The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this 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" elsewhere in this 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 ofJuly 28, 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 theU.S. , provide working capital and support further 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, theUnited 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." 84
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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 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 theU.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.
For more information on the FDA’s regulatory process, see “Business-FDA and Other Government Regulation.”
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 inDecember 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 endingApril 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 theU.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 theU.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 in this 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.
RECENT DEVELOPMENTS
Initial public offering
OnJune 17, 2022 , we completed the IPO. The IPO 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. The Common Stock and the IPO Warrants were immediately separable following the IPO. The IPO Warrants are exercisable at any time up to expiration, which is five years from the date of issuance. We received approximately$5.2 million in net proceeds from the IPO after deducting the underwriting discount and commission and other estimated offering expenses payable by the Company of approximately$1.2 million .
We received approx.
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July 27, 2022 , we have used approximately$800,000 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$4.4 million of the net proceeds from the IPO for costs directly related to achieving FDA clearance and for working capital and general corporate purposes. Changing circumstances may cause us to consume capital significantly faster than we currently anticipate. The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our global marketing and sales efforts, our development efforts and the overall economic environment. Therefore, our management will retain broad discretion over the use of the remaining proceeds from the IPO. We ultimately may use the remaining proceeds for different purposes than what we currently intend. Pending any ultimate use of any portion of the proceeds from the IPO, if the anticipated proceeds will not be sufficient to fund all the proposed purposes, our management will determine the order of priority for using the remaining proceeds, as well as the amount and sources of other funds needed.
Until we use the net proceeds from the IPO, we may invest the net proceeds in a variety of capital-preserving investments, including short-term, high-quality, interest-bearing and
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 theU.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.
Functionnary costs
Our operating expenses consist solely of research and development expenses and selling, general and administrative expenses.
Research and development costs
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
Our selling, general and administrative expenses include salaries and personnel costs for field support staff, business development, consulting, stock-based compensation and administrative staff who support our general operations such as general 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, recruitment costs, travel costs and amortization.
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Table of Contents Interest Expense
Interest expense relates to our loan facilities and convertible notes. For more information, see “-Description of indebtedness”.
Other income (expenses), net
Other income (expense), net, consists mainly of the cancellation of loans issued under the CARES Act.
The following table summarizes our results of operations for the periods presented and as a percentage of our total revenue for those periods based on our statement of operations data. The year over year comparison of results of operations is not necessarily indicative of results of operations for future periods.
Summary of income statements for fiscal 2022 and fiscal 2021:
For the year ended April 30,
2022 2021 $ Change % Change
(In thousands, except percentages)
Revenue $ 14 $ 26 $ (12 ) (46 )%
Cost of sales 8 11 (3 ) (27 )%
Gross margin 6 15 (9 ) (60 )%
Operating expenses:
Research and development 3,001 1,708 1,293 76 %
Selling, general and administrative 1,714 875 839 96 %
(Gain) loss on disposal of property and
equipment - (2 ) 2 (100 )%
Total operating expenses 4,715 2,581 2,134 83 %
Loss from operations (4,709 ) (2,566 ) (2,143 ) 84 %
Interest expense (372 ) (132 ) (240 ) 182 %
Gain on extinguishment of debt 250 250 - -
Other income 3 - 3 NM
Other expense - (4 ) 4 (100 )%
Other income (expense), net (119 ) 114 (233 ) (204 )%
Net loss $ (4,828 ) $ (2,452 ) $ (2,376 ) 97 %
*NM - Not meaningful
Revenues declined from $26,000 to $14,000 in Fiscal 2022 when compared to Fiscal
2021, a decrease of approximately 46%. Our revenues to date have been in
relation to establishing distributor relationships outside the United States and
obtaining feedback during product development and improvement. The decrease in
revenue is due to the timing of engaging new distributors and fact that our CE
Mark under the MDD lapsed in Fiscal 2022 as well as the continuing effects of
the COVID-19 pandemic which impacted engagement with medical institutions and
distributors.
Cost of sales decreased
During Fiscal 2022, research and development expenses increased$1.3 million when compared to Fiscal 2021, an increase of 76%, primarily resulting from increase of$783,000 related to clinical trial studies,$328,000 in software consulting and hardware development, and$120,000 in payroll expenditures which is consistent with work being performed for device development and ongoing clinical validation studies in preparation for a new De Novo submission. 87
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During Fiscal 2022, selling, general, and administrative expenses increased$839,000 , or 96%, when compared to Fiscal 2021. The increase is primarily due to additional accounting, audit, and professional and recruiting fees incurred as part of preparation for the IPO.
Interest expense increased
Cash and capital resources
We had an accumulated deficit as ofApril 30, 2022 , of approximately$54.4 million as well as incurring a net loss of approximately$4.8 million and negative operating cash flows in Fiscal 2022. We have incurred net losses and negative cash flows from operations since inception and we expect to continue to incur significant operating losses for the foreseeable future. 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.
From
In fiscal 2022, we raised
From our inception to
Our independent registered public accounting firm has issued an opinion on our audited financial statements included in this 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. The events and conditions described in this paragraph, along with other matters, indicate that a material uncertainty exists that may cast significant doubt on our ability to continue as a going concern. Additionally, financial statements for future fiscal years may continue to include this explanatory paragraph with respect to our ability to continue as a going concern. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. This going concern opinion could materially limit our ability to raise additional funds through the issuance of equity or debt securities or otherwise. Until we can generate significant recurring revenues, we expect to satisfy our future cash needs through debt or equity financing. We cannot be certain that additional funding will be available to us on acceptable terms, if at all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate research or development plans for, or efforts with respect to launch of sales of, our device. 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. Our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital, enter into critical contractual relations with third parties and otherwise execute our business objectives.
The table below presents our cash flows for the periods indicated:
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Year Ended
April 30,
U.S. dollars, in thousands 2022 2021
Net cash used in operating activities $ (3,644 ) $ (2,452 )
Net cash (used in) provided by investing activities $ (2 ) $ (1 )
Net cash provided by financing activities $ 3,841 $
2,680
Net change in cash and cash equivalents during the period
227 Operating Activities Net cash used by our operating activities of$3.6 million during Fiscal 2022 was primarily due to our net loss of$4.8 million plus net non-cash items of$59,000 , offset by$1.0 million of net changes in operating assets and liabilities. Net cash used by our operating activities of$2.5 million during Fiscal 2021 was primarily due to our net loss during the period.
Fundraising activities
During Fiscal 2022, net cash provided by financing activities was$3.8 million and was primarily from the issuance of the Bridge Securities. During Fiscal 2021, net cash provided by financing activities was$2.7 million and was primarily from the issuance of convertible promissory notes, Series C Preferred Stock, and shareholder notes. For additional information, please refer to "-Description of Indebtedness."
Future capital requirements
Although our current aim is that the proceeds from our IPO would be sufficient to achieve FDA clearance, which would allow us to market the MyoVista in theU.S. , there is no assurance this will be case. Additional funding will be required to support the sales launch of the MyoVista into theU.S. , provide working capital, and support further R&D. Our primary current sources of capital are the net proceeds from the IPO and the net proceeds of the 2021 Bridge Financing. If an opportunity presents itself, we may in the future attempt to obtain funding through the sale of debt or equity securities, although we may not be able to complete financing on terms acceptable to us or at all. The accompanying financial statements have been prepared assuming that the Company will continue as a "going concern." For more information, please refer to "Risk Factors-There is substantial doubt about our ability to continue as a going concern, which could prevent us from obtaining new financing either on reasonable terms or at all."
Description of the debt
From
As of April 30,
2022 2021
Bridge Notes $ 3,442 $ -
$130K Note 130 130
$1.5M Notes 1,500 1,500
$1M Loan and Security Agreement 1,000 1,000
PPP Loan - 250
Total: $ 6,072 $ 2,880
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Table of Contents 2021 Bridge Financing InDecember 2021 , the Board approved the sale of Senior Subordinated Convertible Loan Notes (the "Bridge Notes") and associated warrants (the "Bridge Warrants"), (together the "2021 Bridge Securities"). The Company sold$4,695,555 principal value of the Bridge Notes which were issued with a 10% original issue discount (OID), and accrued interest at 8% per annum and had a maturity date ofDecember 22, 2024 . In accordance with their terms, the entire amount of the Bridge Notes, including$165,516 of accrued interest, converted upon the IPO into 1,606,027 shares of Common Stock to at a conversion price of$2.89 and Pre-Funded Warrants to acquire 77,443 shares of Common Stock at an exercise price of$0.0033 per share. The Bridge Warrants have a 5-year term from their date of issuance and, in accordance with their terms following the IPO, have the right to purchase 1,365,960 shares of Common Stock at an exercise price of$5.16 per share. The exercise price of the Bridge Warrants is subject to full ratchet downward adjustment for 18 months following the IPO in the event of an issuance of Common Stock at a share price (or issuance of convertible securities or options at a lower conversion price or exercise price, as applicable) lower than the then current exercise price. Upon a lowering of the exercise price, the holder will be entitled to exercise the Bridge Warrants such that new exercise price multiplied by the number of shares of Common Stock purchased is 150% of the principal amount of the Bridge Notes originally purchased.$130K Note OnAugust 12, 2019 , the Company entered into an unsecured drawdown convertible promissory note withFront Range Ventures, LLC , or FRV, for an aggregate amount not to exceed$130,000 , which we refer to as the$130K Note. The$130K Note may be repaid at any time upon 20 days' notice to the holder. The$130K Note is convertible into Series C Preferred Stock at any time, upon written notice by either the holder or the Company or at maturity, at the lowest price paid for the Series C Preferred Stock prior to conversion, which is currently$25 per share. The$130K Note matures 20 days following FDA clearance of the MyoVista. Under the terms of the agreement, the note is non-interest bearing. The$130K Note does not contain any covenants that restrict our ability to conduct business. The$130K Note does not contain specific events of default but any breach of its terms by the Company would entitle FRV to all available rights and remedies, at law or in equity.
InDecember 2020 , the Board of Directors approved the offering of a series of secured convertible promissory notes in the amount of$1,500,000 ("$1.5M Notes"). The$1.5M Notes were sold as a series to a number of different investors with$1,490,000 of the notes being sold to shareholders of the Company of which members of the Board of Directors of the Company subscribed for$30,000 . The notes had an original maturity ofJuly 31, 2022 and were subsequently amended onNovember 2, 2021 , extending maturity toOctober 31, 2022 . As part of the extension agreements, inNovember 2021 , the Company issued warrants, or the$1.5M Lender Warrants, to purchase 4,545 shares of Common Stock of the Company which, in accordance with their terms, have an exercise price of$2.89 following the IPO. The$1.5M Lender Warrants expire onOctober 12, 2026 . The entire amount of the$1.5M Notes converted upon the IPO into 909,071 shares of Common Stock at a conversion price of$1.65 . In accordance with their terms no interest was payable as they converted prior to maturity.
InApril 2020 , the Company entered into a loan and security agreement with FRV andJohn Q. Adams , Sr. who are both shareholders of the Company.Mr. Adams is also a former director of the Company. Each party committed to lend a principal amount of$500,000 , totaling$1,000,000 and the loan was drawn in three installments of$300,000 upon execution of the loan agreement,$350,000 on or aboutJuly 2, 2020 and$350,000 on or aboutSeptember 4, 2020 . The loan had an original maturity date ofSeptember 30, 2021 , which was amended onSeptember 30, 2021 making the note repayable on demand. The loan was amended again onNovember 3, 2021 , extending the maturity toSeptember 30, 2022 . As part of the extension agreement, inNovember 2021 , the Company 90
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issued 15,152 warrants to purchase Common Stock of the Company at an exercise price of$2.89 following the IPO. The loan was further amended onMay 24, 2022 , extending maturity toSeptember 30, 2023 . In connection with the amendment inMay 2022 , the Company agreed to payMr. Adams all accrued but unpaid interest on his note prior toSeptember 30, 2022 . The loan accrues interest at a rate of 12% per annum, compounded annually, which is payable at maturity. The Company is also required to pay default interest at a rate of 18% per annum, compounded annually, on any unpaid amounts due at maturity until the loan amounts are fully repaid. The loan is collateralized by substantially all of the Company's assets and intellectual property, except for the secured interest on the covered technology as discussed in Note 10 to the Notes to our Financial Statements.
From
The
•
non-payment of principal or interest;
•
breach of any representation or warranty set forth in any of the documents and instruments executed and delivered under the
•
cross default and cross acceleration of certain other debts;
•
bankruptcy and judgments;
•
a final judgment or an order for the payment of a sum greater than
•
cessation of our activities; and
•
sale, conveyance or disposition of all or substantially all of the Company's assets or the effectuation of a transaction or series of related transactions in which more than 50% of the voting power of the Company is transferred.
The
Paycheck Protection Program Loans
OnApril 20, 2020 , the Company received loan proceeds in the amount of$250,200 under the Paycheck Protection Program, or the PPP, which was established as part of the Coronavirus Aid, Relief and Economic Security Act. Following the PPP guidelines, the loan was forgiven inNovember 2020 .
On
Current outlook
We have financed our operations to date primarily through the issuance of Common Stock, preferred stock, warrants and debt securities. We have incurred losses and generated negative cash flows from operations since inception. Since inception, we have generated limited revenues from the sale of products through establishment of distributor relationships outside theU.S. during the development of the MyoVista. We require FDA clearance to market the MyoVista in theU.S. and do not expect to generate significant revenues from the sale of our device in the near future or prior to FDA clearance. 91
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As ofApril 30, 2022 , our cash and cash equivalents were$918,000 and inJune 2022 , we received net proceeds of$5.2 million in the IPO. We will need to seek additional financing to fund our future operations. Our future capital requirements will depend on many factors, including:
•
the progress and costs of our research and development activities;
•
the costs of manufacturing our device;
•
costs of filing, pursuing, enforcing and defending patent claims and other intellectual property rights;
•
the potential costs of contracting with third parties to provide us with marketing and distribution services or to build such capabilities internally; and
•
the magnitude of our general and administrative expenses.
Until we can generate sufficient cash flow from operations, we expect to satisfy our future cash needs through equity financings. Additional funding will be required to support the sales launch of the MyoVista into theU.S. , provide working capital and support further R&D. We cannot be certain that additional funding will be available to us when needed on acceptable terms, if at all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate research or development plans for, or efforts with respect to launch of sales of, our device. 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. Our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital, enter into critical contractual relations with third parties and otherwise execute our business objectives.
Significant Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP. The preparation of these financial statements in accordance withU.S. GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our estimates are based on our knowledge of current events and actions we may undertake in the future and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. We believe the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgements and estimates. For additional details regarding our critical accounting policies, see the "Financial Statements-Notes to the Financial Statements, Note 3 - Summary of Significant Accounting Policies".
Determination of the fair value of common shares
Given the absence of a public trading market of our Common Stock prior to the IPO, and in accordance with the guidance as outlined in theAmerican Institute of Certified Public Accountants' Accounting and Valuation Guide , Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our Board of Directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our Common Stock including:
•
external market conditions affecting the medical device industry and trends within the industry;
•
actual operational and financial performance;
•
current business conditions and projections;
•
the rights, preferences and privileges of our preferred stock over those of our common stock;
•
our financial condition and results of operations, including our levels of available capital resources;
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advancing our research and development efforts;
•
stock market conditions affecting comparable public companies; and
•
general US market conditions and the lack of marketability of our common stock.
Stock-based compensation
The Company accounts for employee and non-employee share-based compensation in accordance with the provisions of ASC 718, Compensation-Stock Compensation. Under ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). The estimated fair value of common stock option awards is calculated using the Black-Scholes option pricing model, based on key assumptions such as fair value of common stock, expected volatility, and expected term. These estimates require the input of subjective assumptions, including (i) the expected stock price volatility, (ii) the calculation of the expected term of the award, (iii) the risk-free rate and (iv) expected dividend yields. As there had not been a public market for the Company's Common Stock prior to the IPO, management has determined the expected stock price volatility at the time of grant of the option by considering a number of objective and subjective factors, including stock price volatility of comparable companies that are publicly available and based on the industry, stage of life cycle, size and financial leverage of such other comparable companies. The Company has estimated the expected term of its Common Stock options using the "simplified" method, whereby, the expected term equals the arithmetic average of the vesting term and the original contractual term of the option due to its lack of sufficient historical data. The expected volatility is derived from the historical volatilities of comparable publicly traded companies over a period approximately equal to the expected term for the options. The risk-free interest rates for periods within the expected term of the option are based on theUS Treasury securities with a maturity date that commensurate with the expected term of the associated award. There is no expected dividend yield since the Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future. For stock options issued to employees and non-employees, the fair value of stock-based awards is recognized as compensation expense over the requisite service period, which is defined as the period during which an employee is required to provide service in exchange for an award. The Company uses a straight-line attribution method for all grants that include only a service condition. The Company accounts for forfeitures when they occur. Stock-based compensation expense recognized in the financial statements is reduced by actual awards forfeited.
Inventory pricing and valuation
Inventory consists of finished goods, work in progress, sub-assemblies and raw materials and is stated at the lower of cost or net realizable value. Net realizable value is the estimated sales price, which is derived from similar marketable devices, less standard costs approximating the purchase costs on a first-in, first-out basis. Reserves for slow-moving, excess, or obsolete inventories are recorded when required to reduce inventory values to their estimated net realizable values based on product life cycle, development plans, production expiration or quality issues. Inventory that is used for research and development are expensed as consumed. Inventory consists mainly of raw materials and components used in the current hardware build of the MyoVista. Devices and components are used for research and development purposes and device sales, which to date have been in international markets as sale of the MyoVista in theU.S. is subject to FDA clearance. We are partially through a new, pivotal clinical validation study and device testing and development necessary for a revised FDA De Novo submission, which we expect to take place later in the fiscal year endingApril 30, 2023 . We believe that our hardware platform is in final form; however, prior to FDA clearance and market acceptance of the MyoVista, further hardware changes could be necessary which could have an impact on net realizable values. The majority of the Company's current inventory is intended for use to build finished products for sales both internationally and in theU.S. following regulatory clearance. Finished products do not contain materials that would degrade significantly over the useable life of the device and are considered to have a useable life of over seven years. Existing inventory 93
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related to finished devices are planned to be updated to the latest hardware revision and specifically allocated to a limited distribution for field reliability studies and are not slated for general purpose sales. On a quarterly basis, management evaluates inventory and makes specific write-offs and provides an allowance for inventory that is considered obsolete due to hardware and/or software related changes. If the Company does not receive FDA clearance and/or obtain market acceptance of the MyoVista, the Company could have further material write-downs of inventory due to obsolescence in excess of the amount currently reserved. Going Concern
The Company is subject to a number of risks similar to start-up companies, including dependence on key people and products, the inherent difficulties of developing a commercial market, the need for ‘obtain additional capital, competition from large companies and other technologies.
AtApril 30, 2022 , the Company had an accumulated deficit of$54.4 million and stockholder's deficit of$6.1 million . In addition, the Company has generated recurring losses and negative cash flows from operations since its inception and has a working capital deficiency. Based on these factors there is a substantial doubt regarding the Company's ability to continue as a going concern. InJune 2022 , the Company raised approximately$5.2 million in net proceeds from the completion of the IPO. The Company's forecasts and cashflow projections indicate that current resources would be insufficient to support operations significantly beyond the second calendar quarter of 2023 and repay the$1M Notes as they fall due inSeptember 2023 . Additionally, the FDA can delay, limit or deny clearance of a medical device for many reasons outside the Company's control which may involve substantial unforeseen costs. A negative variance in the forecasts and cashflow projections would make the Company's ability to continue as a going concern dependent on an additional capital fund raise.
The Company’s plans include raising capital through the sale of additional equity securities, debt or capital inflows from strategic partnerships. Management cannot guarantee that such financing or strategic relationships will be available on acceptable terms, or not at all, which would likely have a material adverse effect on the Company and its financial statements.
Recent accounting pronouncements
InAugust 2020 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. For convertible instruments, the FASB decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with currentU.S. GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The FASB decided to amend the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions.
The FASB observed that applying the guidance on the scope exception for derivatives results in some contracts being accounted for as derivatives while accounting for economically similar contracts as equity. The FASB has also decided to improve and modify the guidelines relating to the EPS.
Amendments to this ASU are effective for fiscal years beginning after
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InOctober 2020 , the FASB issued ASU 2020-10, Codification Improvements, which updates various codification topics by clarifying or improving disclosure requirements to align with theSEC's regulations. The Company adopted ASU 2020-10 as of the reporting period beginningMay 1, 2021 . The adoption of this ASU did not have a material impact on the Company's financial statements.
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