 in software consulting and hardware development, when compared to the same periods ended July 31, 2021, which is consistent with work being performed for device development in preparation for a new De Novo submission, offset by approximately $81,000 in credit memos applied to previously accrued amounts which resulted from negotiations with the University of Glasgow for the use of the Glasgow algorithm license.
Selling, general, and administrative expenses for the three months ended July 31, 2022 were $997,000, compared to $275,000 in the three months ended July 31, 2021. The increase of $722,000, or 262%, was primarily due to approximately $576,000 for preparatory expenses for, or on-going expenses associated with, being a public company including investor and public relations, SEC reporting, accounting and legal, insurance, and stock registrar expenses and an approximately $146,000 increase in stock compensation due to the vesting of options when compared to the same periods ended July 31, 2021.
Interest expense for the three months ended July 31, 2022 was $144,000, compared to $78,000 in the three months ended July 31, 2021. The increase of $66,000, or 85%, was primarily due to interest and debt service amortization related to the Bridge Notes for
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approximately half of the quarter ended July 31, 2022. All of the Bridge Notes and accrued interest were converted to equity upon consummation of the IPO in June 2022.
Liquidity and Capital Resources
Our cash requirements are, and will continue to be, dependent upon a variety of factors. We expect to continue devoting significant capital resources to R&D, clinical studies and go-to-market strategies. Our principal sources of capital are cash on hand and the proceeds of future offerings of equity and debt securities. We cannot assure you that we will be able to consummate the sale of any such securities on terms acceptable to us, if at all.
As of July 31, 2022, we had approximately $4.3 million of cash, an increase of $3.3 million from $918,000 as of April 30, 2022.
On June 17, 2022, we completed our IPO which consisted of the sale of 1,500,000 Units, with each Unit consisting of one share of Common Stock, and one IPO Warrant to purchase one share of Common Stock at a combined public offering price of $4.25 per Unit. We received approximately $5.2 million in net proceeds from the IPO after deducting the underwriting discount and commission and other IPO expenses payable by the Company of approximately $1.2 million. As of September 9, 2022, we have used approximately $1.5 million of the net proceeds from the IPO for costs directly related to achieving FDA clearance for the MyoVista device, to pay accrued and unpaid interest under the $1M Loan and Security Agreement, and for working capital and general corporate purposes including personnel costs, capital expenditures and the costs of operating as a public company. We intend to use the remaining net proceeds from the IPO for costs directly related to achieving FDA clearance and for working capital and general corporate purposes.
The table below presents our cash flows for the periods indicated:
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Three Months Ended July 31, |
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U.S. dollars, in thousands |
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2022 |
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2021 |
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(Unaudited) |
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Net cash used in operating activities |
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$ |
(1,812 |
) |
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$ |
(717 |
) |
Net cash (used in) provided by investing activities |
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$ |
(7 |
) |
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$ |
— |
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Net cash provided by financing activities |
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$ |
5,173 |
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$ |
— |
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Net change in cash and cash equivalents during the period |
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$ |
3,354 |
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$ |
(717 |
) |
Operating Activities
Net cash used by our operating activities of $1.9 million during the three months ended July 31, 2022 is primarily due to our net loss of $1.6 million plus $214,000 in non-cash expenses less $492,000 of net changes in operating assets and liabilities.
Net cash used by our operating activities of $717,000 during the three months ended July 31, 2021 is primarily due to our net loss of $502,000 less $240,000 in non-cash expenses plus $24,000 of net changes in operating assets and liabilities.
Financing Activities
Net cash provided by financing activities of $5.2 million during the three months ended July 31, 2022 is primarily from the issuance of common stock in the IPO.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our 2022 Annual Report on Form 10-K.